Kennedy-Wilson Holdings Inc (KW) 2014 Q4 法說會逐字稿

Welcome to the fourth quarter 2014 Kennedy-Wilson earnings conference call. My name is Vanessa, and I will be your operator for 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 and I will now turn the call over to Christina Cha, Vice President of Corporate Communication at Kennedy-Wilson.

Good morning, everyone. Joining us today 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-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. So as a starting point, the Company reported its EBITDA yesterday -- or EBITDA for the year of $317.8 million, which is a 100% increase from $159 million for 2013. We also announced yesterday that we were increasing our dividend by 33%, from $0.09 per share per quarter to $0.12 per share, payable in April.

The adjusted net income was $133.7 million, or $1.50 per basic share which includes $27.3 million, or $0.31 per basic share of loss on early extinguishment of corporate debt. And just to amplify that a little bit, we paid off -- Kennedy-Wilson refinanced its $350 million, 8.75% senior notes due in 2019. We did this in December, primarily with the proceeds from its $350 million of 5.875% senior notes due in 2024.

So we lowered the interest rate by almost 300 basis points, and extended the maturity out by five years. As a result of the prepayment of the 8.7 -- 8.75% senior notes, the Company recorded a loss on our early extinguishment of corporate debt of approximately $25.8 million, which is a one-time charge, and the refinancing will lower our interest expense by $10.1 million per year during the remaining term of the debt.

Also, just as a refresher, in the of third quarter of 2014, we paid off $40 million of preferred -- trust preferred, which carried an interest rate of 9%, so we're saving $3.6 million in interest on that. And then going forward, we have a $100 million convertible preferred with Fairfax Financial, which is converting in May of this year, and that carries a coupon of 6%. So that 6% will also go away beginning in May.

Our GAAP net income to common shareholders was $13.8 million, or $0.14 per basic share and $0.14 per diluted share. That also includes $27.3 million, or $0.31 per share, as I went through that -- that debt extinguishment earlier. We had a really remarkable 2014, where we achieved our highest adjusted EBITDA in our history.

We had our largest year of investment activity. We raised $2.2 billion of equity capital on the London Stock Exchange for Kennedy-Wilson Europe. And we refinanced, as I said earlier, a large portion of our corporate debt at a lower interest cost.

The other thing that I'm going to talk about a little later in this call is what we're doing at the property level in terms of debt refinances. In terms of fourth quarter highlights, during the three months ended 12/31/2014, the Company and its equity partners completed $688.9 million of investment transactions. The Company invested $110.1 million in 587-point -- $587.7 million of acquisitions, and received $18.3 million from $101.2 million of dispositions.

In terms of the fiscal year 2014 highlights -- during the year, the Company and its equity partners completed $4.3 billion of investment transactions. The Company invested $600.7 million in $3.2 billion of acquisitions, and received back into Kennedy-Wilson $184.9 million from $1.1 billion of dispositions.

As I said earlier, we launched Kennedy-Wilson Europe about this time last year, we were closing the initial IPO, which raised $1.7 billion. And then in October we completed a $565 million follow on offering for Kennedy-Wilson Europe. Of note, too, the initial IPO was the second largest real estate IPO in the 200-year history of the London Stock Exchange.

As of December 31, 2014, Kennedy-Wilson owns approximately 14.9% of the shared capital of -- in KWE, and Kennedy-Wilson holdings serves as the external manager of KWE. Further highlights for the year was the Company raised a record $5.4 billion of equity and debt during 2014 for itself and its investment platforms.

The Company and its equity partners completed new investment-level financings of $1.4 billion, including $100.2 million of assumed debt, with a weighted average interest rate of 2.93%, and a weighted average maturity of 5.8 years. The Company and its equity partners also refinanced $300 million in investment-level debt, with a resulting weighted average interest rate of 3.27%, and a weighted average maturity of 5.9 years. The loans, prior to the refinancing, were $271.2 million of debt, with a weighted average interest rate of 4.57%, and a weighted average maturity of 4.2 years.

The Company also increased its capacity under our unsecured line of credit from $140 million to $300 million. Additionally, KWE, in its inaugural year, obtained a $225 million -- or $350 million unsecured line of credit. And I thought -- we're coming up now on the fifth anniversary of our going on the New York Stock Exchange, which was April 14, five years ago now, and so I thought it would be useful if -- to frame what's happened in the last five years -- if Matt Windisch took you through some of the highlights of the last five years. Matt?

Thanks, Bill. So we've obviously had an extremely active five years as a public company. At the end of 2014 we -- we're approaching $15 billion of total acquisitions since going public, and we've now crossed that threshold here into 2015.

In terms of our assets under management, when we first went public, we had $5.6 billion under management. As of the end of 2014, we're at $18.1 billion. With a 27% compound annual growth rate per year of assets under management.

Our investment account, which as many of you know represents the money that Kennedy-Wilson has invested in the portfolio of properties and loans, et cetera, that we own with our partners, that investment account has grown from $212 million at the end of 2009 to $1.7 billion at the end of 2014. That's a 50% compound annual growth rate. Looking at our adjusted EBITDA, we en -- we entered 2010 with $31 million of adjusted EBITDA for the full year of 2009, and this year we had $317 million of adjusted EBITDA, that's a 59% compound annual growth rate.

So with that, I'll passion it back to Bill to go through the investment business highlights.

Thanks, Matt. And before I get into the highlights, I want to give you a little bit of a frame of reference for, what we own. So as of December 31, 2014, we had an ownership interest in approximately 32.6 million square feet, which includes over 20,000 multifamily units, 14 million square feet of commercial rentable space, 177 residential units, 619 residential lots, and almost 1,000 hotel rooms.

The investment portfolio has a book value of [$9.1] billion in assets, including [$4.8] billion in equity, in which Kennedy-Wilson has approximately a 32% ownership interest. In addition to our existing income-producing portfolio, we have entitled, or are in the process of entitling, over 3,000 additional multifamily units in the United States and Europe on land, with little or no basis that we own within or adjacent to existing income producing assets. As Mary will update you on here in a little bit, between the acquisitions that we've done in KWE and the contemplated acquisition that we'll talk about here in a little bit that we're doing with Winthrop, our total square footages are going to increase to over 40 million square feet with those acquisitions.

So, in terms of the investment business itself, for the quarter our adjusted EBITDA was $48.3 million, which was a 4% increase from the prior year. For same property multifamily units, total revenue increased 9%. Net operating income increased 10%, and occupancy remained flat at 95%.

For same property commercial assets, total revenue increased 3%, net operating income increased 2% and occupancy increased 3% to 88%. And remember in the commercial properties, as I mentioned on earlier calls, a number of the assets that we bought were assets to reposition that had very, very low vacancies or could have been empty buildings, entirely empty.

For the year ended 12/31/2014, our adjusted EBITDA was $278.5 million, which was a 97% increase from $141.5 million. For same property multifamily units, total revenue increased 7%, net operating income increased 10%, and occupancy remained flat at 95%.

On the commercial assets, total revenue increased 1%, net operating income increased 1%, and occupancy increased 1% to 86%. The Company and its equity partners acquired approximately $3.2 billion of real estate-related investments, including $2.4 billion acquired by Kennedy-Wilson Europe, in which the Company invested a little over $600 million of equity, representing an approximate 23% weighted average ownership stake. The Company's investments for the year were directed 69% to the United Kingdom and Ireland, and 31% to the western U.S.

To date we've completed -- sorry, the Company and its equity partners sold 19 commercial properties, three multifamily properties, ten condominium units and four residential investments, which resulted in gross sale proceeds of $1.1 billion. As I mentioned earlier, the Company's share of these net proceeds was $184.9 million, compared to a book value of $105.2 million.

Over the last 12 months, we've added 8.5 million rentable square feet of real estate to our investment portfolio, including almost 3400 multifamily units, and 42 commercial properties. During that same period of time we've been able to grow the investment level annual multifamily and allied by approximately $43 million, to $212 million. Additionally, we grew our commercial annual NOI by $65 million, to $210 million.

Finally, our investment account during the year grew by approximately $567 million, to $1.7 billion, which represents a 45% increase over the 12-month period. In terms of our service business, our adjusted fees were $121 million, a 67% increase from $72.4 million.

Our adjusted EBITDA was $59.3 million, which represents a 87% increase from $31.7 million. In terms of Kennedy-Wilson Europe, as Christina said, Mary Ricks is on the line. Mary had her and our earnings call earlier this morning our time in Europe, so fresh of coming off of that call, I'd like Mary to walk us through highlights of Kennedy-Wilson Europe.

Great, thank you, Bill. During the fourth quarter, Kennedy-Wilson Europe completed the following offer of approximately $565 million of ordinary shares. Kennedy-Wilson acquired approximately $75 million of KWE's ordinary shares in the offering.

As of December 31, 2014, Kennedy-Wilson owns approximately [28.2] million shares of KWE with a cost basis of $333.8 million, which represents approximately 14.9% of KWE's total share capital. Since its launch in February 2014 through December 31, 2014, KWE has acquired 82 direct real estate assets. That was transacted in 16 different transactions, that total approximately 6.6 million square feet, and five loan portfolios totaling $2.4 billion in purchase price, which KWE currently expects to produce approximately $141 million annualized net operating income.

And in its capacity as external manager of KWE, KWH will receive management fees, 50% of which are paid in KWE shares, equal to 1% of KWE's adjusted net asset value, reported by KWE to be $2.1 billion at December 31, 2014. Additionally, in certain performance fees -- during 2014, KWH earned -- KW Holdings earned $14 million in management fees and no performance fees.

Annual management fees to KW now total approximately $22 million per year, and KWE also announced this morning a 75% increase to its quarterly dividend from GBP0.04 to GBP0.07, which represents a 2.8% annual yield on the IPO price, which demonstrates the strong cash flows generated by the portfolio. And I might just take you -- bring you up to speed a little bit and take you to the two markets that we're operating in right now in the U.K. and in Ireland. And really what we've seen there in those two markets is considerable improvement in GDP.

In the U.K. we've seen 2.6% increase in GDP, which is really the best growth since -- since the height. And in Ireland we're seeing a lot of very, very good improvement in Ireland, with GDP for 2014 predicted to come in around -- GDP growth, 5% increase. We're also seeing prime Dublin office rents, increasing significantly, experts predicting office rents to grow to EUR55.00 a foot at the end of 2015, and some experts are predicting Dublin office rents to go through the peak of EUR65.00 a foot at the end of the year or early in 2016.

Additionally, we've seen quite a bit of retail sale improvements in Ireland. Those are still 15% below the peak, so there's good growth to come there. Dublin apartment rents grew 7% last year, and Dublin office values are still below the peak, and are trading at about the 15-year average. So we're seeing sort of all the drivers pointing to the right -- in the right direction.

And then I think the last thing Bill, I'll say, before I hand it back to you is just in terms of what we've done post the period, so post the end of December. We've acquired two large portfolios, one portfolio from Aviva, we're calling that portfolio Gatsby, and that portfolio was a GBP500 million portfolio with 180 assets spread throughout the U.K. We acquired that at just below a 7% yield, and we've fixed the interest rate at sub 3%, 2.96%. So we have a 400 basis point positive accretion, which is obviously very good for returns.

We've also increased the occupancy from 9.9% at year-end to 94.5% today, as well as increasing the weighted average on expired lease term from 7.7 years to 8.2 years. Mostly that comes through selling voids as well as the Gatsby portfolio. And then the last thing that I might point out is the annualized NOI has gone from GBP90.6 million at year-end to GBP133.4 million today, or roughly $200 million.

And as Bill said earlier, that's enabled us to increase our dividend -- dividend yield.

Right. So it's been quite an extraordinary performance out of Kennedy-Wilson Europe, the -- so when you think about it, we were just closing the IPO about this time last year, and so all the money from that IPO has now been deployed into properties that are going to produce now slightly over $200 million a year in net operating income. One other thing that I thought I should mention on the call that's not in the earnings release is what our debt strategy is.

We've talked a little bit about what we're doing at the corporate level but at the property level, we have similar opportunities to reduce our debt cost. And as a company, what we're -- our leverage right now at the property level is roughly 45%, and so as a policy, we want to keep that leverage under 50%. But if these very low interest rates -- and again to give you a little bit of frame of reference, when we made our first visit to Ireland in December of 2010, the ten-year Irish interest rate was 14.5%.

Today, this morning, the ten-year in Ireland was .88%, less than 1%, actually more than half of what we're paying here in the United States on our ten-year. So that creates opportunities to finance and refinance existing debt that we have.

And so I want to take you through one example so you understand how we're looking at, these individual properties. So two years ago, we bought one of the largest apartment complexes in Salt Lake City. And we were attracted to Salt Lake City, where we had not been before, because of the job growth, the great university system, and the overall economy in Salt Lake City and the state of Utah.

And as we did in Ireland, and we did in Japan, and in many other markets, we always try and get into these markets early, before other people, other institutional buyers are in those markets. So we bought a 366 unit apartment project in Salt Lake City that sits on 35 acres of land in a prime residential neighborhood, it's land that could never be duplicated in Salt Lake City, so we had a high barrier to entry.

In any event, when we purchased that property, we bought it for $43.5 million in November 2012 and we paid a 7.34% cap rate. We assumed $26.3 million of debt that had an interest rate of 4.71%, and then we put on what's called a supplemental loan of $5.3 million and an interest rate of 5.43%. So the combined debt on the property is roughly $32 million. So now you fast-forward it to 2015.

So during the period of our ownership, we've grown rents by 11%. The NOI has gone from $3.1 million to $3.7 million, which represents a 17% increase. And we've implemented almost $4 million worth of renovations at the property level. So what we try and do at all of, particularly our apartment complexes here in the United States and in Europe, is what I'll call reamenitize these properties with fitness facilities and business centers so that this drives the rent.

So what we've decided to do with Sandpiper, this loan will close sometimes in March, so remember the number $32 million, we're now putting a $53 million loan on the property. And we're -- we have a prepayment penalty that we have to heed of $5 million, so we're going to cash out $17 million of equity out of that property, which represents our entire investment. So we put a ten-year loan on, with a fixed rate of 3.24%, it's interest-only for five years.

The interest payment on the $53 million versus the $32 million is almost identical, but we've locked in that interest rate now for ten years. And then Mary similarly, in Ireland, Mary and her team just completed a refinance of some assets that we bought early on in the -- our entry into Ireland, and so the original loan on those four properties was EUR82.5 million, and the floating rate interest was slightly over 4%.

We just refinanced that portfolio for buildings with $131 million euro loan from a life insurance company at a rate of 2.57% fixed for ten years. And also, as a frame of reference, that interest rate of 2.57%, similar to what's happened with the ten-year Irish Treasury versus the U.S. Treasury, is probably about at least 100 basis points inside of what we could do here in the United States.

And then to add on to Mary's point in real time, the first office building that we bought in Dublin in 2011 had leases, the majority of the leases in the building were rolling in three to four years. And so we underwrote that deal, that the leases, as they matured, we would actually do new leases in the building at EUR17 per square foot. We've now essentially released almost the entire building, but the rental rate that we underwrote at [$17] a foot, we did the leases, the new leases at 43 and change -- EUR43.

So EUR17 turned into EUR43. So not only are we lowering our borrowing costs in many of these markets, but the net operating income of the properties is exceeding what our original underwriting was.

So in terms of subsequent events, we've alluded to a few of them but since December 31, the Company and its equity partners have completed total acquisitions of $806 million, which included $764.3 million related to the Aviva portfolio that Mary mentioned and the Park -- Parks portfolio. In addition, the Company and its equity partners have $631.7 million of investments under contract, including $89 million in KWE.

I mentioned earlier that these investments will add approximately nine million square feet to our portfolio, and included in those acquisitions is another 5600 multifamily units, primarily here on the West Coast, with a concentration in the Seattle market. And post the closing of the -- these acquisitions in Seattle, we'll have about 10,000 units. Seattle is -- is -- is just doing extremely well with great job growth, many, many Fortune 500 companies headquartered there, in fact, more Fortune 500 companies are headquartered in Seattle than here in Los Angeles.

So, as we announced in our 8K filing a couple weeks ago, in January Kennedy-Wilson entered into a purchase agreement with a wholly owned subsidiary of Winthrop Realty Trust to acquire a 61.5% interest in vintage housing holdings for approximately $86 million, VHH owns certain interests in 30 multifamily properties totaling almost 5500 units, which have been capitalized with tax credit financing. Upon the closing of the transaction, the property developer and current manager of (Technical Difficulty) of the equity interests and we obviously own the remaining 61.5%.

Included in this acquisition is the assumption of approximately [$328 million] (Technical Difficulty) along with third-party equity (Technical Difficulty) and unrestricted stock. The total value of that acquisition is $486 million, and we expect the acquisition to close sometime here in the first half of 2015.

Once we've completed that transaction on a pro forma basis, we'll own 26,000 apartment units. And then lastly, in February of 2015, KWE closed the acquisition -- this is the same 163 of 180 mixed use properties located throughout the United Kingdom -- this is the Aviva transaction. The closing of the balance of the portfolio is under contract, and that will close here in the next 12 months. So, with that overview, I'd like to open it up to any questions that anybody might have.

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

Good morning, congratulations on a great finish to the year, and in terms of the five-year anniversary, I think to say you've been active might be a bit of an understatement. First to focus on Europe and Ireland in particular, following up on some of your and Mary's comments, you mentioned when you entered the market in 2011, the ten-year was above 12%, there was no property level debt market, you were buying properties at mid teens cap rate. When you look at the ten-year now sub 1% there, we're obviously seeing what it's doing to financing and valuation on the properties you own, but do you see it limiting the opportunity set in terms of acquisitions going forward, and maybe how do you reconcile it with something like the Aviva portfolio, where you still clearly found a pretty good deal on the 7% yield range?

Well, thanks, Jason. I'm going to let Mary answer that in just a second, but I think that, what I was trying to obviously point out was the Sandpiper and the Salt Lake City transaction, but, our timing, and not to self-congratulate, but our timing in getting into Europe and particularly Ireland and the United Kingdom, was spot on. And in addition to the real estate acquisitions that we did, of course, I think most people know that we were instrumental in recapitalizing the Bank of Ireland itself, which is also turned out to be a great investment for everybody that invested there.

But what really took us to Ireland in the first place was the fact that there are 700 U.S. companies that have their European headquarters in Ireland, and the majority of the U.S. tech companies, particularly the California tech companies -- Facebook, Google, LinkedIn, Twitter, and on and on and on -- have major operations in Ireland. And so that connectivity between California and Ireland was really what took us there in the first place.

Now, Mary, in terms of what you see as the investment outlook in both places, I'll turn that over to you.

Okay, sure. Hi, Jason. You know, I would think Kennedy-Wilson in Ireland, we've got, if not the largest, one of the largest platforms there, so we've got over 30 people on the ground, so we have local experts in Dublin that know the market inside and out, know the occupier market, know everything that's going on there, and I think that gives us a competitive advantage. A lot of the competition that we're seeing are, the private equity firms that are coming from New York or from the States with, one or two people looking to team up with people in Ireland, and people like ourselves.

So that gives us one advantage. I mean, I think we're still seeing a lot of very interesting opportunities. You saw that we -- you may have seen that we announced the Gardner House acquisition, which was a loan that we acquired at the end of the year, and then we have now converted it just with owning it for less than 90 days, we've taken title to that real estate, and that's a great office building in downtown Dublin. And that was done off market. That was a deal that we bought from an investment bank who we know quite well who had acquired a whole portfolio of loans. So that was off market.

And then we did the Elliott transaction, which was another off-market deal where we're just working through now just, if I fast forward in terms of asset management, we are working with the borrower to consensually sell all the assets, but we will be taking title to the three largest assets, and that's the Irish Time building in downtown Dublin, the Herberton apartments where basis is EUR150,000 a unit, which is sort of 50% of where multifamily trades today in Ireland, and then retail center that we'll own above a 10 yield. And so, I think the team on the ground and the -- with the knowledge and the relationships that we have with financial institutions and other -- the governmental agencies and insurance companies that are selling, we'll continue to find really interesting acquisition opportunities in Ireland.

NAMA still has EUR16 billion worth of assets to sell. They have done a great job getting through their book, but they're -- that's still a huge amount of assets that need to trade -- change hands. So we're excited about the opportunities in Ireland and in the U.K., we -- even though we see the GDP growth and the region is improving, secondary markets outside of London, which, we've called very early and we've been a player in that market for a long time, in those markets, we're seeing a lot of growth, yield compression, rents increase. We're seeing some assets being taken out of stock and converted from commercial to resi, and that's helping all the underlying fundamentals of real estate.

So we continue to see really interesting opportunities in the U.K., and rates, like we've been talking about throughout the call, rates are at historic lows and when we did the Gatsby financing, so that GBP500 million deal came with stable debt because Aviva -- who was the lender for these assets over the past six and seven years, have taken title and had receivers in place -- they wanted to stay involved with this portfolio because it's a very, very high quality, very good portfolio with almost a ten-year (Inaudible) throwing off-grade income.

So we structured a deal with them where they provided staple debt, roughly GBP350 million of staple debt, and we did the debt in three different tranches, so a three-year floater, a five-year fixed, and an eight-year fixed., and together the average rate is sub 3%. So when we fixed our five and eight-year (Inaudible), the ten-year was literally at historic lows. I think we got a little lucky on that day, but we just have unbelievably good positive accretion on all those deals. And we still see great opportunities in the U.K. and Ireland.

I think, too, Mary, one of the things that you discussed on your call, and is true here in the U.S. that is not readily apparent when you look at our information, are the asset management opportunities that we have on not only existing properties, but where we have land that we bought for basically nothing or very low basis. You might talk a little -- just as an example, what's going on in Ireland with Clancy Quay, which is an asset we own in Kennedy-Wilson Holdings.

Sure. That's an asset that we bought from a couple of lenders, and it's got three phases. The first phase is 423 Apartment units, and there's a whole ongoing project there with regard to just taking units back and renovating units and then increasing the rents. We did a major, major amenity package there, and people here in Europe are very interested in -- and it's been a really great thing in Ireland, is to take the U.S. style of multifamily management with the tenant gyms and with the business centers and with the whole amenity packages, and we've brought that over to Ireland, which has been so well received.

We did that work, spent a couple million euros on that amenity package and have -- really, the occupancy has stayed so solid, so it's been a great retention policy. But we've also been increasing rents, and have seen double-digit increases, and so that's obviously dropping to the bottom line.

And then we have a second site where we have 160 units, we are planning for 160 units at Clancy Quay, and we hope to be on site there and start construction a little later this year. And then there's a third phase as well that we don't have planning on yet, but we think would be a great sort of grocery and another multifamily commercial project of Clancy Quay.

Okay. And I think if we could, before we get off of that, I think one more example that I think is particularly relevant is what we did at The Rock in Manchester.

Yes.

Where you bought that, basically allocated nothing to the apartment units.

Yes. That's a project we bought the debt, which was roughly GBP275 million, we paid GBP75 million for the whole project, which included a 750,000 square foot retail center, which has all the big names -- Debenhams, Marks & Spencer, Next -- very, very strong covenant retail center. And then above the retail, there's residential units, and the first one -- first -- actually, first two phases have been sold off, individual units, so there were three other phases of residential that weren't built out yet, just the facade was put in place, but it also had planning.

We paid nothing for that, so we literally put a zero basis on that residential. We've now built out the first phase, 66 units, they're fully let, doing very well, yield on cost is roughly 11%, and we're just completing the second and third phase now, which will have the same yield on cost.

Okay. And just sort of following up on the rates question, the phenomenon obviously isn't confined to Ireland, Japan, ten-year yields are below 50 basis points, ten-year back below two. Bill, you talked in your prepared remarks about what it's doing on the financing side with the corporate refinance and also property level, but I just wonder if maybe you could tie it with what you're seeing in valuations and cap rates because I think on a nominal basis, when people read about cap rates and the 4.5%, 4% range, it obviously, has some level of concern, but in real terms, there's still a pretty big spread there relative to historical figures. So I was just wondering if you had any perspective on that.

Well, I mean, there clearly is cap rate compression going on all over the globe as people look for yields, but I think you can see, Jason, from the two bigger transactions that we -- the one that Mary just completed -- well, two that she just completed in Europe, the Aviva transaction, the yield was slightly over 7%. The yield on the Park Inn transaction is over 9% -- this is an unlevered yield I'm talking about.

And if you look at the Winthrop transaction that we're about to complete, that's slightly over 7%, also. And so, Mary and I, we have been doing -- we have been here for 25 years plus, and what happens, I think, to a company like ours, once you get the kind of scale that we have, you tend to see more transactions.

And the other part of our whole business philosophy has always been to buy things through off market transactions. Europe, because it's fresh in my mind, we've transacted with 16 different financial institutions or receivers in Europe. And I would say Mary probably 80-plus%, because it's true on portfolio-wide, everything we own, around 80% of everything that we've bought, we buy in an off market transaction.

Yes.

And so we're always looking for some anomaly, some inefficiency in the market, whether that's somebody that needs to get rid of something at the end of a quarter, somebody that needs to get rid of something, where they don't want a fully marketed process going on. So we're not -- we're not what I would call the retail -- we're not your typical retail buyer. And the other part of our whole strategy over all these years is to bend -- to build our own infrastructure so that we had feet on the ground in every market, where we were finding these transactions ourself. We weren't just relying on the brokerage community to deliver a transaction to us. So, we're not -- when we tell you about all these acquisition numbers and so on, this is not meant to be like we're just buying things for the sake of buying things.

If there's not something that's compelling to us in terms of the yield, or what I call there has to be a story attached to every deal that we do. If there's not something compelling attached to it, then, we're not going to do it.

But I think the reverse of it, which is what I was trying to allude to, was that with the compression in cap rates, it's clearly impacted the value of the existing things that we own, and so you saw last year, even though it's not readily apparent, we sold $1 billion worth of assets last year. And so as a company, not only are we using this opportunity to refinance corporate debt, refinance property level debt, but also where there's assets that strategically don't fit in what we want to do, we're selling them at very attractive cap rates.

For example, we own one office building in San Francisco, where there was no reason for us to have one office building in San Francisco. So we sold it last year. Mary, in the first -- well, in the last 60 days, has probably sold over GBP20 million, right, Mary, is that right?

Yes, about close to GBP20 million of several smaller assets, just pruning through the portfolio, but we made an 18% return in that short span of time. You'll see more of that coming out of Europe as well.

And so we're -- here in the States, we're selling a few apartment buildings right now where we have, smaller ownership interests in. And so as you can see, what we've been doing over the past three, four, five years, is increasing our ownership interest in our assets, but where they don't fit strategically, or it's an asset we don't want to own, the reverse of -- the good news about these lower cap rates is, we're able to get out of these assets at very attractive prices.

Okay. That all sounds great. I appreciate the details. Thank you.

And thank you. Our next question comes from Mitch Germain with JMP Securities.

Good morning, guys. Just maybe some thoughts on Japan. I know it's been a while since we talked about your holdings there.

I'll have Matt answer that.

Thanks, Mitch. I think really echoing what Bill and Mary were talking about with interest rates. I mean, clearly in Japan, it's been a low interest rate environment there for several years but in particular, the past year or so, rates there have -- are at historic lows. You've also seen obviously a significant weakening of the yen over the past year. We're fully hedged against our position there in terms of the currency.

But that's led to, in dollar terms, cheaper assets for foreign buyers. And so, there's been some -- there's been several large transactions in Japan in the multifamily space, at very attractive prices, so we feel very good about the valuation of our current assets. They're producing great cash flow. We've got good leverage, positive leverage on that portfolio, but certainly in our view, the values there continue to increase. So we're very happy with the portfolio we have and the value of it today.

Great. And, Bill, I spoke to Matt about, you know, the view on the vintage portfolio but I'd love to get your view. It seems a bit less traditional than some of the types of deals that you typically do, a bit more in the steady cash flow side than opportunistic feel to it, so maybe if you can just provide some perspective.

Well, yeah. I mean, this could be a long-winded answer, Mitch, so I'm going to try and highlight it. But we -- and I personally -- I visit a lot of the assets that are in this portfolio. And these are really very high quality assets in markets that we like, particularly the Seattle market. And as I said earlier, when you think about Seattle, where we will now have almost 10,000 units, you've got, Microsoft -- we've got an apartment building directly across from Microsoft headquarters. You've got Costco, you've got Amazon, you've got Safeco Insurance, you've got Starbucks, on and on and on down the line.

And so you've got population growth and job growth. And so when you think about the Winthrop portfolio, it brings a couple of things to our company. Obviously more concentration in the Seattle market, but I think opportunities to refinance and recapitalize some of the existing deals.

Even though they're very attractive financing on it, as these tax credit deals reach their 15-year term, there's opportunities to buy out the tax credit owner. And so there's many opportunities in this portfolio to, what I'll call, recapitalize some of the existing assets that they own.

Great.

Anyhow, that's how I look at this deal. It's attractive real estate in the first place with opportunities to recapitalize that are going in cap rate that is going to produce for us about a 14% cash on cash return. And I also should have added earlier, too, just as a general overview, like that Aviva portfolio that Mary bought, that's producing a 15% cash on cash return.

And so in this zero -- and I think also, Mitch, part of our perspective is that in this near zero interest rate environment, even though a lot of the things that we're selling right now we're putting up 18%, 20%, 30%, in some cases 40% returns, we don't think it's a prudent period of time to be underwriting things to, what I would consider to be above market kinds of returns because that means you're going further out on the risk spectrum. So what we're very, very focused on, really, is producing current cash on cash returns, generally in excess of 10%, with upside through asset management.

But as I mentioned, these two larger deals that we've just done, when you blend them together, were at a roughly 14.5% cash on cash return day one, without any asset management.

A far departure from the typical 7% or so returns that most of the other multifamily REITs are getting. Mary, I think it was the first deal in Spain, I know you guys announced a joint venture there, maybe just talk about the effort that -- of growing KWE outside of the U.K. and Ireland, and thanks.

Sure, thank you. So we've been focused and have been looking out for opportunities in Spain. Last year, we underwrote several billion euros of assets, loan portfolios, et cetera, as well as in Italy, we've been looking a bit as well over the last fourth quarter. I think, for us, the interesting thing about our platform here in Europe is that it is cross jurisdictional and multi sector. So that really enables us to, maintain pricing discipline and really focus on the best risk, weighted returns.

And so we really haven't found anything super interesting in Spain, but for we do like the opportunity of the commercial conversion to resi in the Madrid and Barcelona markets. We feel like that product type is the -- the resi market that either bottomed or is kind of touching bottom. So this company, Renta, who is a well-known operator in that space, has been in Spain for over 20 years doing just that, came to us with an opportunity.

And other interesting thing about the deal is, the specific deal itself is interesting, but it's also that Renta -- we have a one-way option, really, on all of their opportunities. And so they're going to be bringing us everything that they see and so that could lady to more interesting commercial, conversions to resi in those two cities. And then, as you know -- sorry, just to add one other thing, I think, we do have an office in Madrid, it's led by Christina Perez, who is a phenomenal real estate and, debt expert, and then we also have an interest in the Banco Popular servicing platform.

And we own a piece of that along with another private equity form that employs 270 people and manages over EUR20 billion of assets for Banco Popular. So we've got boots on the ground, we've got all the market knowledge, we've got relationships, we sort of have it all teed up and set up in Spain. But, we'll just see if we like the returns that the Spanish deals bring to us this year.

Great. Thanks. And congrats on a terrific 2014.

Thank you so much.

And thank you. Our next question is from Vincent Chao with Deutsche Bank.

Good morning, everyone. Just going back to the Winthrop deal for a minute here. I mean, they're in the process of liquidating. I'm just curious, is that portfolio sort of completely picked over at this point, or is there potentially more to do with those guys?

Matt.

We've actually bought two things from Winthrop. We bought a loan back in 2014, about a $5 million loan, [secured by, to buy] an office building here in Los Angeles, which was our first transaction with them and a way to create the relationship. And then obviously we're doing the vintage deal.

There are a few more assets in the portfolio that are on the West Coast, so it's certainly possible. We have a great relationship with them so we'll -- see how that goes. A lot of their concentration now is primarily on the East Coast so generally we would not be looking at that.

Okay. Thanks. And then just going back to the commercial portfolio and, I think Bill you alluded to some of the work that you're doing and some of the assets you're buying, which in some cases are empty. But I couldn't help but notice, the same-store NOI growth trends really shifted from the last couple quarters. The pool, I know, changed quite substantially this quarter so that's probably a big part of it, but as we look forward, at the growth rate of that portfolio, how should we be thinking about that in terms of just overall same-store NOI growth over the next say year or two? When do you think some of those value add things that you're doing will kick in and will start to see some of that growth pick up?

Yeah it's probably -- see, when you think about it, I'm just rattling off buildings off the top of my head, but we bought a building in Marina del Rey, which is right near Playa Vista, which is a very, very hot part of the L.A. market, but when we bought that building -- which is 60,000 square feet -- the tenant that was in there needed 120, so they moved to another building, the person that owned the building had owned it for years, he didn't want to go through the whole rehab. It takes about, from the time you buy a building like that, let's say, is a 1980s vintage building, it takes you about at least a year to get your plans, approvals and everything together to complete the rehab.

Sometimes it's as long as 18 months. And so it takes you -- and then when you look at a building like that, it's generally going to talk nine months to 12 months to lease it. So we had a building like that in Pasadena, the one I'm just talking about, one here in Beverly Hills, all three of those buildings were completely empty.

And so the cycle takes about, really almost two and a half to three years before you're actually producing income out of those buildings. But you're buying them in a way where it reflects that lead time. And so the building that we bought in Marina tell Rey, we bought it at a per square foot price that was half of what the market would be for a full building, maybe even less than that.

So I'd expect you'll see, really starting next year, rental growth and occupancy growth in the commercial portfolio because some of these buildings, like Marina del Rey, Pasadena, Beverly Hills, they're all being finished as we speak and leased as we speak. So you'll see that income really coming in next year.

I guess I was more referring to the U.K. and Ireland, where we saw the dip in same-store NOI growth in Ireland, and it sounds like there's some rehab work to be done in those markets as well. But just trying to figure out how we should think about same-store NOI growth in those markets more specifically, I guess.

The same-store -- this is Matt. The same-store pool, as you mentioned, was a big shift. We really had a lot of the Irish assets come on for the quarter that were not there for the full year. And then in the U.K. there's a, as you can see, the occupancy levels on the same-store are relatively low, so there's clearly a lease-up strategy going on there.

And in Ireland in the particular quarter we just didn't have a lot of roll, and so there wasn't the opportunity to increase rents. So it's really hard to look at, as you know, one quarter. I think you're going to have to look at that once the same-store properties are now on, really, over the next year or two is when you'll see the metrics really start to make sense.

Right. And I'm going to say something stupid and obvious, but in the apartment buildings, since you've got a normal turnover in an apartment building complex of, say, 30% to sometimes 50% per year, you're repricing that unit every day. So you're raising rents if that market is allowing you to do that, almost every day. Where in the office buildings, particularly ones that, even have occupancy, you might have three-year -- the building I mentioned to you, the so-called (Inaudible) building in Dublin, when we bought that building, we bought it at a 15% cap rate, but we underwrote it that the cap rate was going to go down to less than 10% because we underwrote it to lower rents.

What's happened, obviously, in Dublin is that [$17] rents are now [$44], and so the renewals that we've done in that building have kept the cap rate on our original basis at 15%. But the office buildings are a different animal than the apartment buildings, because you've got leases in there that have term left on them. So it takes longer to move the dial with these office buildings than it does on the apartment units.

Okay. Thanks. And then just one last question for me. Just talked about the strong dollar in different parts of the call here today, but I'm just curious, as we think about adjusted EBITDA, what is the -- what was the [FX] headwind here on your reported EBITDA because I think your hedges are more on the balance sheet side? And then just, what's the sensitivity to some of the different rates out there?

Sure, yeah. So if you look at -- I guess if you look -- in two steps. If you look at our investments globally, almost half of our investment account is foreign investment, so Japan, U.K., Ireland, et cetera. And so, we have a hedging strategy in place, as you mentioned, where we'll really hedging the balance sheet. And not hedging the cash flows per se.

Although the balance sheet hedge generally would be significantly larger than a cash flow hedge. So if you look through the EBITDA for the quarter, call it half of that is coming really from overseas, and so the impact of the P&L is, if you say there's a 10% appreciation of the dollar versus the foreign currencies, so take half the EBITDA and say, there's a 10% move on that, you're talking $2 million to $3 million for the quarter that -- that's from currency.

Okay. Thanks.

Had the dollar stayed even against those currencies, our EBITDA would have been $2 million to $3 million higher for the quarter.

Our next question is from David Riley -- pardon me -- our next question is from David Ridley-Lane with Bank of America.

Sure, thanks. Just a quick numbers question. Roughly, what does the 750 Apartment conversion, that was consolidated into your P&L in the fourth quarter, add in terms of annualized NOI?

The NOI on that is approximately $9 million annually.

Okay. And then on the vintage housing transaction, should we start modeling in your share of that NOI starting in, say, the third quarter or are you expecting it to close in the second quarter or --

Yes, I mean, it could close any time between 30 and 90 days from now, depending on customer closing conditions, so we expect certainly by the end of the second quarter, if not sooner, to have that in the Company.

It's mainly loan assumptions that we're going -- the consents and so on.

Got it. Okay. And then after the closing of the vintage housing transaction, I think that does take your cash balance (Inaudible) holdings down a bit. I know you still have your revolver, but how do you think about cash balance, given the transactions that are pending, including the vintage housing, specifically at KW Holdings?

Well, as I said earlier in the call, last year we sold $1 billion of assets and generated for the Company about $186 million of cash. We have some similar plans afoot this year, some of which will maybe generate even more cash than what I outlined at the $186 [million].

And so when you think about our cash position, we've got asset dispositions of -- we already have underway that are probably going to generate more than they did last year, and this whole -- the reason I went through that refinance exercise with you was to show you that, without increasing the leverage at the property level, with these very low opportunity rates, we also have the ability to refinance some of our existing assets that have appreciated a lot in value and take cash out of that.

And so, out of the four properties that we did in Europe, that's a 50-50 bencher with Fairfax, we took almost $55 million of cash out of that refinancing. The Sandpiper refinancing is $17 million, and so on and so forth. And so we'll generate somewhere around $75 million this year, to KW Holdings, just out of refinances, similar to what I've been through here, today.

Got it. Thank you very much.

Thanks.

And thank you. Our next question is from David Gold with Sidoti & Company.

Hey, good morning.

Hey, David.

Just a couple of quick ones, I know we're running long. The first one is, in listening to or going through the presentation this morning on the European side, clear that there's a lot of opportunity in a number of different markets there. And I was just curious if you could give a limit more color on how we're thinking now about capital allocation both in European markets and in the U.S.

You mean, David, in terms where we're going to invest our money?

Right. Right. How you're thinking about allocating the capital. Exactly.

It's funny, I'm going back now at least two years, Matt, maybe three. At least two years we've been saying, for the past two years that I thought that roughly we were going to be doing 70% in Europe and 30% here in the United States, and it's funny how these things turn out, but that's about what's ended up happening.

And I would say that, on a go forward basis -- we've started the year very fast, and you can't really annualize the numbers that we've done through the first -- when you look at KWE and KW and you include the Winthrop acquisition in the first two months of the year, what we either have under contract or have closed is $1.5 billion, versus the $3.2 billion that we closed for all of last year. You can't really annualize that number. And -- but I suspect it's going to be, you know, the same, 60-40, 70-30 Europe, but it's all always with overriding caveat that if there's nothing that makes sense to buy, we're not going to buy anything.

We have so many assets right now, when you add it up, throughout the entire Company, in terms of numbers, we probably have over 400 individual assets, and so the asset management opportunities to increase NOI, to increase value, to get a piece of land entitled, to do a Rock-type of apartment build-out, to do a Clancy Quay, there are many, many, many of those opportunities in that 400-plus portfolio. So it's not just a matter of continuing to do acquisitions. It's really focusing on the things also that we own.

Right. No. Fair. But I guess what I'm more trying to get a sense for is, when you think about the world being your oyster, even thinking about Europe more specifically, a number of markets where there are different stages of cycle, different opportunity sets, and when you think about the dollars, is it -- obviously there's a finite number of dollars to allocate, and, basically what the thought process that goes into whether it's by country or is it, purely a function of as you look at it, it's getting to a certain return?

Yeah, I -- it's on not really by country in the sense that we already have our footprint in the places that we want to be. And so in the places that we are already at, which is, West Coast of the United States, primarily the United Kingdom and Ireland, to a lesser extent Japan, those would be the places that we would invest. And as I said, I think, the split is probably going to be 60-40 or 70-30 weighted toward Europe.

But at the fundamental root of everything right now is that we're -- we're -- we're just being mindful of these very, very low interest rates and sometimes the -- both the good and the bad behavior that can come out of these lower interest rates. And so we're not trying to, so to speak stick our neck out in a way where we're taking undue risk on these acquisitions. So I think that that's the biggest thing, is just to keep in mind right now for us the extreme volatility that exists in the world, framed against the fact that we have a great, great platform, and then finding things like we're able to do that are off market generally, where we can get above market returns that are risk adjusted in a way where we're very, very comfortable that we've got the downside covered.

Yes. Okay. Fair enough. Just one other quick one, a numbers one for Matt or Justin. Remember correctly, the convertible in May converts to about 8 million shares, is it, and if you add --

Yes.

-- is that at the start of May, or was it mid May, just for modeling perspective?

Mid May, I think May 15th.

May 15th at 8 million.

Yes.

And then there's another piece of there to convert which is 32 million that converts into 3 million shares, but that's not for, I believe, a couple more years.

We had the option to convert that on the 17th.

So that, then Fairfax will then be -- there'll be an ownership position of 11 million common shares, but the preferred dividend that we've been paying them on both of those pieces by 17 will have gone away.

Perfect. Thank you. Both.

Thank you. Our next question is from Vance Edelson with Morgan Stanley.

Hello, and thanks for taking the questions and congrats on the quarter. Back to the U.K. and the 180 property portfolio acquired, you mentioned that globally, for Kennedy-Wilson, scale and buying off market are two benefits. Can you speak to some of your advantages that allowed you to come out on top versus the competition on the U.K. portfolio? Was it also your ability to obtain financing or anything else we should think about?

Well, I think it's -- I think we have a -- one big advantage, obviously, is having the captive capital, having capital in both our platforms, so to speak. The other advantage that we've got right now over what I believe are the private -- see, a lot of times, and not to critique the private equity business, but that's a model built around having to trade stuff all the time. And in the case of the Aviva transaction, it was very important to the seller that they were able to provide staple debt, as Mary outlined, but some of the staple debt that they wanted to provide had an eight-year term on it.

So if you're a private equity firm or anybody that wants to trade things every two or three years, you can't do a deal like that. So that narrows down the universe of people that are going to be interested in doing something like that, which creates an even bigger inefficiency in the market. And, I think the same thing is true with the Winthrop acquisition we did.

We look at that as a business we can build over time, not one where we can buy the -- the people that are going to own the 31.5% of that company have owned that business for over 15 years, built that business. So I have a hunch that some of the other people that they might have been talking to were thinking about maybe figuring out a way to liquidate the business. We want to build the business. And so having the capital and having a little bit longer term perspective, is a huge advantage to us right now.

Okay. That makes sense. And then shifting gears, maybe you've touched on it, but for the recent transactions that have effectively seen Kennedy-Wilson taking a larger stake in existing previously unconsolidated investments, what is the mindset of your partners that are willing to partially sell, I'm sure it varies, but are they generally wanting to diversify or harvest their holdings or is it something else?

Oh, it could be a multitude of different things that they might be thinking about, but you know I can't really speak for what they would be thinking about, but if an opportunity presents itself and we think that, it's compelling as a long-term investment, like Palisades, from our perspective, when you can find a roughly 750 unit great property in the Seattle market, those are very, very, very few and far between, particularly these bigger assets. And so a couple years ago we bought out Summer House, we bought our partners out of Summer House in Alameda, which is a -- near the -- it's in East Bay, and you know to frame all that, I mean, we've been able to significantly grow the NOI. That property is also almost 700 units.

But this coming year, not that I'm doing any forecasting or anything, the NOI on that property is going to be probably close to about $9 million. That's an increase of almost $1.5 million a year from the time we originally did that buyout.

So, sometimes the partners, have other uses that they have for their own capital, and I can't really speak to that, but we look at these -- particularly these bigger engines as an opportunity where we think we can, continue to improve the bottom line. Those are attractive opportunities for us.

And, really, unless -- if it is a good buy from our perspective, it's got to be a transaction that's good for both parties. We're not trying to take advantage of somebody. It's got to be good for both parties.

But we know these assets cold. Not like you're buying something that you have to get up the learning curve on. And so that's another great advantage of buying some of these things that we're already invested in.

Okay. Fair enough. And then just quickly, if you could just remind us on the dividend policy as you see it, a nice increase announced yesterday. How should we think about the dividend going forward?

Well, we had two dividend announcements, KWE went up, as Mary said, 75%, so that .GBP0.07 is roughly $0.11 so that's $0.44 a quarter, and that equates to a dividend yield of roughly 2.7%. Our dividend yield at now $0.48 on our current price is probably, I don't know, I don't have the math, something Luke 1.7%, 1.8%.

And so we don't have an announced dividend policy. It's just all going to depend on how we feel about returning money to the shareholders, because we're very focused on creating a total return for all of the shareholders in both Companies.

So, there's no specific policy, we look at it every year at this time. And, in consultation with the Board, try and figure out what we think is the most prudent for the coming year. So there's no specific policy.

Okay. I'll leave it there. Thanks again.

Thanks.

And thank you. We have no further questions. I will now turn the call over to Bill McMorrow for closing remarks.

Okay. So thanks, everybody, very much. As Matt went through the -- as I said, I won't be talking to all of you again until after we've crossed over the five-year anniversary, but it's been a terrific five years, and we appreciate all the support that we've gotten from everybody. Thanks very much.

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