Kennedy-Wilson Holdings Inc (KW) 2017 Q1 法說會逐字稿

Good day, and welcome to the Kennedy Wilson First Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Daven Bhavsar. Please go ahead.

Good morning, and welcome to Kennedy Wilson's First Quarter 2017 Earnings Conference Call. This is Daven Bhavsar, and 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 1 week and by webcast for 3 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 could find a description of these items, along with the reconciliation of the most directly comparable GAAP financial measures, in our first quarter 2017 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 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. We're pleased to have reported another solid quarter of results, which has gotten us off to a good start in 2017.

As you'll see in Q1, we were able to generate additional recurring cash flow through strong property level operating performance driven by market-leading same-property results. Also, we further increased cash flow through our capital recycling program, which is focused on harvesting nonincome-producing assets, adding value to our existing portfolio and upgrading the overall quality of our assets.

This morning, I'll discuss our financial highlights for the quarter, the operating performance of the properties and our investment activity before commenting on the proposed combination transaction with Kennedy Wilson Europe that we recently announced.

Starting off with the financial highlights for the first quarter. Adjusted EBITDA was up 8% to $77 million compared to $72 million during Q1 of 2016. Similarly, adjusted net income was up 11% in the period to $43 million compared to $38 million in the Q1 of last year. For the quarter, our share of property level NOI grew by $6 million to $63 million, an increase of 10% from Q1 2016.

Lower levels of dispositions in the quarter resulted in a decrease in our share gains by $4 million. On the heels of a relatively light first quarter of transactional activity, we expect to have some significant activity in the second quarter, which we'll discuss later in more detail.

Looking at our investment portfolio. At the end of the first quarter, we had an ownership interest in over 400 real estate investments globally, including almost 28,000 apartment units, of which 1,800 are under construction.

For the quarter, our share of total multifamily revenues and NOI increased by more than 7% on a same property basis.

It's important to view these results in the context of what many of our peers are experiencing. The largest public multifamily REIT's NOI growth averaged 4% on a same property basis during Q1 versus 7.4% for us. Our outperformance can be attributed in part to our weighting in the state of Washington, which had same property NOI growth of 8% in the quarter. Our multifamily portfolio is currently 94% leased and consists primarily of garden-style communities with high-quality tenant amenities located in suburban cities at a substantial discount to Class A CBD rents. Our rents average around $1,600 per month compared to rents of our peers, which are 40% to 50% higher.

We also now have $107 million of NOI coming from 9,000 wholly-owned apartment units, which is up $24 million from a year ago. This is due to a combination of strong same-property growth and the addition of an additional 1,500-plus units to the wholly-owned portfolio. As comparison, when we went public in 2009, we had just one wholly-owned property totaling 200 units that generated $2 million of NOI on an annual basis.

Our multifamily portfolio has a focus on 5 major markets: The San Francisco Bay Area, primarily the East Bay of San Francisco; Southern California; the Pacific Northwest; Dublin, Ireland; and the United Kingdom. Our largest market is the state of Washington which, along with its largest submarket, Seattle, continues to outpace national averages in the creation of new jobs. This has led to continued economic and population growth. The Seattle submarket has an unemployment rate of 3% as the private sector continues to perform well and hiring from tech companies remains robust. Amazon, for example, which is Seattle's largest nongovernment employer, currently has nearly 10,000 current job openings in Seattle alone, and its presence continues to transform the South Lake Union district and its surrounding submarkets. The strong underlying fundamentals of this market remain favorable for our apartment portfolio.

Looking at our commercial portfolio for the quarter. Occupancy grew by 1%, while our share of revenue was up 4% and NOI was up 5% on a same property basis. Our Western U.S. office and retail portfolio had an outstanding quarter with same property revenues up 8% and NOI up 11%. During the quarter, for example, we stabilized 150 El Camino in Beverly Hills, finishing the TI work during the first 2 months of the year and allowing our major tenet, Imagine Entertainment, to take occupancy in March. This brings the total occupancy of this 60,000 square foot Class A office building to 100% from fully vacant a few years ago.

Turning to Europe. Our portfolio there is concentrated in the U.K. and Ireland and includes assets acquired prior to the formation of KWE, along with our ownership stake in KWE, which was approximately 24% at the end of the quarter.

Earlier this morning, KWE released its business update. During the period, KWE completed 36 commercial lease transactions at 15% above in-place rents. This includes the rent review with Telegraph Media Group, which is the largest tenant at 111 Buckingham Palace Road. The rent review was completed with rents increasing 21%. The annualized NOI in the KWE portfolio as of March 31 stands at, in U.S. dollar terms, $200 million. KWE's portfolio of 223 properties is over 93% occupied with an average weighted lease term of 7 years.

Turning to the KW balance sheet. We closed the quarter with $168 million of corporate cash and $475 million of availability on our undrawn revolver, for a total of $643 million of liquidity at the KW corporate level with no corporate debt maturities until 2024. In total, our debt has an average -- a weighted average maturity of just under 7 years with 70% fixed and 16% hedged against long-term interest rate increases.

With regard to our capital allocation for Q1, Kennedy Wilson invested approximately $67 million of cash from our balance sheet. Of that, roughly 1/3 went towards value-add CapEx within our existing portfolio and 2/3 into new acquisitions.

During the quarter, we and our partners completed over $420 million of investment transactions, including $272 million of acquisitions, in which we had an average 36% ownership interest; and $150 million of dispositions, in which we had a 43% ownership interest.

We continue to find ways to recycle capital and improve the quality of our portfolio. In February, we and our partner acquired Radius, a 282-unit multifamily property in South Lake Union Seattle, for 145 -- $141 million, which our interest is 50%. The majority of our equity for the acquisition came from the sale of The Grove, a property that we own with our partner in San Jose, which was a 331-unit apartment community built in 1964, which we sold in Q4. The sale resulted in $58 million in cash proceeds to the partnership and a 5x equity multiple to Kennedy Wilson.

On the disposition side, together with our partners, we sold $150 million of real estate in Q1, including another $53 million of nonincome-producing investments. As I mentioned on past calls, we continue to reduce the amount of nonincome-producing assets in the company through the continued asset sales or creating income through asset management and construction initiatives. Nonincome-producing and unstabilized assets have now shrunk from 25% of our investment account a year ago to 20% at the end of the first quarter.

As I mentioned earlier, we expect to pick up a transactional activity in the second quarter. Subsequent to Q1, we closed on the disposal with 28-acre and title land parcel in Orange County, which was a nonincome-producing asset, and the sale resulted in $29 million of proceeds back to the company and a cash profit of $8 million. Additionally, we still own the adjacent 5-acre and titled retail parcel with a 0 cash basis. We are also under contract to sell an office building in Los Angeles for $69 million and to acquire an office building in the greater Seattle market for $153 million. These 2 transactions should result in an additional $10 million of recurring annualized NOI added to Kennedy Wilson. There are many other potential opportunities we are evaluating, which we will update you on during our next call.

Now I'd like to give you a brief update on 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 cost basis. This land in most cases sits within or adjacent to income-producing assets that we already own. In our supplement, we detailed our largest developments, which we expect to spend approximately $164 million of KW's cash on over the next 2 or 3 years. We are targeting a 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 are on track to be fully completed by the end of 2018 with the first building being delivered in Q1 of 2018. Once completed, this project will deliver approximately 690,000 total square feet, including 425,000 gross 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 adjacent to Phoenix Park in Dublin, we have now delivered 78 of the Phase 2 units, of which 40 are leased, and we expect to deliver the remaining 84 units in Phase 2 this summer. Phase 3, which is still in design, is expected to deliver another roughly 250 units by 2020. And when completed, Clancy Quay will total approximately 835 units and will be one of the largest multifamily properties in Dublin.

In the U.S., we continue to build multifamily units through our Vintage Housing platform, 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 house over 1,200 units either in planning or under construction in Seattle and Northern California that we expect to complete over the next 12 to 18 months. And so you can see that we are making great progress on these important developments, which are expected to add additional income across our portfolio and create meaningful value for our shareholders.

Looking ahead, we announced on April 24 the proposed combination between Kennedy Wilson and Kennedy Wilson Europe. This combination will significantly improve our recurring cash flow profile and enhance our ability to generate attractive risk-adjusted returns for our shareholders. As we've announced, upon completing the transaction, we intend to increase our first quarterly dividend by approximately 12%, which demonstrates our confidence in the combination and its long-term prospects. The transaction is expected to close in the third quarter and is subject to customary closing conditions, including the receipt of shareholder approval from both companies.

Between our diversified global portfolio, ample dry powder, the value-add initiatives underway, our experience of investing in many market cycles and our senior management team that has now been doing this for many years together, we remain well-prepared for any market environment to continue our track record of creating long-term value for our shareholders.

So with that, I'd like to open it up to any questions.

(Operator Instructions) The first question comes from Craig Bibb of CJS Securities.

You guys made more progress on selling nonincome-producing assets during the quarter and even in Q2 also. Is there a target for where you want nonincome-producing to be as a percentage of the portfolio?

I don't know that we necessarily have a target, Craig. But I think that you'll see over time that it's going to trend down into the 10% to 15% range.

Okay. And that would include nonstabilized properties?

Craig, that's right. So I think, as Bill was mentioning, we would expect that the properties there producing recurring cash flow would continue to make up a greater and greater proportion of the overall portfolio.

Right. And I think, too, Matt was saying, and I would add, is that you have to -- not that you have to remember, but what is happening is that the vast majority of the things that we have under construction are going to be finished this year and into next year. And so you'll see the cash flow, as I said in my presentation, the cash flows from those as they continue to stabilize. And it takes generally, I would say particularly on the apartment buildings, it takes about 6 to 9 months after you finish completion of the project itself to get into a stabilized occupancy that's in the 90-plus percent range.

Okay. And it looks like you've highlighted out in Q2, you had bought some office properties -- or an office property, and you've been trending away from office also. Was that -- are these one-offs or did you change your mind?

I think we found -- we had a unique opportunity. We were selling several assets, including one that I can't comment on right now because it's still in negotiation that is -- are producing significant gains. What we're able to do is on a tax-deferred basis, exchange those into other assets. And so we found, really, what I would call a unique opportunity in the Seattle market that's occupied by 2 Fortune 500 companies fully leased that's producing significantly more income, more NOI than the properties that we're selling. So I would say it was more of a unique opportunity that came along.

Okay. And then last one. In the quarter, I realized, Q1 was light for transactions for Kennedy Wilson and light for the industry overall, and your transaction kind of closed randomly between quarters. The negative spread in the quarter was because of the tax-deferred driven -- tax deferral transactions? Or just what created that? And again, I realize this was not a huge number of transactions.

Right. Yes, Craig, so you're talking about the cap rate spread? So I think if you look at the quality of the assets that we bought during the quarter versus the quality of the assets that we sold, that's what's leading to that differentiation. But as you mentioned, it's a very small number of both acquisitions and dispositions, so I don't think this is telling of what it's going to look like for the full year.

Well, I mean, I think to Matt's point, I think, a good example of that in part was the sale -- although it occurred last year, was the sale of the office building -- or I'm sorry, the apartment building we sold in San Jose. And we traded that along with our 50-50 partner, the LeFrak family. We traded that into a brand-new building that sits directly across the street from the corporate headquarters for Amazon and the 12 million square feet of office space that they're currently building on that campus. And the addition that's also happening adjacent to their campus is that both Google and Facebook are taking up big quantities of square footage for their own use. And so we took what I would call it, not even a CBD, but more of a suburban San Jose asset, traded it into a brand-new asset at the Radius. And I think, the other thing always, as I've said on these calls, to remember about the Seattle market is that along with the job growth, the rents there have not increased. Although they've increased at the pace that they have, say, for example, here in Los Angeles, where in L.A. now, it is not unlikely that a consumer could be paying 40% to 50% of their income for their monthly apartment rents. And that same metric, for example, in the Radius, they're paying roughly 20% to 25% of their income. So the idea here is, where we can, to take gains from some of these older properties and put them into high quality, well-located properties that we think over time, over long term, have upside in terms of the rents.

(Operator Instructions) The next question comes from Mitch Germain of JMP Securities.

So I know there's a bunch of development opportunities that you've got in your supplement. And I'm curious, I know that there are others that exist in your portfolio. If you can maybe provide some perspective on maybe what that next generation of development will look like?

Well, I think it's -- Mitch, as we said in the supplement, if you look at the major projects that we're doing, we have slightly over $1.5 billion of construction going on right now. And we have a pipeline, probably another $300 million of construction that we're evaluating doing right now. So that's really the universe. But we're -- I would say were in a bit of a peak period right now, because as I've said earlier in the call, a lot of this is going to get finished in '17 and '18. And so we're not making really any forecast about what we're going to do as far as future development. We just have to see what kind of market conditions exist. The one, for example, Clancy Quay, that we own in Dublin, which is owned in KWH, and that's a 50-50 partnership. When we bought that, we bought the existing 420 units that are very, very high quality for a very big discount to original cost. And with that came roughly 6 or 7 acres behind the property of these old barracks buildings, and obviously, land that was available for us to build when we bought that asset. All the units in the 420 that were -- the structures were finished, but the units weren't finished, and we took that to roughly a 95% occupancy. And so then as we were evaluating the market there, there is a real housing shortage in Dublin. We decided to go ahead and get planning permission to build out the second phase. And so now that we've built out, almost built out, by this summer, we will finish the second phase, we're evaluating now. We're in planning and we're evaluating the idea of building out the remaining acreage there, which will give us another 250 units. But we're not committed to building those 250 units until we get Phase 2 stabilized and we see what market conditions are like. So we've got a few of those locations like that, where we're going -- as I think everybody knows, the entitlement processes, particularly here in the United States are extremely lengthy. And so you've got to go ahead with your excess land and get things entitled. And then at the time you finish the entitlement process, you obviously have to make an evaluation as to whether you want to make the additional capital commitment to build out that project.

Great, that's helpful. And then last one from me. I know you guys have a couple of retail investments. Obviously, the sector has been experiencing significant amount of scrutiny of late. I'm curious if it's something that you're monitoring in terms of maybe from a capital deployment perspective, maybe tipping your toes in the water a little deeper. Just curious in terms of how much you're paying attention to that space and what your appetite might be to do that.

Well, I mean, we're keeping an eye on it, for sure. But you have to remember that most of the retail that we own here in the United States is grocery anchored, really smaller assets, generally averaging $20 million, $25 million in size. We own some bigger retail properties in Ireland, particularly through KWE, where we're actually seeing very good leasing activity. The very, very big box retail, I'm not sure that, that's necessarily our cup of tea, but we're keeping an eye on it, as we do every asset class, to see where there might be value opportunities. But we don't have any specific plans to make any meaningful investment in these, what I call these big-box retail properties here in the United States.

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, again, everybody, for listening in on the call. And as always, we appreciate the long-term support that we receive from all of you. Thanks.

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