Kennedy-Wilson Holdings Inc (KW) 2016 Q2 法說會逐字稿

Good morning and welcome to the Kennedy-Wilson second-quarter 2016 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I'd now like to turn the conference over to Daven Bhavsar, Director of Investor Relations. Please go ahead.

Good morning everyone and welcome to Kennedy-Wilson's second-quarter 2016 earnings conference call. This is Daven Bhavsar and joining us today are Bill McMorrow, Chairman and CEO of Kennedy-Wilson; Mary Ricks, President, 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 three months, please see the Investor Relations section of Kennedy-Wilson's website for more information.

On this call we will refer to certain non-GAAP financial measures included EBITDA and adjusted net income. You can find a description of these items along the reconciliation of the most directly comparable GAAP financial measure in our second-quarter 2016 earnings release, which is posted on the Investor Relations section of our website. Statements made during this conference call may also include 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'd now like to turn the call over to our Chairman and CEO, Bill McMorrow.

Thank you Daven, good morning everybody. I'm here on our office in Dublin Ireland and I would like to thank everybody for joining us today, we are pleased to have reported a solid second quarter, driven by continued growth in our property net operating income.

Today we will cover the following topics, we will start off with our key financial highlights for the quarter, followed by a review of our increase in recurring cash flow, and solid operating performance at our properties. Next we will discuss our balance sheet before turning to a summary of our investment transactions for the quarter. And finally we will discuss our current market outlook before opening it up to your questions.

So starting off with the financial highlights for the quarter, adjusted EBITDA was $74 million compared to $113 million during Q2 2015. Adjusted net income for the quarter was $43 million compared to $63 million in the second quarter of 2015. To give you a bit of context around these results, during the second quarter of 2016 our share of property NOI was up by $11 million, while our share of transactional related gains was down by $54 million.

In particular in the second quarter of 2015 we sold our Japanese multifamily portfolio, consisting of 2,400 units. We also reinvested the proceeds from that sale actually on the same day into the 5,500 unit Vintage Housing, West Coast US apartment portfolio. The results of which we will discuss later in the call.

The NOI growth in our multi family portfolio has been a key source of recurring income for the Company. On a same property basis we have now seen 12 consecutive quarters of 8% or higher NOI growth and six consecutive quarters in excess of 10%. For the quarter, out multifamily revenues were up 8% and our NOI was up 11%.

If you look at the second quarter same property stats for four of the largest publicly traded apartment REITs, on average they put up 5.5% revenue growth and 6% NOI growth. We outperformed as a result of our unique strategy in the Western US which makes up 86% of our equity investments in the multifamily sector. Our properties are not typically located in the central business districts or CBDs.

Most of our portfolio is in suburban, garden style apartments were relatively low densities and typically sit on large tracts of land. We tend to buy slightly older product and implement capital improvement initiatives to enhanced value add high-quality amenities and increase rents. Our typical rents can be anywhere from 30% to 60% lower than rents at newly built CBD located apartments.

This delivers a unique value proposition and relative affordability to our tenants. Our team has been fantastic in driving these impressive results, especially considering that when we went public in 2009 we had a 15% ownership interest and a total of 10,000 units and only one 100% owned property that at that time generated $1 million of NOI.

Today we have a 43% ownership interest in over 25,000 units, including 7,800 units that we own 100% of. Those 7,800 units alone generate $88 million of annualized NOI, so we have gone from $1 million to $88 million during that period of time.

Looking at our stabilized commercial portfolio for the quarter occupancy grew by 2%, while revenue and NOI increased by 1%. The same property pool and commercial is relatively small to the size of our overall commercial portfolio, because we tend to buy lower occupied properties where we can add value through leasing and capital improvements. These properties do not show up in the same property pool until they have been stabilized for both periods that are being compared.

We continue to make progress on our leasing efforts across our unstabilized commercial portfolio. For example, during the quarter we completed leasing at 150 South El Camino in Beverly Hills which is a 60,000 square foot building that we acquired vacant in 2013. After complete renovation we have now fully leased the property with last tenant, Imagine Entertainment, expected to take occupancy after they finished their TIs in the first quarter of 2017.

I would like to now review our balance sheet. The second quarter ended with another wave of volatility caused by the UK referendum vote. As discussed on many of our past calls, we have been preparing for this type of volatility over the last several years by continuing to extend our debt maturities and grow the recurring cash flows across the business.

Besides our revolving line of credit we have no corporate debt maturities until 2024. At the property level our loan to cost is approximately 50%, and that ratio would be much lower against today's market value of our properties. In total, 66% of our corporate and property level debt is fixed and 82% is hedged against long-term increases in interest rates.

Now moving on to the investing side of the business, for the first six months of 2016 Kennedy-Wilson invested approximately $138 million of cash from our balance sheet. Of the $138 million, $92 million or two-thirds of our investment dollars, were invested in a combination of KW share repurchases, KWE stock purchases, and CapEx related to our existing portfolio. Where we expect to create new recurring income streams.

Specifically with regards to our share repurchase plan we have spent $28 million including $23 million in Q2, since launching the $100 million program in February 2016. Also during the first six months of the year, we invested approximately $46 million or one-third of our investment dollars on the acquisition of new properties.

On the acquisition side in Q2, we and our equity partners acquired $382 million of real estate, including $223 million through KWE. These acquisitions had a weighted average cap rate of 6.8%. On the disposition side, together with our partners we sold $380 million of real estate at a weighted average cap rate of 4.3%.

Excluding KWE sales, KW's equity multiple on these realized investments was 2.3 including our share of promoted interests. We remain focused on our strategy of selling lower yielding investments and redeploying our capital into higher yielding, well located, higher quality assets. In fact, for the year we have now sold non-income producing investments generating over $100 million in gross proceeds.

Subsequent to the end of the second quarter, we completed $288 million of investment transactions. In July the Company acquired a 100% ownership interest in a 430 unit multifamily property in the Seattle suburb of Auburn, Washington. For $81 million, investing $19 million of equity.

In addition, subsequent to the end of the quarter we sold two multifamily properties totaling $207 million in sales price. These sales generated net proceeds of $116 million and a total profitable of the $108 million to KW and our partners. KW share of the profit, including promoted interests, was $20 million equating to a 3.9 times equity multiple.

In addition, our partners in these dispositions included what we call our Fund III and Fund IV, which are our KW value add funds. In total these funds received cash profits of $41 million and a deal level IRR of 50%. On our most recent fund, Fund V, we completed a $500 million fund raise in the second quarter of this year.

Fund V's investors include a number of the best-in-class global institutions. Additionally, Kennedy-Wilson as a 12% investor in the fund.

Fund V's current portfolio consists of 12 investments, with a total purchase price of $580 million. In addition to its existing portfolio, Fund V still has $500 million in purchasing power using 50% leverage.

Turning to KWE, earlier this morning KWE released its half-year results. KW owns 21.6% of the share capital in KWE and acts as its investment manager. The annualized NOI in KWE's portfolio as of June 30 stands at $215 million. During the quarter KWE completed leasing transactions on over 420,000 square feet.

The KW portfolio has a number of ongoing value add and development initiatives that will be completed this summer which will create further cash flow for the Company. In fact, KWE has now completed its renovation of the Baggot Street office complex in Dublin where they increased the existing 92,000 square foot office building by 38,000 square feet. The 130,000 square foot building was recently handed over to the Bank of Ireland on a 25 year lease; and remember, this building was obviously empty while we were doing the renovation.

Additionally, post-Brexit, strong leasing momentum continued in our UK portfolio, as KWE has now completed over a dozen leasing transactions post-Brexit adding $1 million of annualized NOI. Next I'd like to give you an update on a few of the larger projects we have in progress.

At our five acre waterfront capital block development in Dublin, which sits adjacent to our State Street office building in Dublin's South Docks, we recently appointed a contractor to build the 660,000 square foot mixed use project. Which includes 330,000 square feet of office across three buildings. 190 apartment units across three buildings, including a 23 story tower, along with 25,000 square feet of retail and cultural space.

We currently estimate that it will take three years to fully complete this project, with the first office building being delivered in late 2017. Kennedy-Wilson has a 42.5% ownership stake in the capital dock development.

Another significant investment where we have a lot of value creation underway is the Vintage Housing Holdings that I previously mentioned. We're now just over a year into our investment in Vintage Housing portfolio, and it's performed beyond our expectations. Vintage Housing as you might remember is engaged in the development of management of affordable housing on the West Coast, with a focus on independence senior properties.

At the time of our investment, Vintage owned interest in 5,500 units across 30 multifamily communities. Over the past year, through operating, financing and tax credit equity related distributions, our investment in Vintage has returned 55% of our initial capital of $78 million. And today produces a cash-on-cash yield of our 12% to KW.

Additionally, through Vintage have over 1,200 units under construction in Seattle and the San Francisco Bay Area that we expect to complete in the next 18 to 24 months. Once these units come online we will have nearly 7,000 units in this portfolio.

In conclusion, looking into the second half of 2016 and beyond, we believe that global volatility will continue to persist, driven by a variety of factors. The election in the US, the ultimate outcome of the UK referendum vote, uncertainty around interest rates, and currency fluctuations and so on. However, Kennedy-Wilson is well-positioned to take advantage of any market dislocations, but more importantly we remain focused on executing on our asset management investment strategies.

Our powerful global network of relationships continues to provide us with real-time market information, and gives us an edge in making the best real estate investments possible. With that, I'd like to open it up to any questions.

(Operator Instructions)

Mitch Germain, JMP Securities

Good morning everybody. Bill, just really curious I'd love to get some thoughts about planned dispositions, what specifically you might be targeting in the portfolio right now, maybe is it safe to assume that you guys could be a net seller based upon what your outlook is and maybe some thoughts around that please?

Well, I don't know about the net seller part Mitch, obviously, I think to make sure that I frame this properly, we went into that Brexit vote, now I'm talking about KWE, with nothing in escrow to buy. And we are very, very well-positioned in the sense that we maintain a lot of liquidity in that company. So, as far as the United Kingdom is concerned I think it's just way too early to see how this is all going to play out in terms of new acquisitions.

You've seen some activity among the open-ended funds but really not a lot has transacted yet. In both KWE and KW we're operating under a similar philosophy right now, where we're getting rid of, or selling what I would call the lower priced inventory that we have in both companies and converting that money into higher quality, higher earning assets. So that's happening in both of KWE and KW.

In addition to that, we have in the US, we have three reasonably sizable apartment properties that we're in the process of marketing right now. But we plan to redeploy the proceeds from those hopefully meaningful gains, into additional multifamily units that are earning a higher gross income. It's hard to say at this point whether we are going to be net sellers or not during the second half of the year, but obviously we have some planned dispositions underway.

And I guess we've seen a couple of assets trade in the UK post-Brexit, a couple of re-financings as well, are you guys seeing any indication of new capital, opportunistic capital maybe entering into the market?

Mary you want to answer that?

Sure, I would say that especially given the currency situation, you definitely are hearing a lot from US investors. So that we're seeing and we're still seeing very good liquidity, especially as Bill indicated, in the smaller lot size transactions. Because when you think about this low interest rate environment, for the kind of tale of our portfolio, these are great opportunities for investors to put their capital to work. For example on high street assets in the town that they live in, it's a great investment opportunity to pay us in the 5% yield when they can get no real yield elsewhere. So, we think that there's still really good liquidity within our own portfolio.

Right and last one for me, just a bookkeeping question on the development schedule in the supplemental we saw I guess, some of this the disclosure changed, I think some of the items the projects that we are seeking entitlement no longer on there, is that anything behind that?

This is Matt, so nothing behind it except we just want to really focus on the projects that we are actually under development as opposed to the ones that are seeking development. So it's -- we just thought we should be more focused on what's actually being built. As opposed to what might be built in the future.

Got you, thank you

And Mitch, I would add to Mary's point, I think both in the United States and Europe we're seeing tremendous demand on the part of investors that are searching for yield. So, there's very, very good liquidity right now particularly in assets, I would say under $15 million in value and particularly in the apartment market in the US. I think the point we were trying to make when we talked about the two sales post the second quarter, those were meaningful profit numbers on those apartments' sales. Really in a relatively short period of time in our ownership.

Great excellent quarter, thanks guys.

Vincent Chao, Deutsche Bank

Hi, good morning everyone, just sticking with the UK and the Brexit. I know it's early days, but just curious how you are thinking about timing of deployment of capital. I know right now there's a lot of transacting, but I guess what -- even if the spreads look attractive on some of the deals that you might be able to get I guess how you're thinking about sort of getting in now versus waiting a little bit longer just to see how things play out? And then two, do you expect the opportunities will be more on the loan side versus the asset side?

Mary?

Yes, I would say, what we're seeing right now is a lot of the UK property funds looking to -- their facing redemptions due to some liquidity mismatches where they are getting marked weekly oftentimes. So, the stuff that we're looking at -- I mean, UK property funds have always owned good assets, in good locations. So I think the opportunity is really to pick up high quality assets, oftentimes good long income, and/or assets where if there's a real need for liquidity very quickly then obviously the price will reflect that.

So I think the timing is good now, if we see opportunities that make a whole lot of sense relative to good covenants and long income. Because I think as you guys probably know the length of leases in the UK and Ireland versus on the commercial side versus the US, I mean, these leases here are generally much longer than US leases. So you can buy stuff that has 7 to 15 year lease terms, that we think will withstand any bumps in the market over time.

So those are I think are going to be some interesting opportunities. We've seen a little bit that come out of the UK property funds, I think there's way more to come. As there's political uncertainty as it bumps along before there's a real resolution as Bill said. So we're seeing that. And then on the PRS space, or the multifamily space to use a US name, we think that there's really good potential opportunity here in the UK in London.

And there were some structural changes that happened before the vote that we saw a softening in residential assets in London, and that's kind of been exacerbated by the Brexit vote. So we have sort of teams looking at that and having lots of meetings and conversations. So I think there's going to be some pretty interesting opportunities here to come, but we're going to be very selective as we always are, and seek really the best risk adjusted returns across our markets. Here and I'm sure in the US of course.

Vin to add to that, in addition to the acquisition side remember we have a number, the Baggot Street, Clancy Quay, now Capital Dock, we have, and what I said in the vintage portfolio, the units that we have under construction there and so we have many, many projects underway right now, that will be coming on line here in the next really, three months to, in the case of Capital Dock over the next really two to three years. And so all of those are going to be adding to the recurring income of both companies.

Okay thanks for that and just a question on the performance in the UK, I know it's a small part of the same-store pool but the commercial NOI was down 9%, was there something specific going on there?

No, no, no not 9%, no.

You're talking about for KW Holdings?

Yes, sorry

You're looking at a total of really two portfolios there. And one in particular, there was some role in free rent and we do cash NOI, so as you can see the occupancy was actually up slightly so it's just free rent running through primarily.

Okay and did you have a sense when that runs out?

It should run out the next three to six months.

Okay thanks guys

David Ridley-Lane, Bank of America Merrill Lynch

If you look across US multifamily portfolio, how many of those buildings are still undergoing some level of property improvement and unit refurbishments, trying to get a sense of what percentage of that portfolio is still to have some let's call it above-average NOI growth.

Matt?

Don't know we have an exact number in terms of -- we've got 130 properties across the western US, Japan and in Europe. I'd say in the western US, given the age and the time at which we bought these, I would guess you still have between 25% and 50% that are undergoing some sort of renovation, whether it's a common area amenities or unit upgrades, so still a fair amount of the portfolio where we are adding pretty significant value.

And then more of a market comment, if you -- I appreciate the commentary about how your multifamily assets are in suburban areas in garden style with the rents being lower, if you look at the market trend there do you see a number of years where those types of multifamily assets could continue to see above-average rent increases, given the value that they represent to the renters?

Well, I don't know that we're going to make a forecast on what we think the rents are going to happen. As I've said before on these calls, the markets that we're in, in addition to the fact that they are not generally CBD, and they're suburban value-add properties, where we could do unit renovations and add amenities.

Particularly in the Seattle market, in East Bay San Francisco you've got extremely strong job growth, and so I would say that to me, the continuation of the rent increases whatever they're going to be, I don't want to forecast whatever they're going to be, are driven in large part by the continued job growth particularly in those two markets. And as I've said many times for example, in the Seattle markets you've got more what I would call, Fortune 500 types of companies than we have in Southern California. And of course everybody I think is well aware of what's going on in the tech world in Northern California.

Right. And then I know KW has boots on the ground in Spain and Italy, and has been underwriting a lot of transactions, curious to get a sense of deal flow in those two markets.

Mary?

Yes, we're, I think we're very focused right now on executing our asset management plan in both of those markets. We've got our LNG property which is a shopping center in one of the best residential areas with a big office park next to it in Madrid. That's going to undergo a major renovation. We are in discussions now with probably the largest retailer in all of Europe, definitely in Spain, to increase the size of their unit and it's all positive discussion. So pretty focused there, it's kind of an all hands on job right now.

And then we've got of course, our Puerta Del Sol retail unit that will be a flagship store for a retailer, it's in really the best location in Madrid. It's kind of the Piccadilly Circus or the Times Square in New York to use a reference of Madrid. So again that's a big focus of our asset management team in Spain. We are always looking for opportunities, we just underwrote a big office complex in Madrid, we're constantly staying clearly disciplined in terms of our underwriting. And I think the difference between sort of KWE and a lot of our competitors is just, we're not going to underwrite massive double-digit rental type growth, which is what I think some of the buyers that are looking at especially office assets in Spain are doing.

And so for us it's very much about stock selection and conservative underwriting and really buying the right assets that have good underlying cash flow but also growth opportunities, and I would say the same holds true in Italy as well. Constantly working through and looking at assets, but we're going to be really careful with our capital right now and I think our focus over the first half of the year we were net acquisitors in Ireland, about half of our acquisitions were in Ireland in Dublin.

We've been very focused on the south suburb office market which we've made some excellent acquisitions there. In fact our Chase office building we already have under offer an 8,500 square foot suite office space there, that we -- the passing rent in that building is EUR19 a foot. We underwrote in the mid-EUR20s and we have it under offer in the high EUR29 a foot. So making really great progress there.

So when you think about sort of KWE and the landscape for investing our capital, it's very much organic growth driven. So what our own asset management initiatives where we can invest capital and further write risk-adjusted returns, and there's a lot to play for there. And then of course, other future acquisitions and we're underwriting deals all the time.

Yes, I think, again, last footnote to that, we've feel no pressure to buy anything. But the second part of the answer is, as we've been saying for several years, we have many, many opportunities to add value and increase cash flow from existing assets that we already own. Or pieces of land that we got for literally almost nothing next to properties we already own. So we're very, very focused on the asset management and value-add initiatives attached to things that we already own. While we are being -- looking at things but we're being very careful about the things that we're looking at right now. All right, thank you very much

Craig Bibb, CJS Securities

Hello guys. Bill, you are talking about -- with I think senior rates in Lithuania are 0.5%, got to be a ton of people searching for yield, do you have to wait until fund V is fully invested before you start to work on fund VI?

We have to wait Craig, until it's 70% invested. We were -- I guess we are in escrow now on a property non-refundable apartment property, that will take that fund to roughly 62%, and so relatively soon after that we are going to be through the 70% threshold.

In Q3?

Well, in Q3 we will be through the 62% number that I mentioned.

And then, would it likely be a larger fund?

I think that would be the hope and if you look of the progression looking at fund III, fund IV, fund V, fund V was the largest fund that we've done, co-mingled fund and that was at $500 million. And the prior fund IV was $300 million, and so we would certainly have an expectation that it's going to be larger than fund V.

A couple of questions for Mary, it sounds like post Brexit its most of the activity has been with smaller properties, have any large assets traded hands and is there enough activity that you could characterize cap rate post Brexit?

Yes, actually some larger assets have traded. There's one asset that's coming to market in Midtown that's a very good asset. It's an office asset with some retail on the ground floor in a very prime location. And they're still looking for an aggressive price, and there's a lot of demand.

So I think people look at London is one of the great cities in the world, and it is a safe haven and I think you're still going to continue to demand a good investor appetite from across the globe for London. For the foreseeable future, so we are seeing -- and there aren't as many larger assets coming to market of course, but there are some. And yes, there's still demand.

And then seems like the timing of the completion of Capital [Dock] could be good if financial firms are taking look at Dublin, has there been any retires there?

That's a very good point, it is arguably the very best development site in all of Dublin. And I think as I may have mentioned just to refresh everybody's memory, we bought the debt on the State Street Bank building, Mary in 2012 or 2011?

I think it was 2012.

And so, with that, acquisition, came roughly say 3.5 acres next door to it that was part of the same collateral package. Mary, redid the State Street Bank lease for terms certain 15 years. Very nice income stream.

But when we bought the State Street Bank building we did not allocate a lot of basis to that piece of land. We were since able to acquire through the addition or contribution of 1.5 acre next to our site to round it out to roughly a 5-acre site. That is going to encompass the things that I just went through, the office, the multifamily, and the retail. The vacancy rates in the area that we're building in right now, are very, very low. Mary, correct me if I'm wrong, but they are generally in the 2% vacancy range.

Yes, correct

So it's roughly there's 98% occupancy in that market with very little new construction going on. We obviously as a result of what's gone on with Brexit, have feelers out everywhere. And we're in an active marketing program right now, because this is going to be one of the really first-class developments that's going to be available to really anybody, but if any financial institutions decide that they want to have a different location than London, we're going to -- Dublin is clearly one of the places that they would consider.

And so, we're not only reaching out to the financial institution industry, but of course, the tech industry and the other parts of the service industry. The Irish economy as you all know was, is the fastest-growing economy now in Europe. And so that's creating opportunities too in the service sector, the bigger law firms are expanding also. So there's many opportunities for us and we think it's going to be coming online at a very good time in the market.

Okay. And then Mary, you guys are liquid going into the Brexit vote, still liquid what's keeping you up at night or where do you see KWE as maybe vulnerable?

What's keeping me up at night, I think all the political risk just around the world, stuff that you can't really control. It's clearly something that we are watching and always concerned about. My number one concern always is just the retention of our people, because we just have such an unbelievably good team. And when I come in every day I want to make sure we've got all of our people happy and committed and locked down, so I would say that's my biggest concern right now.

And you guys have no city of London exposure or real finance exposure?

We have zero city of London, zero Canary Wharf, we have in our UK portfolio, 12% of that is central London office. Which is really made up of two assets, one is 111 Buckingham Palace Road in Victoria, where our passing rent is GBP47 a foot, 40% below market I would say. And then the second asset is Friars Bridge Court where our passing rent is GBP22 a foot. So if we did nothing and just rolled the tenants over we could double that rent. If we did sort of a light touch refurb, we could even increase the rent further.

And then we've just gotten the preliminary approval to have that -- that's a 100,000 square foot building to build a 200,000 square foot building, and it's a planning permission for three years, so it gives us feel good optionality and flexibility. So really and that's GBP22 a foot when market deals for new builds are being done at GBP60 a foot and it's really tight market. It's the South Bank market in London. So those are really our two only office buildings in London, Central London.

Thanks a lot guys

This concludes our question-and-answer session. I'd now like to turn the conference back over to Bill McMorrow for any closing remarks

So thanks everybody for listening in today, we appreciate all your support, and as always we're always available to answer any questions that come up, post this call. So, thanks again.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.