Kennedy-Wilson Holdings Inc (KW) 2016 Q4 法說會逐字稿

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

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Daven Bhavsar, Director of Investor Relations. Please go ahead.

Good morning and welcome to Kennedy-Wilson's fourth-quarter 2016 earnings conference call. This is Daven Bhavsar. Joining us today are Bill McMorrow, Chairman & 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 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 including adjusted EBITDA and adjusted net income. You can find a description of these items along with a reconciliation of the most directly comparable GAAP financial measure in our fourth-quarter 2016 earnings release, which is posted on the Investor Relations section of our website.

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

I would now like to turn the call over to our Chairman and CEO Bill McMorrow.

Thanks Daven and good morning everybody and thank you for joining us today. 2016 was another productive year for Kennedy-Wilson and we're pleased to have reported a solid fourth quarter, highlighted once again by growth in recurring income and continued outperformance of our multifamily portfolio. As we normally do, we'll start by discussing our key financial highlights for the quarter and the year along with the recently announced increase in our dividend and an update to our capital return program.

Next we will review our real estate portfolio and the operating performance of our key segments. We will then discuss our balance sheet before turning to a summary of our investment activity for the quarter. Next we will give you an update on some of the major value enhancement projects that we have in progress. And finally, we will discuss our views on the current market environment before opening it up to questions.

Starting out with the financial highlights for the fourth quarter, adjusted EBITDA was $117 million compared to $122 million during Q4 of 2015. Our full-year adjusted EBITDA was $350 million compared to $371 million last year. The composition of our adjusted EBITDA continues to improve and become more heavily weighted toward property cash flow and less so towards gains.

For the year, our share of property level NOI grew by $35 million to $241 million, an increase of 17% from 2015. Our share of gains and promoted interests were down by $55 million, which was primarily due to having no promote for KWE during 2016.

As a result of the continued growth in our recurring cash flow, we raised our quarterly dividend for the sixth consecutive year to $0.17 per quarter or $0.68 on an annual basis, which represents a 21% increase. Our new dividend rate equates to a 3 1/4 dividend yield on our closing stock price of yesterday. We have now raised our dividend by 325% over the last six years.

In 2016, we paid a total of $61 million in dividends to common shareholders, during which time we also completed $50 million of the $100 million share repurchase program that was announced a year ago. So in total, through the dividend and the stock buyback, we returned $111 million, or roughly $1.02 per average common share outstanding, which was a record amount.

Looking at our investment portfolio at the end of the year, we had an ownership interest in 455 real estate investments. Our portfolio is currently allocated two-thirds to the Western US and one-third to Europe, which is primarily the United Kingdom and Ireland.

In the Western US, multifamily represents almost half of our investment balance. The NOI of our multifamily portfolio continues to perform well and produce significant recurring cash flow for the Company. For the quarter, our share of total multifamily revenues increased by 9% and our share of NOI was up 10% on a same-property basis.

We continue to outperform many of our peers. Looking at some of the larger public multifamily REITs, NOI growth averaged 6% a same-property basis during 2016 versus 12% for our portfolio. This outperformance can be attributed in part to how our portfolio is positioned. Our multifamily portfolio, which is currently 94% leased, is predominantly garden-style communities located in suburban cities, which still offer a substantial discount to Class A CBD rents.

In addition, most of our assets are acquired with a plan to implement our value-add asset management strategies. The average rent per month in our market rate portfolios is approximate $1600 compared to over $2500 for many of the other West Coast multifamily REITs. Also we now have $100 million of NOI coming from 8,800 wholly-owned units which is an increase of 1,300 wholly-owned units and $24 million of NOI from 2015.

The Western US represents 93% of our multifamily NOI with a focus on the state of Washington, the Bay Area and Southern California. We own over 10,000 units in the state of Washington, which is our largest market, and which saw another quarter of strong same-property growth with our share of revenues up almost 10% and NOI up almost 14%. Washington, and in particular the greater Seattle market, continues to outpace the national averages in terms of growth with strong underlying fundamentals resulting in an attractive rental market.

Amazon is almost 10,000 job openings currently in Seattle alone and is expected to occupy almost 12 million square feet in the South Lake Union district. Facebook is also building 600,000 square feet and Expedia is expected to move into its new headquarters to the Seattle market in 2019.

Boeing still maintains a strong presence in Seattle with over 71,000 employees in the State of Washington. Microsoft, Starbucks, Nordstrom and Costco are a few of the other fortune 500 companies that have their headquarters in Washington and continue to fuel its growth. So, the combination of strong underlying fundamentals, our substantial discount to CBD rents and our value-add initiatives resulted in attractively positioned multifamily portfolio.

Looking at our commercial portfolio for the quarter, occupancy grew by 2%, while our share of revenues and NOI both increased by 6% on a same-property basis. This was the strongest quarter for the commercial portfolio in all of 2016. In particular, our Western US office and retail portfolio had an outstanding quarter with same-property revenues up almost 10% and NOI up 13%.

During the quarter, we stabilized two Western US properties including an office asset in Marina del Rey and one in North Hollywood as tenants began to take occupancy. We expect our last tenant at 150 El Camino in Beverly Hills to take occupancy in March leading to further upside in recurring income for our Western US commercial portfolio. That building once that tenant occupies will be 100% leased.

Turning to Europe, our investments there first started with the assets that we acquired before the formation of Kennedy Wilson Europe Real Estate PLC in 2014. These investments include five multifamily assets, 10 commercial properties, three development projects and the Shelbourne Hotel in Dublin. The remainder of our European investments are through our ownership stake in KWE, which we own approximately 24% of the share capital.

Early this morning, KWE released its full-year 2016 results. The annualized NOI in the KWE portfolio as of December 31 stands at approximately $200 million up 23% from a year ago. KWE's portfolio of 223 properties is 95% occupied. During the quarter, KWE completed sales of $185 million, resulting in just over $500 million of sales across 89 properties in 2016.

Post Brexit, KWE completed 65 leasing transactions which added over $4 million in incremental annualized NOI. Additionally, KWE also completed its $100 million sterling share buyback announced in September. KW's cash position at year-end stands at $560 million.

Turning to the KW balance sheet, we closed the year with $260 million of cash and $475 million of availability on our undrawn revolver for a total of $735 million of liquidity at the KW corporate level with no corporate debt maturities for another seven years. We also have minimal property-level debt maturities in the next couple of years. In total, our debt has a weighted-average maturity of just under seven years and 86% is fixed or hedged against long-term interest rate increases.

We also remain very focused on allocating our capital appropriately. During 2016, Kennedy Wilson invested approximately $390 million of cash from our balance sheet. Of that, roughly half of our investment dollars went toward a combination of KW share purchases, KWE stock purchases and value-add CapEx within our existing portfolio, where we expect to add new sources of recurring cash flow. The other half of our investment dollars went into new acquisitions.

In 2016, we continued to find ways to recycle capital in our portfolio by selling off noncore and nonincome-producing investments and improving the quality of our portfolio through redevelopment and selective acquisitions. For example, during the quarter we sold the Academy an office building built in 1991 in North Hollywood, California where we had completed our business plan. We sold this asset for $62 million, which resulted in a 1.5 equity multiple and a gain of $15 million during the quarter.

We utilized a 1031 exchange and acquired Alara Hedges Creek, a 408-unit garden style apartment community situated on 20 acres in an affluent suburb of Portland, Oregon. We acquired this property off market and intend to implement our value-add asset management strategy which includes unit renovations and common area upgrades.

In total, the Company and its equity partners completed $850 million in investment transactions in Q4, bringing our total year to date to $3.1 billion with $1.4 billion of acquisitions and $1.7 billion of dispositions. For the quarter, we and our equity partners acquired $341 million of real estate, of which 96% was within the Western US. On the disposition side, together with our partners we sold $508 million of real estate in Q4, including another $81 million of non-income-producing investments.

For the year, we have sold $270 million of non-income producing assets, of which our share is $120 million. Over the next few years, we expect a reduction in the amount of non-income producing assets in the Company through either continued asset sales or creating income through asset management and construction initiatives.

Now, I'd like to update you on a few of our ongoing development initiatives. As I mentioned on previous calls, many of these projects are being built on excess land which we originally acquired with little or no basis within or adjacent to income-producing assets that we already own. In our supplement, we detailed out the six largest developments, which we expect to spend approximately $215 million of KW's cash over the next 2 to 3 years and where we are targeting 10% to 15% annual return on that equity once these assets are stabilized.

At the Capital Dock Campus, which is one of the largest development projects in all of Ireland, we have made significant progress on the vertical construction and remain on track to deliver the first new office building later this year. And we expect to be fully completed on this project by 2019. In the end, Capital Dock will deliver 690,000 total square feet, including 425,000 square feet of office, 25,000 square feet of retail and 190 multifamily units housed in a 23-story high-rise. At Clancy Quay, which is about 3 miles from Dublin's city center as part of phase 2, we delivered another 34 units in Q4, with the remaining 83 phase-2 units to be delivered by Q3 of this year.

Phase 3, which is still in design, is expected to deliver another 254 units by 2020. When completed, Clancy Quay will total 840 units, making it one of the largest residential communities in Dublin. In the US, we continue to build multifamily units through our vintage housing joint venture, which is majority owned by Kennedy Wilson and is engaged in the development and management of affordable housing on the West Coast with a focus on independent senior living. Vintage currently has 1,240 units either in planning or under construction in Seattle and in Santa Rosa that we expect to complete over the next 12 to 18 months.

And so, you can see that we have very good visibility on the completion of several key developments across asset types and geographies, which will create value and additional income across our portfolio. Looking ahead, the market environment both in the US and Europe continues to experience volatility, driven largely by political change and monetary policy. While these and other factors play out, we remain very thoughtful in how we allocate our capital, both investing for the long-term and ensuring that we create value for shareholders as we have been doing since going public seven years ago.

We currently sit with a strong liquidity position and remain ready to take advantage of global market dislocations. But, we also remain very focused on executing on our key initiatives, which include enhancing the values of our existing portfolio to create meaningful recurring NOI. And finally what makes Kennedy-Wilson unique is our global network of relationships that provides us both valuable real-time market information and a proprietary source of new investment opportunities.

With that, I'd like to open up to any questions.

(Operator Instructions)

Craig Bibb, CJS Securities.

Hello guys. Another solid quarter. Commercial NOI in the US jumped up. I think that's because of the properties that were stabilized during the year. Could you-- if that's correct, great. And then, could you give us a perspective on how much additional NOI is coming in as more properties are stabilized? I know you have at least the El Camino will be later in the year.

Right. Yes, you're right, Craig. So we did have two significant assets that came on line. One in North Hollywood and one in Marina del Rey in the fourth quarter. So that certainly added to that NOI number. And then if you look at the building in Beverly Hills, El Camino, as well as several other office and retail assets, we think there is significant upside coming in the NOI over the next 6 to 12 months.

Could you give us a ballpark number? Just annualized.

Yes, I think it's somewhere between $4 million and $6 million from those two to three buildings.

And then, in the UK, commercial NOI slipped. I assume part of that is FX and you may have sold something; is that correct?

It's a combination of some FX, but also some of the portfolios in the UK we bought were slightly over rented; and so as we've renewed the leases, the rent has come back to market.

Then, NOI at the Shelbourne slipped a little bit. Is that, you guys are doing a renovation there and when will it be done?

So there's, well, a part of that is, a portion of that is FX as well as the euro slips was the biggest portion of that.

But we are, Craig, we are doing a roughly $20 million renovation there right dollars. But when you think about that property, roughly over the last 3 years, the NOI there has probably gone up 60% to 70%. But I think the most important take away from the NOI increases is really to think about the projects that we're completing that are under construction this year and next year. And we will be through the majority of all of these construction projects by the end of 2018 and into the early part of 2019. And so, there's significant dollars that are being spent there that are going to create new NOI once we get those properties occupied and producing income.

Okay. Can you give us a ballpark on yield once all those projects are completed, yield should be 6%, 7%, 10% --

Well what we mentioned was that on our equity that we're investing, we're targeting 10% to 15% return on equity. That's a levered returned, so I think your number of 7% is in the ballpark in terms of unlevered.

Great. Thanks a lot guys.

Yes.

Vincent Chao, Deutsche Bank.

Hey good morning, everyone. Just wanted to go back to the capital allocation comments for 2016 about half into share repurchases and development CapEx and half in acquisitions. As we think about 2017, how do you think that mix will shake out and would you, given the current environment and volatility that you mentioned, would you expect to be a net seller here in 2017 again?

Vincent, is always hard to tell sitting here in February exactly how the year is going to play out. In our business, things just tend to unfold over the year. We clearly have, and as I always say on these calls, we have no, ever have any goals in terms of what we're doing on the acquisition side, because you've just got to see what opportunities unfold. We have -- last year, as I said, we did a little over $3 billion in total transactions. So anyway, I can't really give you any numbers.

I can tell you though, that the big, big focus of what we're focused on is the internal asset management of the completion of the construction projects that we have underway and the properties that we already own where, as I said in my remarks, the apartment buildings that we own, the communities that we own, even though those are running at 94%, 95% occupancy, each one of those has its own capital expenditure program. It might be a finished building, but we're redoing units, we're redoing common areas; and at each of those properties, that can be up to $7 million to $10 million on the bigger properties. So whether we buy anything or we clearly will sell some things this year, the main focus is really on the things that we currently own because there's big uplift in those properties.

Okay. Thanks for that. Maybe just sticking with the investment side for a second here, just as you think about, forget about what you might actually close, but in terms of the pipeline of deals that you're looking at, is there-- has that been changing at all, shrinking, growing, same?

No, I think you're always in our business you're looking at, you can pick whatever number you want, you're looking at 25 to 50 deals to find one that you think makes sense. And so, as I said, we've spent now three decades building relationships all over the world that have allowed us over that period of time to buy off-market transactions. And when you think about really the real secret to our growth success, it has been the ability to, on the acquisition side, to buy probably 75% of our assets through relationships that we've created with, whether that is a financial institution or a developer that has to sell for whatever reason based on their capital.

So, I would say, as we've gotten more scale, we get shown more opportunities. But we have an active, active, active group of people that are out in the market, from the senior management on down looking for these opportunities. So the level of things that we're looking at is still the same. It is just as I said, you've got to be very selective and you've got to recognize that we are spending -- devoting, a lot of time and dough to the things that we already own.

Okay. And on that front, I know the development pipeline as it stands today has about $230 million to complete. How much is budgeted for development CapEx this year?

Yes, so last year we spent $110 million in 2016, so we're planning to spend at least that amount in 2017. Probably somewhere around that range, maybe slightly higher.

Okay.

And remember too, at some of these assets, there's debt at the property level; so that's not the total scale of the CapEx program. That's just our share of what we're putting in.

Right. That's your share. Okay, okay. Thanks. I'll jump back in the queue.

David Ridley-Lane, Bank of America, Merrill Lynch

Sure so, based on your current disposition plans, would you expect 2017 to be similar to 2016 in terms of the scale of dispositions?

Yes, Dave, this is Matt. No. I think as Bill mentioned, it's a little hard to predict these things, but we do have a healthy pipeline of assets that we plan to sell in 2017, a few of which are currently on the market, a few of which will go on later. So we think we will have a healthy disposition pipeline, but there's not a specific number that we want to put out there right now.

But I think, what is fair to say, unless there are external conditions that affect any market, every year we're going to have assets that we're disposing of for a variety of reasons. So, we can't really put a number on what that might be this year.

Understood. And then, you've talked a lot on the development projects. Based on what you expect to deliver in 2017, can you talk about the rough recurring NOI that would come online from those?

Yes, so we talked a bit about the, on the value add, $4 million to $6 million of really commercial coming on. And if you look at 2017, we're going to have, at Clancy Quay, we're going to deliver some new units. We have some of the vintage assets that will be completed.

And then Capital Dock we'll have one of the buildings finished. And so I think you'll see some additional NOI this year from that, but I think the majority of it's going to come in 2018.

Exactly.

Okay. And then, am I right? What was the share repurchase in the quarter itself?

The fourth quarter?

Yes.

I think it was roughly $20 million.

It was a little, it was about $20 million -- I think it was $21 million. In the quarter and we've done $50 million in 2016 with an average price of $20.50.

And then, is the thinking continue to use the remaining $50 million through the rest of this year?

Yes, it's certainly, like you mentioned, we have $50 million left and, depending on market conditions, that's certainly an option for us to spend capital in that manner.

Sure. And can I get a quick update on Fund 6 and the progress through there?

Yes, we're in the market with that now. We've had actually our first set of closings on that and I think I've said in the past that our target on that fund is going to be somewhere between $500 million and $750 million.

We've had very fine results on Fund 3, 4 and 5 and so several of the larger key investors that are in those sets of funds, because we're basically except for fund 5 which is $500 million, we're fully invested in that except for $100 million. And Fund 3 and 4 are all in their final stages of disposition with very good results.

And so, we've got a number of the larger investors, and when I say larger, I'm talking in the $50 million range that are going to reup into Fund 6. So I think you'll see, by the end of this year, we will have most of the fundraising completed on Fund 6.

All right. Thank you very much.

Vincent Chao, Deutsche Bank.

Hey, guys. Just curious, I didn't touch on the operating performance here, but we've seen a moderation in same-store revenue across all US you're more so than some of your peers. You have maintained pretty strong same-store rev growth, but still a little bit of moderation. I was just curious as some of the larger CBD markets have pulled off, are you starting to see a notable pickup in development activity in your markets?

No, I think the markets that you've seen most of the development activity on the West Coast have been in the CBD, downtown LA, downtown San Francisco, clearly in Southern California. You've got a tremendous amount of development going on in downtown Los Angeles that we don't own anything in. And so you've got activity going there and you do have activity going on in the Seattle market of size.

But, the big difference in Seattle and really the LA market for sure, not so much San Francisco but the LA market, is the amount of job creation that is going on there. And as I said in my remarks, you've got more fortune 500 companies in Seattle than you do in Los Angeles. And so, you've got real job growth going on there that has the capacity to absorb the number of units that are being built. And I think that Los Angeles, that's a whole different ballgame.

I think I was thinking more on the East Bay where San Francisco is also seeing a ton of supply and now rents are really starting to come down quite rapidly and you are seeing concessions and things like that. We had heard that East Bay was starting to see a little bit of a pickup in development. So curious what you are seeing there. And then also, to the extent that new developments are coming online in Oakland, could you give a comparison of what prices they're looking for rate-wise versus your in-place portfolio? Because I know there's a huge discrepancy between the CBD and what you guys own in the East Bay. But just curious on new developments in the East Bay, how the delta looks?

I'm going to let Matt answer part of it, but you are making a good point that in some of these markets where you've got new construction going on, the construction costs have gone up too. And so we're fortunate that, well, several of the communities that we own in the East Bay are extremely high barrier to entry products.

If you look at Bella Vista, that's on 50 acres of land in the East Bay that you could never get that entitled today. We have 1,000 units in that one project. And then if you look at the other big project that we have in the East Bay in Alameda, you've got almost 700 units at Summerhouse.

So our projects in the East Bay generally are on big pieces of land, high barrier-to-entry markets, where there's a good-sized rent differential between San Francisco and the East Bay. So we haven't seen the kind of challenges that you're talking about in our assets.

Yes, Vin, and then in terms of the performance of the Bay area portfolio for the quarter, our revenue growth on a same-store basis was 8 1/2% and NOI growth was over 10%; so it's been slightly slower than say the Seattle market, but continues to be extremely robust.

Okay. Thanks, guys.

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

So, thank you everybody for joining us. As always, thank you for your support. Thanks.

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