Nov 6, 2013
Executives
Christina Cha – Vice President-Corporate Communication William J. McMorrow – Chairman and Chief Executive Officer Matt Windisch – Executive Vice President Mary L.
Ricks – President and Chief Executive Officer-Kennedy Wilson Europe
Analysts
Jason M. Ursaner – CJS Securities, Inc.
David J. Gold – Sidoti & Co.
LLC David Ridley-Lane – Bank of America Merrill Lynch Mitch B. Germain – JMP Securities LLC Andrew Berg – Post Advisory Group LLC
Operator
Welcome to the Q3 2013 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.
Christina Cha, you may begin.
Christina Cha
Thank you. Good morning everyone.
Joining us on today’s call are Bill McMorrow, Chairman and CEO of Kennedy-Wilson; Mary Ricks, President and CEO of Kennedy-Wilson, Europe; Matt Windisch, Executive Vice President of Kennedy-Wilson; and Justin Enbody, Chief Financial Officer of Kennedy-Wilson. Today’s call is being webcast live and will be archived for replay.
The replay will be available by phone for one week and by webcast for one year. Please see our Investor Relations section of the 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.
William J. McMorrow
Thanks, Christina and good morning everybody. As is our usual practice, I’m going to go through the press release and then we’ll open it up to any questions.
Just as a anecdote to our next week, on the 13th we’re coming up on the fourth anniversary of our public offering, and as you can see from the press release here we had a excellent quarter. Our EBITDA for the third quarter was $42 million versus $17.5 million the prior year, which is 142% increase over those two periods.
Also for the first nine months our EBITDA was $111 million versus $55 million for the nine months of 2012, which is 100% increase and I might also note too that that EBITDA number for the first nine months is ahead of – we were slightly above $100 million for the full year of 2012. During the quarter we had a active investment quarter and we acquired $1 billion of real estate investments and for the year-to-date now we’ve acquired almost $2.6 billion of investments.
We also raised during the quarter another $120 million of equity for Kennedy-Wilson itself. So when you look at our investment account, our gross investment account stood at $1.1 billion at the end of the third quarter compared to at $909 million for the prior year.
The net investment account is approximately $1 billion, and as I think most of you know, we carry our investment account on our books on a depreciated basis. And generally speaking, the difference between our gross investment account, our net investment account is roughly around $100 million.
The other, I think, very interesting statistic really is the amount of cash that we’ve distributed out of our partnerships during the first nine months. So we distributed $940 million to KW and its partners during the first nine months, of which our share was $209 million.
So in order to increase our investment account as we have, we’ve invested $387 million during the first nine months of the year. In terms of what the company now is invested in, we have almost 23 million square feet of real estate, which includes 16,511 apartment units, 79 commercial properties and $1.6 billion in unpaid principal balance of loans.
As I said earlier, we’ve been very active on the acquisition side, and as I said at the beginning of the year, we felt going into the year that a large percentage of our investment activity would be centered around Europe, and so when you look at what we’ve done here through the first nine months, approximately 70% of what we’ve invested has been in Europe. When you look at the property level financing, which I think is an important thing to look at when you think about interest rates, we now have about 85% of our debt at the property level either on a fixed rate basis or with caps.
And so in other words, we only have 15% of our debt exposed to rate increases. And I think as you’ve heard on previous calls what we’ve been doing really the last two years is lengthening out the maturities of the debt at the property level and fixing interest rates.
In terms of the U.K. loan portfolio, which was our first big investment that we made in Europe in 2011, the so-called BOI REIM loan portfolio, the company invested approximately $62 million into that loan portfolio.
Our book basis now today is $11.4 million, which represents our 12.5% interest. Of the 24 connections of borrowing relationships that we were inside that portfolio we’ve now resolved all but three.
And by the middle of next year we expect to have resolution on the remaining three connections. In Japan, our book equity now is $72 million, which represents approximately 41% share of the ownership.
And as I’ve said before, I think this really represents a good example of what happens inside our investment account. At original cost that $72 million was approximately $125 million, but through depreciation and distribution.
That account has been reduced down from $125 million to slightly over $72 million. Fairfax Financial which is our partner in Japan and KW has received a $104 million of distribution since 2010, which our share is $49 million.
Our management and leasing fees as the company has grown have increased dramatically like 52% to $54 million for the first nine months of the year from $35.5 million during the same period of 2012. In terms of corporate finance, as I mentioned we issued $6.9 million shares in September and generated gross proceeds of about $128 million.
Also, concurrent with that, we increased our unsecured line of credit from $100 million to $140 million. And we also extended the maturity of that line to October 1, 2016.
There is currently nothing outstanding on that line of credit. And then lastly, before I open it up to questions, we in 2012 we purchased the Meyers Research group, and the Meyers Research group is one of the foremost residential research companies in the U.S.
During the last year and a half, in addition to the acquisition performing well, Jeff Meyers who runs the Meyers Group has created a iPad application that we launched about three or four weeks ago, called Zonda, which is a iPad application using 300 metrics impacting the housing industry. We now have that delivered to a number of clients and we expect this to perform well for us over the next several years.
With that Christine, I want to open it up to any questions?
Operator
And thank you, we will now begin the question-and-answer session. (Operator Instructions) And we have our first question from Jason Ursaner with CJS Securities.
Jason M. Ursaner – CJS Securities, Inc.
Good morning congratulations, very strong quarter.
William J. McMorrow
Thank you, very much.
Jason M. Ursaner – CJS Securities, Inc.
When you look at the gain related to the title transfer on The Rock property, obviously it’s non-recurring to the property itself, but it looks as though you still remain pretty conservative on the mark-to-market. I’m just wondering if you could may be add some detail there and then also overall how do you look at that type of gain in context of the overall investment portfolio being held at historic book?
Matt Windisch
Thanks Jason, this is Matt. In regards to The Rock, we had several days, we in fact have several more in the future where we buy mortgages with the intent to eventually end up with the real estate and the way the accounting works is there is a change of control and that we have the mortgage and it converts to fee ownership.
We have to put that asset on our books at fair value, and then once that is done, going forward we start depreciating the asset I guess. And so we’ve had several of these in the past and we have many more mortgages like this in the portfolio, and so it’s – in essence on this asset, you are right it is a non-recurring thing, but it is a recurring situation for the Company into the near future.
William J. McMorrow
I think to Jason Mary Ricks is here, but I think to give a little color on this asset you have to see in Europe particularly, but also in the U.S., but in Europe particularly the quality of the assets we have been able to purchase in the last two years is really at the very top-end of quality in the real estate industry and The Rock is no difference. And when you think about these acquisitions we are buying these very big discounts to original cost.
But a very high quality asset, but in some cases the way you are actually getting to the ownership of the asset is through the purchase of the mortgage. I think Mary, you can give a little bit of color on The Rock and what is going on there.
Mary L. Ricks
Right. So The Rock is a very large retail shopping center located in Bury which is suburban areas with lot of foot traffic and lots of tourists that come in as well as local people that shop there.
So it is a shopping center with Debenhams several high-quality national tenants. We are almost fully lend – we are 97% occupied on long-term basis with the large national covenants.
And then we also have residential units there that we will be building out over the next. So basically the residential units where – we’re build success to sort of exterior of them and we're just building out the interiors over the next 12 months.
We see a very strong rental income opportunity there. So we are basically combining the retail and just finishing up the leasing there, finishing out the residential.
And then we're also building four retail units that will be storefront restaurant units. It will also help drive traffic to this asset.
So we are not only did we add value by just taking control of the assets. We also executing on several asset management initiatives that will help drive the NOI.
Jason M. Ursaner – CJS Securities, Inc.
Okay great. And just staying with the equity and JV income line for a second.
So can you maybe talk a little bit about the impact from writing off some of the upfront costs related to acquisitions and the impact its having on the reported GAAP P&L?
Matt Windisch
Jason, this is Matt. So what happens is particularly in Europe where there is stamp duty which is similar to transfer tax in the U.S.
We are required to write-off all of the cost related to the acquisition the day that we buy it. So on two of our large acquisitions in Europe which totaled roughly $800 million in the third quarter, we had to write-off almost $10 million of expense the day we bought them.
But the way the Company looks at it is, it is all part of the purchase. So when we are buying an asset, we are factoring in obviously the closing costs and our total bases.
And so in our minds the price we're paying is obviously – includes that fee net expense that we are required to write it off, so it has the impact of lowering our earnings for the quarter in which we buy these assets.
William J. McMorrow
But historically and I don't know just in how many years it goes back, Jason. It used to be that that was all capitalized into the purchase price, but you’re not under accounting standards.
So that doesn’t happen that way. So if you are in an active acquisition mode like we are and of course the size of these acquisitions is big, you’re going to have a significant step to transfer taxes, legal fees and so on associated with closing these deals.
But that’s the effect of reducing the basis day one, but it’s going to cost a charge in the quarter that you close these acquisitions.
Jason M. Ursaner – CJS Securities, Inc.
Okay. And just last question from me.
You mentioned EBITDA for the first nine months being well ahead of last year and because of this the earlier timing on gains you’ve accrued higher concentration. Just looking back to the past two years, Q4 had shown a pretty big jump because it was a much larger quarter for you.
I mean if it isn’t a larger sale quarter in terms of gain this year, would you expect to show that same type of increase or the accrual kind of matches the performance so far?
Matt Windisch
It’s the second thing you said, Jason. The accrual matches performance to date and so it will depend on the performance in the fourth quarter.
Jason M. Ursaner – CJS Securities, Inc.
Okay. I appreciate it.
Thanks guys.
Operator
And our next question comes from David Gold with Sidoti & Company.
David J. Gold – Sidoti & Co. LLC
Good morning
William J. McMorrow
Hi, David.
David J. Gold – Sidoti & Co. LLC
Just actually following upon on less sort of Jason’s question, given historically fourth quarter has been particularly strong one for realization. I guess in the last couple of years, would you think that this year would follow the same pattern based on what you know of potential asset sales in front of you?
Matt Windisch
Hi, David, it’s Matt. So yeah, we have a very strong pipeline in terms of the acquisition side, several hundreds of millions in the pipeline to potentially close in the fourth quarter.
Additionally, we do have a few asset sales that are in progress. Whether those will happen in the fourth quarter or next year we’ll have to see.
But we would expect as usual to have a very, very active fourth quarter both on the buy side and potentially on the sell side as well.
David J. Gold – Sidoti & Co. LLC
Got you. Okay.
And on the pipeline, Matt, can you give – is it possible to give anything more sort of specifically as far as a range of deal size that you’re looking at that’s in front of you. And just commentary on if anything has changed there pipeline wise or if you’re still seeing the same large volume of opportunities that we’ve seen probably over the last couple of quarters?
Matt Windisch
I mean currently we have just under $1 billion of deals under contract. Whether those close or not we’ll have to see.
We’re in due diligence on nearly all of them. So like I said we have a very healthy pipeline of opportunities particularly in Europe right now.
David J. Gold – Sidoti & Co. LLC
Perfect. And then just one other, if I remember right I guess it’s December where the due diligence per year ends on the Spanish bank.
Just curious if there is any update there and any change in thinking. I know a quarter ago you said probably too early to start putting money to work in Spain, but curious of any thoughts there.
Mary L. Ricks
Yeah, hi. It’s Mary, how are you?
David J. Gold – Sidoti & Co. LLC
Hi.
Mary L. Ricks
We’re still in our due diligence. It’s a complex transaction as you can imagine because that involves people, not only people but also contracts.
So we’re still working through that. And then in terms of Spain, I think we are feeling like Spain is bottoming out and so that’s the place that we’re interested and we’re looking, but just to express the same sentiment as I did last time I think we really need to have feet on the ground in local presence and local real estate knowledge to execute any transaction.
David J. Gold – Sidoti & Co. LLC
Perfect. So presumably if you do, do the deal something to revisit down the road?
Mary L. Ricks
Right, exactly. And we are looking at a couple different opportunities there, but nothing to announce at this point.
David J. Gold – Sidoti & Co. LLC
Perfect. Thank you all.
Mary L. Ricks
Thanks.
William J. McMorrow
Thanks, David.
Operator
And our next question comes from David Ridley-Lane with Bank of America Merrill Lynch.
David Ridley-Lane – Bank of America Merrill Lynch
Sure. I was wondering on the eight U.K.
shopping centers that you purchased during the quarter. Maybe you can give us a little bit of your thinking in terms of what kind of property management actions you might be taking or what your plans are for those assets.
Mary L. Ricks
Sure. Those came out of the fund.
We actually bottomed from a group of banks that made a deal with the borrowers. So we ultimately bought the real estate.
But it was a fund that acquired all those in 2007 and they really didn’t have any capital to put into those assets. So for six years they were very undermanaged, undercapitalized.
And so, since we’ve closed all those acquisitions, all of the tenants are very, very happy to see that we’re an owner that is potentially a long-term owner and so want to put capital into the centers. And so we’re in the middle right now of several asset management initiatives.
We’ve talked to all major tenants and all the shopping centers. So really it depends on the center, but we’ve got a lot of very interesting things planned not only on the CapEx side, but a variety of tenants have come to us and said they want to expand their sight in each center.
So there is a lot of great NOI building that we’re doing right now across the board and on all those centers.
David Ridley-Lane – Bank of America Merrill Lynch
Okay. And that leads very nicely into my next question, which is what are your expectations for same-store NOI growth next year in the commercial portfolio given those recent U.K.
additions?
William J. McMorrow
Speaking specifically about in the U.K. or overall for the company?
David Ridley-Lane – Bank of America Merrill Lynch
The overall for the company. So your NOI growth in commercial year-to-date is 18%.
I was just wondering if – 2014, what you’re thinking about there?
William J. McMorrow
Yes, maybe we can talk quickly about the 18%. So that’s a combination of a couple very positive factors for us, the first being occupancy increases across the portfolio.
A lot of the assets we’ve been buying both in the U.S. and Europe, part of the strategy is to buy things that are under-leased and undercapitalized.
And so, part of the strategy is to increase occupancy and which we’ve done very well over the past nine months. Secondly, there has been some rent increases in the portfolio, particularly in Northern California.
On the commercial side, we’ve seen rent increases on top of occupancy increases. And so the same thesis is true in Europe where we’re not only buying properties that are at leased from the markets, but also where there is the potential over time to increase rent.
And so, it’s a very similar thesis. We don’t want to give a particular forecast about the exact amount of NOI growth.
So I can just say that the business plan is to continue to grow the NOIs at a robust rate.
David Ridley-Lane – Bank of America Merrill Lynch
Got it. And then, last year you invested $402 million in equity into the investment account.
Year-to-date you’ve invested 369, do you think it’s likely you will surpass last year’s total here in the fourth quarter.
William J. McMorrow
Yes, I think that it’s – we kind of massed in the numbers two is the amount of capital that we’re distributing out of the investment account. So I might be slightly off in this number, but in 2012 we returned almost $1.5 billion to us and our partners, and this year of course we are going to be well over $1 billion number, so in two years we returned obviously $2.5 billion.
Obviously, a lot depends on some of these closings that we are doing, but we’ve got probably I’d say, of the $1 billion that’s in our pipeline what could close in this fourth quarter, it’s going to be somewhere around a third of that that I think we have real certainty on. So I don’t know that you’re going to see a lot of growth in the gross investment account number in the fourth quarter beyond what we’ve already seen at the end of the third quarter.
Because we need to get more distribution fact.
David Ridley-Lane – Bank of America Merrill Lynch
Got it, okay, that is very helpful. And then…
William J. McMorrow
The interesting thing to what’s happened as you look at that investment account and it’s easy to kind of looking hindsight but our strategy really from the beginning are going public in 2009, was that the first opportunities where it’s to acquire a debt secured by real estate. And in those debt purchase acquisitions some were what we call loan to own where we were going to own the assets and others were just self liquidating.
And as you go though these cycles what’s happened is the performance of this loan pools has been very good, and so we’ve been returning a lot of cash to people out of the liquidation in the loan portfolio. But the whole idea was to barbell that with the purchase on a deep discounted basis, very high quality commercial assets, multifamily, retail and office, and so throughout our whole portfolio we got as I said earlier very high quality assets that we own, not only in Europe but in the United States.
I mean it’s simply if you look at Dublin right now, we own the states three bank building on a long-term 15-year lease to states three banks. We own the Bank of Ireland’s corporate headquarters in Dublin.
We won KPMG’s one of their major European headquarter buildings in Dublin. And what’s also true then as you look over to the United Kingdom, I mean The Rock is a extremely high wholly asset.
And then when you kind of circle around like Bob here and then think about our apartment business in the U.S. some of the assets we bought in Seattle and the Bay area and the assets we purchased earlier in the year in Salt Lake City are A quality assets.
So as the loan portfolio, it’s been to take back – we’ve been adding recurring income streams from very high quality assets.
David Ridley-Lane – Bank of America Merrill Lynch
Okay. Thank you.
And just one quick numbers question. Do you happen to have assets under management at the end of the quarter?
William J. McMorrow
It is almost $14 billion.
David Ridley-Lane – Bank of America Merrill Lynch
Okay. Thanks, guys and congratulations on the quarter.
William J. McMorrow
Thanks very much.
Operator
(Operator Instructions) We have our next question from Mitch Germain with JMP Securities.
Mitch B. Germain – JMP Securities LLC
Good morning guys.
William J. McMorrow
Good morning.
Mitch B. Germain – JMP Securities LLC
You are about 35% or so ex-U.S. in the investment account and I am just maybe Bill, curious in terms of and how you look at putting capital to work, I mean is there any sort of tax that you’ve got with regards to exposure overseas?
William J. McMorrow
Well, it is a very good and interesting question. I mean we’ve got extremely well balanced geographic portfolio now when you think about it we’re primarily in the United States, we’re in the Western United States from Seattle to Los Angeles.
But when you think about the Western United States it is really Seattle, San Francisco and LA. We have got a really outstanding portfolio of assets in Japan, but in Japan probably 70% of those assets are centered in Tokyo.
And so the same thing is true, when you think about both the United Kingdom and Ireland. The only difference in the United Kingdom is that the property values in London, they are very, very high, and so although that was a great thing for us in the BOI REIM loan portfolio, because many of the assets were secured by London assets.
Our investment account in London to get better returns has been really outside of London. We think that we have a good couple of more years to go, 2 to 3 years both in those two key markets in Europe that we like Ireland and the United Kingdom.
And the Company has gotten to a size in the United States, but even though there is clearly we have returned to more of a core market in the United States. We have always find opportunities.
It is not a big transaction but we are working on the acquisition of a commercial, and this is kind of what falls out of these things, but we are working on a commercial acquisition right now in Southern California that is actually the lender on. It was an Irish institution and so you get all of these crossover benefits of being the first – we are really the – without sending sounding like a bragging, we were the first movers in Europe.
We went into Europe at a time where people really weren't anxious to invest. And it turned out to be as a hindsight perfect thing but in hindsight it’s turned out to be a very, very good decision.
But as far as the percentages of the portfolio we don't really, obviously we are managing currency exposure, we are thinking about these issues that we're raising, that you are pricing. But we don't have any set percentages on the limitations.
I think that one thing that I am not going to get into a lot of detail on, but in Europe, we are looking at capital raising opportunities, let’s put it that way. And we have such a sound base of assets and we have such a good reputation in Europe that there are many opportunities for us to further capitalize, what I am calling the European platform.
And so we’re looking at many options in Europe right now, because I think one of the things is that we do have to be mindful of the fact. I mean while we’ve raised a lot of equity, the deal sizes in Europe tend to be big.
And so we’ve got to have ourselves in a position for the next couple of three years where we can play in a market where the deal sizes are much bigger than they are in the United States.
Mitch B. Germain – JMP Securities LLC
Great, I appreciate that commentary. Last question from me, obviously I think it was Matt who said you guys have a bunch of sales keyed up.
In the fourth quarter, given where interest rates clearly have moved in the U.S. but fundamentals and cap rates remained pretty strong.
Should we say, is it safe to assume that the sale pipeline is potentially skewed more domestically at this point?
Matt Windisch
Well, I mean I think it’s a combination of two things; loan portfolios in Europe which are liquidating and what we’re doing is, strategy overall is as we are adding more and more high quality assets, we’re pruning what I am calling the bottom 10% of our portfolio. Once we’re always looking for opportunities to recycle capital out of an asset that might be – I am just using generalities, but say it’s maybe a B minus asset in a B location, we might want to recirculate that money out of that asset, because particularly in the United States, we’ve got a tremendous amount of capital looking through all in the markets that we’ve invested in.
So we’ve got like for example, one apartment building that we’re going to be selling next year that we have identified that would fall into that category, but we’re going to have a nice gain in it. We are going to take that capital and redeploy it into a higher quality asset at a better current return.
So we are always looking through the portfolio like anybody would to see where there is opportunities to recycle money. And it’s the point you made even though interest rates have gone up.
they are still by any norm, we were looking at some numbers yesterday over the last 40 years, the interest rate levels that we’re at today are well, well below the averages that you’ve seen over the last 40 years. So we are mindful of interest rate risk and that’s why I said earlier at the beginning that it’s the strategy in the last couple of years, we’ve forgone the LIBOR plus 200 interest rates in a lot of cases for the safety of doing long term financing of fixed rates.
And I think the last point I will make is that, like Japan is a very good example. We have – Matt, I think now refinanced that entire portfolio in the last two years, but historically in Japan in the long-term debt market for properties was like three years.
The last one that we did in Japan had a eight year maturity, but it had an eight year maturity with an interest rate of 1.36 for eight years. And so it’s kind of a no-brainer when you have those kinds of opportunities to lock in your cost.
Mitch B. Germain – JMP Securities LLC
Thank you. Great, quarter.
Matt Windisch
Thanks.
Operator
And we have our next question from Andrew Berg with Post Advisory Group.
Andrew Berg – Post Advisory Group LLC
Thank you guys. Just a couple of quick questions.
There with respect to investments that you’re going to make in the fourth quarter, you’ve heard of the pipeline amount. You also said you’d be getting some money at investment co-funding acquisitions.
Can you comment or quantify how much you expect to receive in the fourth quarter from distributions?
Matt Windisch
I’m not sure Andrew that I’ve got an exact number on mind now.
William J. McMorrow
Yes, I mean I don’t think we can give you an exact number but we expect to have substantial cash coming out of investments in the fourth quarter that we can recycle into the new acquisitions.
Andrew Berg – Post Advisory Group LLC
Okay and then on the …
William J. McMorrow
I think Andrew not to be, we kind of [indiscernible] gotten back $210 million out of our investment account so far this year. And I think it somewhat depends on a couple of the loan portfolio resolutions but it’s going to be, I would say, slightly above that number for the year.
Andrew Berg – Post Advisory Group LLC
Okay, now guys have done a good job taking capital off and just trying to figure out what potential flows were. And then with respect to the reporting you did on the segment basis the services business, management leasing fees, and commissions were up nicely in the quarter, where there any big one time commissions in that or that sort of an operating rate we can think about on a go-forward basis in that $21 million range.
Matt Windisch
I mean there was nothing out of the ordinary there were some acquisition fees, which are typical in acquisition mode as we are, but nothing out of the ordinary.
Andrew Berg – Post Advisory Group LLC
Is it just a byproduct of where assets demand has been in the ongoing.
Matt Windisch
Yes, exactly.
Andrew Berg – Post Advisory Group LLC
Great. That’s what I figured.
I just wanted to confirm.
Matt Windisch
Yes.
Andrew Berg – Post Advisory Group LLC
Great, guys. Thanks I appreciate it.
Matt Windisch
No problem, thanks Andrew.
Operator
And we have no further questions at this time. I will now turn the call over to Mr.
Bill McMorrow for closing remarks.
William J. McMorrow
All right, well thanks everybody for joining, and as always we appreciate all the support we get from everybody. Thanks very much.
Operator
And thank you ladies and gentlemen, this concludes today’s conference. Thank you for participating.
You many now disconnect.