Kennedy-Wilson Holdings Inc (KW) 2013 Q4 法說會逐字稿

Welcome to the Fourth Quarter 2013 Kennedy Wilson Earnings Conference Call. My name is Clifford and I will be your Operator today. (Operator Instructions). I would like to turn the call over to Miss Christina Cha. Miss Cha, you may begin.

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 more information. Statements made during this conference call may be forward-looking statements. Actual results may materially differ from forward-lo9oking 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, everyone. I am going to start by taking you through the body of the earnings release and, then, we will open up for questions.

We had an excellent year in 2013. As you saw yesterday, we reported, for the year 2013, Adjusted EBIDTA of $185.1 million, which represents an 85% increase from $100.2 million for 2012. For the fourth quarter of 2013, Adjusted EBIDTA was $73.9 million, which represents a 65% increase from $44.7 million for the same period in 2012.

As you also saw yesterday, Kennedy Wilson announced that it will pay a dividend of $0.09 per share, which is a 29% increase from the previous quarter. Common shareholders of record as of March 31st of 2014, with a payment date of April 8 of 2014. This, obviously, equates to a $0.36 annual dividend.

As of December 31 of 2013, our gross investment account was $1.2 billion, compared to $909 million, approximately, as of December 31, 2012. Our net investment account, which is net of depreciation, was $1.1 billion as of December 31 of 2013, compared to $838 million as of December 31 of 2012.

We turn to the financial metrics, on the balance sheet. Our total assets increased $515 million--this is on the KW balance sheet itself--or 40% to $1.8 billion, as of December 31 of 2013. The book equity of the Company increased $300 million, or 58%, to $818 million as of December 31 of 2013.

The accumulated depreciation in arriving at these numbers was $135.7 million and $71.3 million, respectively. When you look at our investment account, the change in the net investment account was comprised of $535.8 million of cash contributed to new investments, and income earned offset by $273.1 million of cash distributed from our investment account.

When you think about the operating metrics of our investment business, during the year ending December 31, 2013, our investment segment achieved Adjusted EBIDTA of $171.8 million, which is a 94% increase from $88.5 million in the same period of 2012. During the year of 2013, the Company and its investment equity partners owned 11,755 apartment units, that compared on a same-store basis.

That rental revenue increased by 5%. The net operating income associated with those same-store properties increased by 7%. The occupancy remained flat at 94%. In addition, based on the Company and its equity partners investment in 2.9 million square feet of same-property commercial real estate, rental revenues increased 13%; net operating income increased 17%; and occupancy increased 5%, to a total occupancy of 83% at the property level.

During 2013, the Company and its equity partners acquired $2.8 billion of real estate-related investments, including unpaid loan purchases on loan purchases, which the Company invested $386 million of equity. Our investments in 2013 were directed to 58% to the United Kingdom in Ireland, and 42% to the Western United States. During 2012, the Company and its investment partners acquired $2.9 billion of real estate-related investments, including UPB on loan purchases, in which the Company invested $402.3 million of equity.

In 2012, our investments were directed 69% to the Western United States and 31% to the United Kingdom in Ireland. As we reported on prior calls, I want to update you on the Byron Loan Pool, which was, really, the first significant acquisition that we made in Europe in October of 2011. We purchased 12.5% of that investment. The purchase price was, approximately, $1.8 billion. The investment was secured by real estate located in the United Kingdom, with an unpaid principal balance of $2.1 billion. As of December 31, 2013, the unpaid principal balance, which was originally $2.1 billion, has been reduced, now, to $44.7 billion, due to loan resolutions of, approximately, $2.1 billion, so we have, now, resolved 98% of that pool. During the year ended 2013, the Company received $66.2 million in distributions related to resolutions. We, also, received $23.2 million from our promoted interests.

As we turn to Japan, our book equity in this investment is now $69 million. We own, approximately, 41% of that portfolio of 50 apartment buildings in Japan. We maintained a 95% occupancy in those units. Of note, since our partner Fairfax Financial and KW acquired that portfolio in September of 2010, we have, now, distributed, in cash, $111.6 million, of which our share was $52.4 million. I might, also, note that we have refinanced the entire portfolio in Japan and extended the maturity out to an average of maturity of seven years. The average interest rate on those refinances is 1.4%, approximately.

During the fourth quarter, Kennedy Wilson gained control of certain real estate assets, of which the largest one was the Ritz Carlton, Lake Tahoe hotel. As a result of getting control of the hotel, the Company recognized an acquisition-related gain of $45.3 million, of which $22.6 million was allocated to non controlling equity partners. During 2013, the Company and its equity partners sold $232.3 million of real estate, which resulted in a gain on sale of $59.2 million. This excludes any cash distributions during the ownership period. Our share of that gain was $15.6 million, based on an equity contribution from Kennedy Wilson of $37.6 million.

he other thing that I want to mention when you think about distributions, I mentioned the distributions that we have received into Kennedy Wilson, but the total distributions that Kennedy Wilson originated to KW and its partners, for the year of 2013, was $1.6 billion.

On the Service business side, the management and leasing fees and commissions increased by 28% to $68.1 million, for the year ended 12/31/13; from $53.3 million for the same period in 2012. On the subsequent event (inaudible) front, on February 25, 2014, this past Tuesday, we agreed to acquire, in Sterling, [122 million], which is, approximately, in dollar terms, $203 million of ordinary shares in the initial public offering of Kennedy Wilson Europe Plc, which is now trading on the London Stock Exchange. Our investment will consist of [GBP]87 million, or [$145 million] US of cash subscription, and a contribution of [GBP]35 million, or, approximately, [$58 million] of assets acquired by Kennedy Wilson in the first quarter of 2014.

Our subscription is conditional on KWE's admission to the London Exchange, which is expected to occur on or around February 28th, tomorrow, 2014. Assuming that is done, we will own, approximately, 13.4% of KWE's total share capital, immediately following admission. One of our wholly-owned subsidiaries will act as KWE's External Manager, in which capacity we will be entitled to receive certain Management and Performance fees. In addition, KWE will be provided priority access to all investment opportunities sourced by us in Europe on an ongoing basis.

Also subsequent to December 31, 2013, the Company and its investment partners have acquired [$329.6 million] of real estate-related investments. That includes 1.7 million rentable square feet of real estate, comprising 17 commercial buildings, along with [$157.4 million] of loans secured by real estate. Our equity contribution for these investments is, approximately, [$150 million] and represents 66% ownership interest.

These amounts that I just mentioned exclude our investment that I, previously, went through in KWE. Also of note, in terms of pipeline, we have a very robust pipeline, particularly in Europe. We have, approximately, $500 million of deals currently under contract. And lastly, in terms of subsequent events, in January 2014, Kennedy Wilson issued, and sold, 9.2 million shares of common stock, resulting in gross proceeds of [$197.3 million], which takes our book value to over $1 billion for the first time in our history. So, with that summary, I would like to open it up to any questions that you might have for any of the four of us.

Thank you. We would, now, like to begin the question and answer session. (Operator Instructions). Our first question comes from Jason Ursaner from CJS Securities. You may go ahead.

Good morning. Congratulations on a very strong end to the year.

Thanks, Jason.

You mentioned [$500 million] under contract. I was wondering if you could you talk about the overall acquisition pipeline, both Europe and the US, and, maybe, what you are looking at for the full year in terms of acquisition program?

I am going to have Matt, and myself really, answer that question, Jason. As you look at the year here, as I think I have said on several of the prior calls, I think you will see the bulk of our acquisitions this year, actually, being done in Europe; and assuming that everything is done tomorrow, that that will be done through KWE.

Matt, do you have anything to add to that?

I would just say the pipeline is extremely robust. We would expect, as Bill mentioned, that the majority of the investments dollars will be going towards Europe, as we did in 2013.

Okay. Just, I guess for some investors who may not appreciate the structure for the new entity versus Kennedy Wilson Holding Company, maybe some of the precedent on the structure for the new entity, is it similar at a high level to some of the other [REITs] that have been created there, in terms of fees and performance incentives back to Kennedy Wilson Holdings; would there be any significant differences as the manager?

Yes. I think the one thing, if you would all bare with me here, and excuse us a little bit, because of the timing of what I went through with tomorrow, we were limited in terms of, Jason, what we can talk about today related to KWE. But, at a high level, what I would say is what we have been doing, historically, in Europe is joint venturing with various partners.

e have had about three or four large capital partners that we have done our transactions with. And so when you think about KWE, even though we may, from time to time, do some joint ventures in that vehicle, our vehicle, now, that replaces all of those joint venture partners, is the new entity KWE.

Okay. Just looking forward in the operating results, we have continued to see a shift towards more consolidated properties, you know, outside of Europe, is this a trend that you would expect to continue? How do you see it impacting the P&L going forward?

Yes, I think if you look back, really, over the last four years, you can see a progression that has happened as our capital base has continued to improve in the Company. We are taking, generally, larger ownership positions in the transactions. The only exception to that, of course, would be our Fund business, which is here in the US, which is, really, a smaller part of our capital base. The last fund that we did was, approximately, $300 million, and our contribution to that was 5%. And I think the other part of, obviously, what is going on in the United States, at least in our opinion, is we are in for a, what I would call, a more longer-term core market here in the United States.

So, you may see us, from time to time, taking smaller positions. We did a large acquisition here in Southern California last summer, $225 million acquisition, but our contribution to the capital stack of that was 5%. But generally speaking, where we see good return opportunities, we tend to take larger positions in those transactions. You can see here, in the first quarter, the things that we have acquired, we have a 66% interest in those transactions.

Okay.

The normal evolution we are going through as we have more capital in the Company.

Okay. Just the last question for me, and, then, I'll let others have a chance, the strategy for the commercial portfolio seems to be playing out, kind of as you had talked about with growing occupancy there, given that it is a pretty large opportunity, based on the implied value of square foot, do you see any challenges to continuing to increase occupancy there; and what are comparable square foot valuations in some of the key North California and South California markets?

I think you are going to see, on an overall basis, in the commercial properties, actually, the occupancy is continuing to increase. Because we, as strategy, we bought -- we have had very, very good luck over the 25 years, particularly in Southern California, of buying office buildings that were either vacant, but in great locations. A-plus kind of locations, but had either very low occupancy or were vacant. Those opportunities come along for a number of reasons, but in some cases, the ownership of those assets might not have the capital to lease it up.

And so, we bought several office buildings in the last couple years that have that kind of characteristic of very low occupancy, or in the case of the one in Marina del Ray, no occupancy. We go in and rehab the building and (inaudible). So, I think you are going to see the 83% occupancy number actually increase over time. But, I think the other thing that we are doing here in the US is, we go through a really detailed portfolio examination at the beginning of every year to see any assets that we think have reached, maybe not peak value, but have increased significantly in value.

So, we have identified four office buildings in the Western United States that were in the process of selling this year. And it is a constant process every week and month, actually, as we go through our investment account. We are constantly looking at those kind of opportunities where we may harvest capital.

Okay. Great. I appreciate all of your comments there.

Next question from David Gold from Sidoti. You may go ahead.

Hi, good morning.

Hi, Dave.

Couple of questions for you. First, let's see, how to put it? The capital availability that the European fund gives you, lots of advantages for that and for having funding capital in place, is this something that you are thinking about, or would think about doing, in other markets as well? Is it something we should think about, potentially, as, maybe, a wave of the future for you?

Well, I will let Matt answer that for you, David.

Hey, David. We like to keep all of our options open. I think we have proven, over the history of the Company, not only do we create assets value, but we, also look to create entity value. Like we did in (Japan) and are doing that in Europe, as well. Certainly, we are keeping all of those options at our disposal. We look to implement whatever we think makes the most sense to create shareholder value.

Got you. Got you. Alright, there. I get it, it is a hard one to answer on this call. Second, can you give us a little bit of an update, I know you closed in Spain on the platform, but, basically, a little bit of an update for our thinking there, as to, you know, are we getting closer or are we there as far as moment to start putting capital to work?

Good question, David. Mary Ricks, she and I have been partners here for 24 years and she is the CEO of our business in Europe, so I am, really, going to let her answer that question.

I would say that with the [suite] acquisition we did with [indiscernible] Servicing Entities, that, now, gives us the local expertise to really look at possible acquisition opportunities in Spain. So, just like we have done with Bank of Ireland Asset Management platform, which helped us start in Dublin and, then, in London, we are, now, doing that in Spain as well. So, we are looking at opportunities for sure

Are you feeling, Mary, better about the market there? Has it stabilized, or is this the right moment, or is it too early to tell?

No, I am feeling better about the market there. We have been in Spain, now, for a little over a year, just, really, studying the market and building relationships. We do feel that it is stabilizing and it is reaching bottom in different parts of Spain. So, yes, we are optimistic about the prospects in Spain

Perfect. Thank you all.

Thanks.

Thank you

Our next question comes from Mitch German from JMP Securities. You may go ahead.

Hey, guys, nice quarter. A quick question. I mean, I guess there has been some commentary, some articles written about increasing levels of competition. I think, in particular, I think the "Wall Street Journal" mentioned Ireland; is that consistent with what you are seeing on the ground there?

Well, just to backtrack slightly here. We went to Ireland in November of 2010. We went there at a time where nobody else, really, wanted to go. I think the other thing that Mary and her Team have done is, we built out a, really, a complete infrastructure in, both, United Kingdom, Ireland, and, now, Spain, so that we have a real operating business on the ground.

When we first bought the Investment Management business from the Bank of Ireland, we had 14 people in that business until today in Dublin and London, we have almost 50 people. And, then, inn [Dante] acquisition, now that the headcount is everything, we have the 266 people. And, so, because we got there early, just like we did in Japan in 1994, that allowed us to start transacting with financial institutions, because we didn't have a lot of competition at the time. So, Mary and her team have, now, done transactions with 11 different financial institutions in the United Kingdom and Ireland.

And I think the other footnote to make to the Spain question is that, when you think about this year, a big part of our focus is, really, the two markets that we have been in, we are now going on the last three years. So, while there are, clearly, more people with capital in those markets, we feel that by getting the flag planted early and being able to do the things that we have done, that does give us a real leg up. I think the other part of the answer here is, that the key thing in all of these markets is that you have to be able to really control your own due diligence process.

That is what all of the team of people, really, allows us to do there. So, clearly, there is more capital. We still feel that we have a competitive advantage. I think that, particularly, if you look at Ireland--and Mary can correct me--in 2012, I don't know what the numbers were for [2013], but in 2012, we represented, by dollar amount, 35% of the transactions, in Ireland, were done by Kennedy Wilson.

And, roughly, the same in [2013].

Sorry to keep going on here. We have some very high-quality assets in both of these markets. We own some of the best commercial properties in all of Ireland. So, when you think about the Byron acquisition and the properties we own, it has, now, allowed us to build not only the Team, but a database of information that gives us, really, realtime, on-the-ground information about rents, prices, and all of that, and that allows you to move with a certain amount of speed when you are looking at these acquisitions.

Great. If you could just share, what is an appropriate leverage target when you look at Europe? Is it [50%], 55%? Maybe a little higher? How are you looking at financing some of those deals that you do going forward?

Yes. I think we are looking in the 50% range of an appropriate target.

One comment. You know, when you first went there, there was no debt market. What kind of state of the debt market is there now?

Right. So, when we first went to Ireland, as Bill said, there was absolutely no debt market. We, in fact, had to close our original acquisitions on cash. That has changed considerably. So, for the high-quality assets that we look at buying, and even loan-on-loan financing, you are in the sub-300 margin range, with quite a few active lenders. So, very, very competitive, and I think for us, we have got great banking relationship. So, the leverage will be very accretive to our ongoing acquisitions.

Thank you.

Thank you.

We have a question from David Ridley-Lane from Merrill Lynch. You may go ahead

Sure. I think the loans that you have purchased already in the first quarter, most of those are tied to a UK hotel. I'm just wondering, is this a loan-to-own type of opportunity?

Well, first of all, sorry to correct you there, David. It is an Irish hotel.

Oh, sorry, yeah.

So, yes, that is another one where, you know if you don't mind, I would rather not comment on it too much. It is a loan, and, of course, as you might expect, we are having conversations with the borrower. But, other than that, that is really as much as I can say about that property. It is secured by a very iconic property in Dublin. But we have got, kind of, ongoing discussions going on and I kind of got do confine it to that answer.

Got it. Then, on the acquisition front, you have been, kind of over the last three years, running, plus or minus, around [$3 billion] in acquisitions each year, shall we expect 2014 to be similar ballpark? I mean, you have already done about a half a billion, and have another half a billion under contract, and it is just February, so is [$3 billion] a reasonable target, or would you expect, perhaps, a little more here in 2014?

Well, I never like to give forecasts of what we are going to do. And so my answer isn't really a forecast, but what I would say is, we, obviously, have had an active first few months of the year on every front; both, the capital side and the acquisition side. And what has happened to us, of course, because of all of that, is that we see more opportunities.

We have, as Matt alluded, we have a big pipeline of things that we are evaluating right now. I can't say whether any of them will close, but it would be more of -- I think we have a good shot at being near those numbers, but I think the last thing I would say about that, we don't feel we are under any pressure to put capital to work, if the deals don't make any sense.

So, even though we see continued big opportunities, particularly in Europe, we want to be careful about the things that we are investing in. We have really been able to do some tremendous transactions, not only in Europe, but here in the United States over the last three or four years. So, we are not, intentionally, we are not going to get ourselves into what we consider stupid deals, just to put capital to work.

That makes sense. Thank you very much.

Thanks.

I would like to turn the call back over to Bill McMorrow for closing remarks.

Okay. So, thanks, everybody, for listening in today. As I hope everybody knows, we appreciate your support on all of the capital and, then, our equity, and we will look forward to talking to you next quarter. Thank you.

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