Kennedy-Wilson Holdings Inc (KW) 2013 Q3 法說會逐字稿

Welcome to the Q3 2013 Kennedy-Wilson earnings conference call. My name is Vanessa, and I will be your operator for today's call. (Operator Instructions). And I will now turn the call over to Christina Cha, Vice President of Corporate Communication. Christina Cha, you may begin.

Thank you. Good morning, everyone. Joining 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 the website for more information.

Statements made during this conference call may be forward-looking statements. Actual results may materially differ from forward-looking information discussed on this call due to a number of risks, uncertainties, and other factors indicated in reports and filings with the Securities and Exchange Commission.

I will now turn the call over to Bill McMorrow.

Thanks, Christina, and good morning everybody. As is our usual practice I am going to go through the press release and then we will open it up to any questions. Just as an anecdote, too, next week on the 13th we are coming up on the fourth anniversary of our public offering and as you can see from the press release here we had an excellent quarter.

Our EBITDA for the third quarter was $42 million versus $17.5 million the prior year, which is a 142% increase over those two periods. Also for the first nine months our EBITDA was $111 million versus $55 million for the nine months of 2012 which is 100% increase, and I also might note too that that EBITDA number for the first nine months is ahead of -- we were slightly above $100 million for the full year of 2012.

During the quarter we had an active investment quarter, and we acquired $1 billion of real estate investments and for the year-to-date now we have acquired almost $2.6 billion of investments. We also raised during the quarter another $120 million of equity for Kennedy-Wilson itself. So when you look at our investment account our gross investment account stood at $1.1 billion at the end of the third quarter compared to $909 million for the prior year.

The net investment account is approximately $1 billion, and as I think most of you know we carry our investment account on our books on a depreciated basis, and generally speaking the differential between our gross investment account and our net investment account is roughly around $100 million.

The other I think very interesting statistic really is the amount of cash we distributed out of our partnerships for the first nine months. We've distributed $940 million to KW and its partners during the first nine months, which our share was $209 million. So in order to increase our investment account as we have, we've invested $387 million during the first nine months of the year.

In terms of what the Company now is invested in we have almost 23 million square feet of real estate, which includes 16,511 apartment units, 79 commercial properties and $1.6 billion in unpaid principal balance of loans.

As I said earlier, we have been very active on the acquisition side. And as I said at the beginning of the year, we felt going into the year that a large percentage of our investment activity would be centered around Europe. So when you look at what we have done here through the first nine months approximately 70% of what we have invested has been in Europe.

When you look at the property level financing, which I think is an important thing to look at when you think about interest rates, we now have about 85% of our debt at the property level either on a fixed rate basis or with caps. So in other words, we only have 15% of our debt exposed to rate increases. And I think as you have heard on previous calls, what we have been doing really the last two years is lengthening out the maturities of the debt at the property level and fixing interest rates.

In terms of the U.K. loan portfolio which was our first big investment we made in Europe in 2011, the so-called Byron loan portfolio, the Company invested approximately $62 million into that loan portfolio. Our book basis now today is $11.4 million which represents our 12.5% interest. Of the 24 connections or borrowing relationships that were inside that portfolio, we now have resolved all but 3 and by the middle of next year we expect to have resolution on the remaining 3 connections.

In Japan our book equity now is $72 million, which represents approximately a 41% share of the ownership. And as have said before, I think this really represents a good example of what happens inside our investment account. At original cost that $72 million was approximately $125 million, but through depreciation and distributions that account has been reduced down from $125 million to slightly over $72 million. Fairfax Financial, which is our partner in Japan, and KW has received $104 million of distributions since 2010 of which our share is $49 million.

Our management and leasing fees as the Company has grown have increased dramatically by 52% to $54 million for the first nine months of the year from $35.5 million during the same period of 2012. In term of corporate finance, as I mentioned, we issued 6.9 million shares in September and generated gross proceeds of about $128 million. Also concurrent with that, we increased our unsecured line of credit from $100 million to $140 million, and we also extended the maturity of that line to October 1, 2016. There is currently nothing outstanding on that line of credit.

And lastly before I open it up to questions, in 2012 we purchased the Meyers Research Group. And the Meyers Research Group is one of the foremost residential research companies in the U.S. During the last year-and-a-half in addition to the acquisition performing well Jeff Meyers, who runs the Meyers Group, has created an iPad application that we launched about three or four weeks ago called Zonda, which is an iPad application using 300 metrics impacting the housing industry. We now have that delivered to a number of clients, and we expect this to perform well for us over the next several years.

With that, Christina, I want to open it up to any questions.

Thank you. (Operator Instructions). And we have our first question from Jason Ursaner with CJS Securities.

Good morning. Congratulations on a very strong quarter.

Thank you very much.

When you look to the gain related to the title transfer on the Rock property, Obviously it is nonrecurring for the property itself, but it looks as though you still remain pretty conservative on the mark-to-market. So I'm wondering if you could maybe add some detail there. And then also overall how do you look at that type of gain in context of the overall investment portfolio being held at historic book?

Thanks, Jason. This is Matt. In regards to the Rock we have several of these and we expect to have several more in the future where we buy mortgages with the intent to eventually end up with the real estate. The way the accounting works is when there is a change of control in that we had the mortgage and it converts to fee ownership, we have to put that asset on our books at fair value. And then once that is done, going forward we start depreciating the asset again.

We have had several of these in the past and we have many more mortgages like this in the portfolio. So in essence on this assets you are right it is nonrecurring thing but it is a recurring situation for the Company into the near future.

I think too, Jason, and Mary Ricks is here, but I think to give a little color on this asset you have to see in Europe, also in the U.S. but in Europe particularly the quality of the assets we have been able to purchase in the last two years is really at the very top end of quality in the real estate industry and the Rock is no different. And when you think about these acquisitions we are buying these at very big discounts to original cost, but they are very high quality assets. But in some cases the way you are actually getting to the ownership of the assets is through the purchase of the mortgage. I think, Mary, you can give a little bit of color on the Rock and what is going on there.

Right. The Rock is a very large retail shopping center located in Bury, which is a suburban area with a lot of foot traffic and lots of tourists that come in as well as local people that shop there. So it is a shopping center with a Debenhams, several high quality national tenants. We are almost fully let. We are 97% occupied on long-term basis with the large national covenants, and then we also have residential units there that we will be building out over the next -- so basically the residential units were built, the exterior of them and we are just building out the interiors over in the next 12 months. We see a very strong rental income opportunity there.

So we are basically combining the retail and just finishing up the leasing there, finishing out the residential. And then we are also building four retail units that will be store front restaurant units that will also help drive traffic to this asset. So not only did we add value by just taking control of the asset, we are also executing on several assets management initiatives that will help drive the NOI.

Great. Staying with the equity in JV income line for a second, Bill, can you maybe talk a little about the impact from writing off some of the upfront costs related to acquisitions and the impact it is having on reported GAAP P&L.

Jason, this is Matt. So what happens is, particularly in Europe where there is stamp duty which is similar to transfer tax in the U.S. we are required to write off all of the costs related to the acquisition the day that we buy it. So on two of our large acquisitions in Europe which totaled roughly $800 million in the third quarter, we had to write off almost $10 million of expense the day we bought them.

But the way the Company looks at it is, it is all part of the purchase price. So when we are buying an asset, we are factoring in obviously the closing cost in our total basis. So in our mind the price we are paying obviously includes that fee and that expense but we are required to write it off. So it has the impact of lowering our earnings for the quarter in which we buy these assets.

But historically, and I do not how many years it goes back, Jason, it used to be that that was all capitalized in to the purchase price. But you are not under accounting standards so that doesn't happen that way. So if you are in an active acquisition mode like we are and of course, the size of these acquisitions is big, you are going to have significant stamp duty, transfer taxes, legal fees and so on associated with closing these deals, but it has the effect of reducing the basis day one but it is going to cause a charge in the quarter that you close these acquisitions.

Just last question for me. You mentioned EBITDA for the first nine months being well ahead of last year and because of this the earlier timing on gains you have accrued higher compensation. Just looking back to the past two years Q4 had shown a pretty big jump because it was a much larger quarter for you. If it is not a larger sale quarter in terms of gains this year would you expect to show that same type of increase or the accrual kind of matches performance so far?

It is the second thing you said Jason. The accrual matches performance to date. So it will depend on the performance in the fourth quarter.

Okay, appreciate it. Thanks, guys.

And our next question comes from David Gold with Sidoti & Company.

Good morning.

Hi, David.

Just actually following up on the last bit of Jason's question. Given historically fourth quarter has been particularly a strong one for realization I guess the last couple of years would you think this year would follow the same pattern based on what you know of potential assets sales in front of you?

Hi, David. It is Matt. We have a strong pipeline in terms of the acquisition side; several hundreds of millions in the pipeline to potentially close in the fourth quarter. Additionally, we do have a few asset sales that are in progress. Whether those will happen in the fourth quarter or next year we will have to see. But we would expect as usual to have a very, very active fourth quarter both on the buy side and potentially on the sell side as well.

Got you. And on the pipeline, Matt, is it possible to give anything more specifically as far as a range of the deal size that you are looking at or that is in front of you? And just commentary on if anything has changed there pipeline wise, or if you are still seeing the same large volume of opportunities that we have seen over the last couple of quarters?

Currently we have just under $1 billion of deals under contract; whether those close or not we will have to see. We are in due diligence on nearly all of them. So, like I said, we have a very healthy pipeline of opportunities, particularly in Europe right now.

Perfect. One other, if I remember right, it is December where the due diligence period ends on the Spanish bank. Just curious if there is any update there, and any change in thinking? I know a quarter of guidance is probably too early to start putting money to work in Spain, but curious of any thoughts there.

Hi, it is Mary. How are you?

Hi.

We are still in our due diligence. It is a complex transaction as you can imagine because it involves people; not only people but also contracts. So we are still working through that. And then in terms of Spain I think we are feeling like Spain is bottoming out, so that is a place we are interested and we are looking. But just to express the same sentiment as I did last time I think we really need to have feet on the ground and local presence and local real estate knowledge to execute any transactions.

Perfect. So presumably if you do, do the deal something to revisit down the road?

Right, exactly. And we are looking at a couple of different opportunities there, but nothing to announce at this point.

Perfect. Thank you all.

Thanks, David.

And our next question comes from David Ridley-Lane with Bank of America Merrill Lynch.

I was wondering on the eight U.K. shopping centers that you purchased during the quarter maybe you can give us a little bit of your thinking in terms of what kind of property management actions you might be taking or what your plans are for those assets?

Sure. Those came out of the fund. We actually bought them from a group of banks that made a deal with the borrower, so we ultimately bought the real estate. But it was a fund that acquired all of those in 2007, and they really didn't have any capital to put into those assets. So for six years they were very under managed, undercapitalized.

And so since we have closed all those acquisitions, all the tenants are very, very happy to see that we are an owner that is potentially a long-term owner that is willing to put capital into the centers. We are in the middle right now of several asset management initiatives. We have talked to all the major tenants in all the shopping centers.

So really it depends on the center, but we have a lot of very interesting things planned not only on the CapEx side but a variety of tenants have come to us and said they want to expand their sites in each center. So there is a lot of great NOI building that we are doing right now across the board on all those centers.

Okay. That leads very nicely into my next question which is what are your expectations for same store NOI growth next year in the commercial portfolio given those recent U.K. additions?

Are you talking specifically about in the U.K. or overall for the Company?

The overall for the Company. Your NOI growth and commercial year-to-date is 18%, and I was just wondering if 2014 what you are thinking about there?

Maybe we can talk quickly about the 18%. That is a combination of a couple of very positive factors for us. The first being occupancy increases across the portfolio. A lot of the assets we have buying both in the U.S. and Europe part of the strategy is to buy things that are under leased and undercapitalized, and so part of the strategy is to increase occupancy, which we have done very well over the past nine months.

Secondly, there has been some rent increases in the portfolio particularly in Northern California on the commercial side we have seen rent increases on top of occupancy increases. So the same thesis is true in Europe where we are not only buying properties that are leased below market but also where there is the potential over time to increase rent. So it is a very similar thesis. We do not want to give a particular forecast about the exact amount of NOI growth, but I can say the business plan is to continue to grow the NOI at robust rate.

Got it. And then last year you invested $402 million in equity into the investment account, year-to-date you have invested $369 million. Do you think it is likely you will surpass last year's total here in the fourth quarter?

I think what is kind of masked in the numbers too is the amount of capital we are distributing out of the investment account. So I might be slightly off in this number but in 2012 we returned almost $1.5 billion to us and our partners, and this year of course, we are going to be well over the $1 billion number. So in two years we have returned obviously $2.5 billion.

A lot depends on some of these closings we are doing. But we have probably -- I'd say of the $1 billion that is in pipeline what could close in this fourth quarter is going to be somewhere around a third of that that think we have real certainty on. I do not know that you are going to see a lot of growth in the gross investment account number in the fourth quarter beyond what you have already seen at the third quarter because we are going to get more distributions back.

Got it. That was very helpful.

The interesting thing too, though, that has happened as you look at that investment account -- and it is easy to look in hindsight but our strategy really from the beginning of our going public in 2009 was that the first opportunities were to acquire debt secured by real estate, and in those debt purchase acquisitions some were what we call loan to own where we were going to own the assets and other were just self liquidating. As you go through these cycles what's happened is that the performance of these loan pools has been very good, so we have been returning a lot of cash to people out of the liquidation of the loan portfolios.

But the whole idea was to barbell that with the purchase of, on a deep discounted basis, very high quality commercial assets, multifamily, retail and office. So throughout our whole portfolio we have got, as I said earlier, very high quality assets that we own not only in Europe but in the United States.

Simply if you look at Dublin, right now we own the State Street Bank building on a long term 15-year lease to State Street Bank. We own the Bank of Ireland's Corporate Headquarters in Dublin. We own KPMG's -- one of their major European headquarter buildings in Dublin.

What is also true too then, as you look over to the United Kingdom, The Rock is an extremely high quality asset and then when you circle around the globe here and think about our apartment business in the U.S. some of the assets we have bought in Seattle and the Bay area and the assets we purchased earlier in the year in Salt Lake City are A quality assets. So as the loan portfolios have been tamed back we have been adding recurring income streams from very high quality assets.

Okay, thank you. Just one quick numbers question, do you happen to have assets under management at the end of the quarter?

It was almost $14 billion.

Thanks, guys, and congratulations on the quarter.

Thanks very much.

(Operator Instructions). We have our next question from Mitch Germain with JMP Securities.

Good morning, guys.

Good morning.

You are about 35% or so ex U.S. in the investment account and I am a little bit curious in terms of how you look at putting that capital to work. Is there any caps you have with regards to exposure overseas?

That is a very good and interesting question. We have an extremely well balanced geographic portfolio now. When you think about it, we are primarily in the United States, we are in the western United States from Seattle to Los Angeles, but when you think about the western United States it is really Seattle, San Francisco, L.A. We have a really outstanding portfolio of assets in Japan, but in Japan probably 70% of those assets are centered in Tokyo. So the same thing is true when you think about both the United Kingdom and Ireland.

The only difference in the United Kingdom is that the property values in London are very, very high. So although that was a great thing for us in the Byron loan portfolio because many of the assets were secured by London assets, our investment account in London to get better returns has really been outside of London. We think that we have a good couple more years to go, two to three years, both in those two key markets in Europe that we like, Ireland and the United Kingdom.

And the Company has gotten to a size in the United States that even though clearly we have returned to more of a core market in the United States we always find opportunities. It is not a big transaction but we are working on the acquisition of a commercial -- and this is kind of what falls out of these things. We are working on a commercial acquisition right now in Southern California that actually the lender on it was an Irish institution.

You get all these crossover benefits of being the first. Without sounding like we are bragging we were the first movers in Europe. We went into Europe at a time where people really weren't anxious to invest and it has turned out to be as a hindsight is perfect thing. But in hindsight it has turned out to be a very, very good decision.

But as far as the percentages of the portfolio, obviously we are managing currency exposure and we are thinking about these issues that you are raising, but we don't have any set percentage on the limitations. I think that one thing I am not going to get into a lot of detail on, but in Europe we are looking at capital raising opportunities; let's put it that way. And we have such a sound base of assets and we have such a good reputation in Europe, that there are many opportunities for us to further capitalize what I'm calling the European platform.

So we are looking at many options in Europe right now. Because I think one of the things is we do have to be mindful of the fact that while we have raised a lot of equity the deal sizes in Europe tend to be big. So we have to have ourselves in a position for the next couple to three years where we can play in a market where the deal sizes are much bigger than they are in the United States.

Great. I appreciate that commentary. Last question from me, obviously, I think it was Matt who said you have a bunch of sales keyed up in the fourth quarter. Given where interest rates clearly have moved in the U.S. but fundamentals and cap rates remain pretty strong, should we say is it safe to assume that the sale pipeline is potentially skewed more domestically at this point?

Well, I think it is a combination of two things. The loan portfolios in Europe are liquidating. And what we are doing is a strategy overall as we are adding more and more high quality assets we are pruning what I'm calling the bottom 10% of our portfolio.

So we are always looking for opportunities to recycle capital out of an asset that might be, I'm just using generalities, but say it is maybe a B minus asset in a B location, we might want to recirculate that money out of that assets because particularly in the United States you have a tremendous amount of capital looking for a home in the markets we have invested in. So we have for example one apartment building we are going to be selling next year that we've identified that would fall in to that category, but we are going to have a very nice gain it. We are going to take that capital and redeploy it into a higher quality asset at a better current return.

So we are always looking through the portfolio like anybody would to see where there is opportunities to recycle money. And as the point you have made even though interest rates have gone up, they are still by any norm -- we were looking at some numbers yesterday over the last 40 years the interest rate levels that we are at today are well, well below the averages you have seen over the last 40 years.

But we are mindful of interest rate risk. That is why I said earlier at the beginning, as a strategy over the last couple of years we have foregone the LIBOR plus 200 interest rates in a lot of cases for the safety of doing long-term financing at fixed rates.

And I think the last point I will make is, Japan is a very good example. We have now that I think now refinanced that entire portfolio in the last two years. But historically in Japan the long term debt market for properties was like three years. The last loan that we did in Japan had an eight-year maturity, but it had an eight-year maturity with an interest rate of 1.35% fixed for eight years. So it is a no-brainer when you have those kind of opportunities to lock in your cost.

Thank you. Great quarter.

Thanks.

And we have our next question from Andrew Berg with Post Advisory Group.

Hi, guys. Just a couple of quick questions. Bill, with respect to the investments you are going to make in the fourth quarter to the pipeline amount, you also said you would be getting some money out of investments to help fund the acquisitions. Can you comment or help quantify how much you expect to receive in the fourth quarter from distributions?

I'm not sure, Andrew, that I have an exact number on that. Matt?

I don't think we can give you an exact number. But we expect to have substantial cash coming out of investments in the fourth quarter that we can recycle into the new acquisitions.

I think, Andrew, Kennedy-Wilson has gotten back $210 million out of investment accounts so far this year. I think somewhat depends on a couple of the loan portfolio resolutions, but it is going to be I would say slightly above that number for the year.

Okay. You guys have done good job of taking capital out. I'm just trying to figure out what the potential flows were. With respect to the reporting you did on the segment basis, the services business, management leases fees and commissions were up nicely in the quarter. Were there any big one time commissions in that, or that is an operating rate we can think about on a go forward basis, in that $21 million range?

There was nothing out of the ordinary. There were some acquisition fees, which are typical when we are in acquisition mode as we are but nothing out of the ordinary.

That is adjust byproduct of more assets to management and the ongoing?

Exactly, yes.

That is what I figured. I just wanted to confirm. Great, guys. Thank you. I appreciate it.

No problem. Thanks, Andrew.

We have no further questions at this time. I will now turn the call over to Mr. Bill McMorrow for closing remarks.

All right. Well, thanks everybody for joining. And as always, we appreciate all the support we get from everybody. Thanks very much.

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