Kennedy-Wilson Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2024

There are 8 speakers on the call.

Operator

Good day and welcome. All participants will be in listen only mode in this conference. And please note this event is being recorded. And now I would like to turn the conference over to Devin Bovsar. Please go ahead.

Speaker 1

Thank you, and good morning. Thank you for joining us today. With me today are Bill McMorrow, CEO Matt Windisch, President Justin Embody, CFO and Mike Pegler, President of Europe. On this call, we refer to certain non GAAP financial measures, including adjusted EBITDA and adjusted net income. You can find a description of these items with a reconciliation of the most directly comparable GAAP financial measure and our Q4 2023 earnings release, which is posted on the Investor Relations section of our website.

Speaker 1

Today's call will be 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 website for more information. Statements made during this call may 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.

Speaker 1

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

Speaker 2

Devin. Good morning, everyone, and thank you for joining us today. Yesterday, we reported our results for the Q4 and the full year of 2023, which highlighted further expansion of our Investment Management business, NOI growth across our global multifamily portfolio, and solid progress on completing and stabilizing our newly developed assets, including almost 4,000 multifamily units in the Western U. S. And Dublin.

Speaker 2

Our investment management platform outperformed expectations in 2023. Fee Bearing capital grew by an impressive 42% to a record 8,400,000,000 dollars The significant growth was driven by 148% increase in our credit platform which benefited from the $4,100,000,000 construction loan portfolio acquisition which was the largest single transaction in our company's history. The portfolio is heavily weighted to multifamily development projects. The most important benefit of the transaction was the exceptional team of 38 people that originated the loans and joined KW. We currently have $1,300,000,000 of new construction loans in our closing pipeline, all of which are multifamily properties and are expecting to originate approximately $3,000,000,000 of total new loans in 2024 depending on market conditions.

Speaker 2

Our financial results were impacted by non cash theoretical fair value adjustments related to assets that are performing well and held in partnerships with very large sovereign wealth funds and financial institutions. However, excluding the impact of fair value investments, adjusted EBITDA would have totaled $472,000,000 in 2023. In December, we announced an 18 month cost reduction plan aimed at reducing total overhead costs by $15,000,000 to $20,000,000 annually, as well as a non core asset sale program that is expected to generate over $550,000,000 of cash to KW. Thus far, 2 months into this year, we've either implemented or identified approximately 70% of the cost cuts and have either completed or under contract in over half of the asset sales, which would generate cash to KW of $320,000,000 and GAAP gains on sale in excess of $100,000,000 I am proud of the progress we have made across a number of our initiatives and importantly how we have positioned the company to take advantage of future opportunities that may arise in 2024. Over the last 3 decades, we have been global investors in real estate equity and debt and now with our new construction lending team, we can provide capital to any part of the real estate capital structure.

Speaker 2

Our people enable us to continue deploying capital from KW and our partners investments, which will generate significant risk adjusted returns. While global real estate investment activity declined between 60% to 70 percent in 2023, we anticipate more opportunities in 2024 as inflation has clearly eased and there is a high likelihood of the Fed pivoting to lower interest rates. We have very minimal debt maturities in 2024 and has repeatedly happened at KW, periods of dislocation have presented us our greatest growth opportunities. As such, I'd like to highlight a few priorities for KW this year. First, we are focused on growing our global credit business.

Speaker 2

In December, we raised an additional $2,000,000,000 of new external capital commitments for our debt platform, which totaled $6,600,000,000 in outstanding loans and future funding commitments with approximately $4,000,000,000 of dry powder for future originations. We are well positioned as one of the very few active multifamily construction lenders in the market today. 2nd, we look to find new opportunities to grow our stabilized multifamily portfolio. A large part of this growth will be driven by the near term stabilization of the approximately 4,000 units that is expected to add $43,000,000 of estimated annual NOI to KW. We are also entering a period of time that could present an increased investment opportunities from financially distressed owners as upcoming debt maturities will significantly impact borrowers with floating rate debt.

Speaker 2

And third, we are planning on growing our industrial assets under management, which today totals over 11,000,000 square feet where leasing trends remain favorable. We added to our logistics portfolio in the Q4 in both the United States and in Europe. With that, I'd like to turn the call over to our CFO, Justin Embody to discuss our financial results.

Speaker 3

Thanks, Bill. I'd like to start by covering some of the key drivers of our Q4 financial results. Consolidated revenues improved to $140,000,000 in the quarter and 5 $3,000,000 for the year, an increase of 4% compared to 2022 and 24% compared to 2021. Investment management fees totaled $62,000,000 for the year, an increase of 38% from 'twenty two and up 75% from 20 21. Including our co investment portfolio, our share of recurring property NOI and fees totaled $131,000,000 in the quarter or $524,000,000 on an annualized basis.

Speaker 3

Similar to trends we saw in Q3, our unconsolidated investments, a resulting in $176,000,000 of fair value reductions, with estimated values being impacted by higher implied cap rates as a result of the overall interest rate environment. However, since year end, the outlook remains favorable as we believe we are entering a period of time with a more supportive backdrop with expected improvements in both inflation and the cost of capital. Our dispositions remain muted in the quarter with a focus on non core assets. We sold a number of retail assets and 1 smaller office asset in the UK. These sales generated $83,000,000 of cash to Kennedy Wilson.

Speaker 3

In total, we had a GAAP net loss of 1 point $0.54 per share. Adjusted EBITDA totaled a loss of $129,000,000 in Q4. Excluding the non cash fair value related reductions, our adjusted EBITDA would have been 46,000,000 dollars in Q4 or $472,000,000 year to date. Turning to our balance sheet and debt profile. At quarter end, we had $314,000,000 of consolidated cash and $150,000,000 drawn on our $500,000,000 line of credit.

Speaker 3

Our share of total debt is 99% fixed or hedged with a weighted average maturity of 5.3 years. As of year end, our interest rate hedges have a weighted average maturity of 1.6 years and a weighted average strike of 2.6%, which is well below today's rates. We continue to collect cash as a result of our hedging activities, which is not reflected as an offset to our interest expense in our income statement. In Q4, we collected $13,000,000 of cash, bringing our year to date total to $38,000,000 of cash received from our interest rate hedges. Our effective interest rate of 4.4 percent remained essentially flat from the end of 2022 and reflects 60 basis points of savings over our contractual rate due to our hedging strategy.

Speaker 3

Our debt maturities in 2024 are limited, representing 4% of our total debt. Over 80% of the maturities relate to fixed assets. In the U. S, we have 2 multifamily assets maturing with agency funds. 1 is on track to refinance in Q1, the second matures in November.

Speaker 3

In Europe, there are 4 key maturities, one of which we anticipate paying off, totaling $48,000,000 using the proceeds from our asset retail asset sales, which are largely complete already. We have a loan maturing in May, which we are in the process of refinancing, and the remaining two maturities are not until November December. And with that, I'd like to turn the call over to our President, Matt Windisch, to discuss the investment portfolio.

Speaker 4

Thanks, Justin. Starting with our multifamily business, which is largely suburban and totals 38,000 units, our portfolio produces $270,000,000 estimated annual NOI to KW, which represents 55% of our stabilized portfolio. Our multifamily development and lease up portfolio totals an additional 3,800 units, which once stabilized, we expect to add 43,000,000 25. Globally, same property revenue grew by 4% with NOI up approximately 3% in Q4 as we continue to see many of the same trends from the prior quarter. In the U.

Speaker 4

S, we saw seasonal leasing trends pick up in the 4th quarter, with renewal leasing spreads totaling 3.3% and loss to lease totaling approximately 2% at quarter end. We are encouraged with the improvements we saw in January with renewal spreads increasing to 3.8% and asking rents up 2%. In our largest apartment region, the Mountain West, we saw occupancies improve by 1.5%, leading to revenue growth of 3% and NOI growth of 2%. Our Mountain West assets are diversified across 6 states: Colorado, Nevada, New Mexico, Utah, Arizona and Idaho. Our Mountain West portfolio's average rents are priced at an attractive $1600 and we believe these markets will continue to draw residents seeking a more affordable higher quality of life.

Speaker 4

In our California portfolio, we made great progress working through delinquencies and re leasing units, while also seeing lower levels of bad debt. This led to strong revenue growth of over 5% and NOI growth of 4%. Overall, we have recaptured approximately 2 thirds of our units from nonpaying tenants in 2023, With our California assets still seeing elevated levels of legal and turnover costs and currently having a loss to lease of 4%, the region is set up for further NOI growth as we work through the remaining delinquencies. Overall, we believe renter fundamentals in the U. S.

Speaker 4

Remain healthy. The high cost of homeownership and continued household formation will drive further demand for rental housing, while a noticeable decline in construction starts should moderate the supply side. The stats I just walked through, however, run contrary to the change in fair values that were reported on some of our multifamily co investment properties in 2023. To give an example, we have a 9 property apartment portfolio in which we sold a 49% stake to a large institutional investor in 2021. Since that time, the NOI on those assets has grown by 17% and the operating cash flow after debt service on our 3.62 percent fixed rate debt with an average maturity of 5.5 years has grown by more than 20%, including growth of 10% in 2023 alone.

Speaker 4

However, due to increases in implied cap rates off of a limited transaction data and based on 3rd party appraisals, we took a $40,000,000 non cash mark to market loss on these assets during 2023. We have no intention to sell any of these assets in the short term as we continue to grow the cash flows and complete the business plan. At our Vintage Housing Affordable portfolio, we saw strong revenue growth of almost 10%, driven by increasing levels of area median income, resulting in a robust NOI growth of 7%. In Q4, we stabilized 161 unit property, which was the 4th vintage property stabilized in 2023. We have another 1600 units in our development pipeline, which will grow the portfolio to 12 stabilized units, which is more than double than the 5,500 units we initially acquired back in 2015.

Speaker 4

There continues to be a strong need for affordable housing in the country, while our developments routinely have long wait lists of potential renters. As such, we continue to explore new opportunities to grow our vintage portfolio. Moving over to Dublin, our portfolio there remains close to full at 97% occupancy at year end. Last year, we delivered almost 800 new units, which are over 50% leased today, and we remain on track to deliver another 2 30 units next month. Our leasing on these new developments continues to perform ahead of our business plan as a result of the significant structural undersupply of rental housing in Dublin and the continued growth of the Irish economy.

Speaker 4

Turning to our office portfolio, our office NOI is largely derived from our high quality assets located in Dublin as well as in the UK. We saw strong performance in our Dublin stabilized portfolio with occupancy of 95% and same property NOI increasing by 6 percent due to successful rent reviews, which as a reminder is a unique feature allowing a mark to market on rents during the lease term. Excluding our development asset, our stabilized portfolio in Dublin totals 9 properties with very limited space available, with the majority of the assets 100 percent occupied. Overall, same property revenue and NOI in our European office portfolio was up slightly in the quarter, which contributed to 2% NOI growth for the year. Our stabilized portfolio in Europe is well leased to a solid roster tenants with a weighted average lease term of 7.7 years to expiration and healthy occupancy of 94%.

Speaker 4

In the U. S, in Q4, we stabilized an office asset in suburban Los Angeles, adding approximately $5,000,000 to estimated annual NOI. In total, our consolidated U. S. Office portfolio accounts for only 6% of our total estimated annual NOI.

Speaker 4

Now transitioning over to the key platforms within our Investment Management business. Starting with credit. As Bill mentioned, our credit platform grew by an impressive 148% in 2023 and today represents 56% of our total fee bearing capital. We have successfully onboarded the 38 person team from Pac West, who are now fully vertically integrated and working through a pipeline of over $1,000,000,000 in new potential construction loan opportunities with a focus on the multifamily sector. The platform's economics continue to be very attractive.

Speaker 4

KW's ownership interest in these new loans is 2.5% and the returns have benefited from the high interest rate environment. Today, we are able to generate unlevered returns, including fees on our invested capital of over 20% while lending to very high quality borrowers at low leverage points. The team's long term successful track record, strong relationships and the lack of traditional lenders in the market positions us extremely well to deploy the $4,000,000,000 of dry powder and continue expanding this platform in 2024 and beyond. Along with our credit business, our industrial portfolio is another important platform within our Investment Management business. Fundamentals for our European industrial portfolio remain healthy with supply chain pressures, undersupply in certain markets and continued strength in the occupational markets, all leading to strong demand.

Speaker 4

Our portfolio is over 98% occupied with the majority of our vacant space under We've also seen strong demand from our existing tenants to remain in our properties with tenants engaging in early discussions to extend their leases ahead of expiration. During the quarter, we added another asset to our EU Industrial portfolio, which now totals 1,600,000,000 For the full year, we completed 78 leasing transactions, delivering a 53% increase in rent, which was well ahead of our business plan. In place rents are approximately 25% below market, providing an opportunity for us to mark to market rents over the years ahead. Growing our industrial platform with our strategic partners continues to be a focus for us globally. Our European joint venture has over $1,000,000,000 in AUM capacity, and we are monitoring a number of opportunities we hope to add to this platform.

Speaker 4

We also have over 2,000,000 square feet of industrial in the U. S, where our focus has been on small and mid bay properties with a significant embedded loss to lease. With that, I'd like to pass it back to Bill.

Speaker 2

Thank you, Matt. Fundamentals remain very strong within our multifamily credit and industrial portfolio. We have our best team of people we've ever had at KW and we have partners willing to invest meaningful capital alongside KW's capital. There should be tremendous investment opportunities as we move into the second half of twenty twenty four, driven primarily by debt maturities. We are also nearing completion on almost all of our development projects with minimal capital left to spend and converting these assets currently into cash flowing properties.

Speaker 2

Our asset sale program is progressing very well. We are reducing overhead levels and our income streams from our investment management business and our property level NOI are growing at solid growth rates. With that, I'd like to turn it over to Devin and open it up to any questions.

Operator

Our first question today is from Anthony Paolone from JPMorgan. Anthony, please go ahead.

Speaker 5

Thank you. I guess my first question is you all are making progress on the dispositions and raising capital that you outlined, I think, back in December. But should we think about that as just capital that you want to harvest and redeploy? Or do you think we should expect a lower level of leverage for KW overall as we look out?

Speaker 2

Well, I think Tony, it's a combination of both because some of these properties that we're disposing of have debt cash plan for this year that is going to cash plan for this year that is going to allow us to not only lower our debt, but redeploy capital into new investment activities including like Matt went through with the debt business, because if we're doing $3,000,000,000 to $4,000,000,000 worth of debt this year and 2.5%, that's almost $100,000,000 of capital, if I did the math correctly. Sorry, yes, it's about $85,000,000 worth of capital that we're going to deploy into the debt business. So,

Speaker 6

yes.

Speaker 5

I guess my question is thinking about like your view on leverage as a company, if we look through to just whether it's your co investments, funds, wholly owned assets like historically, I don't know, maybe you've run 55%, 60% or so levered. Do you think that's still the right level over time? Or do you think you want to bring that down?

Speaker 4

Hey, Tony, it's Matt. So I think just to emphasize what Bill was saying, when we announced the plan in December, a use of these asset sale proceeds, I mean, one obviously is to continue to fund and grow the business, in particular the co investment business. But another big part would be to potentially purchase our own securities as well as pay off debt including our line of credit. So I think doing a combination of both will enable us to bring the leverage down over that 18 month period of time.

Speaker 5

Okay. And that kind of is going to go into my next question about just the stock at these levels, like how does buyback fit into just overall thinking about capital allocation?

Speaker 2

Yes. I think, Matt, it was 2018 we authorized a $500,000,000 share buyback program and out of that program, we actually spent $375,000,000 And so we have $125,000,000 worth of capacity left in that buyback program. And clearly, the stock along with other things like Matt talked about reducing debt and reinvesting, that is clearly an investment opportunity that we are focused on.

Speaker 5

And then just last one on this item, just the dividend, you've maintained it at the current level, but also going into the idea of just preserving liquidity and having cash, like how should we think about the dividend on a go forward basis?

Speaker 2

Well, like I always say, we review that every quarter In our plan for this year, we're going to be generating significant amounts of cash both from our disposition plan and from distributions that come out of our properties. But as I will say, we look at that every quarter and given the progress that we've made particularly on these asset dispositions so early in the year,

Operator

And our next question comes from Josh Dennerlein from Bank of America Merrill Lynch. Josh, you may go ahead.

Speaker 6

Yes. Hey, everyone. Thanks for the time. Just wanted to ask about maybe first just like the trends that you're seeing in the Mountain West markets for your multifamily business. It just seems it looks like maybe the rent growth slowing there from a market wise perspective, but then kind of thinking about your portfolio and how you do a lot of value add projects, you might get like an uplift there.

Speaker 6

So just kind of can you help us think about the potential NOI growth across that part of the portfolio?

Speaker 4

Yes, absolutely. This is Matt. So as I mentioned in my remarks, we think if you kind of start off with the affordability, so we're $1600 average rent in that market, which if you compare that to other markets in the Western U. S, is a significant discount. That all being said, I mean, there clearly has been a higher level of supply that's come on recently in those markets, which has put some pressure on our ability to grow the rents at the pace we were growing them at over the past several years.

Speaker 4

I think the good news on that front is the level of supply going forward is dissipating in those markets. And so we're going to have some of the best in class products at affordable prices in markets that continue to attract people for job growth and other factors. So, during the pandemic, those markets were obviously roaring, doing extremely well and kind of outpacing the business plan. So we feel great about the portfolio, but the days of 10% rent growth there are probably behind us. But we think we can continue to compound and grow those rents over time.

Speaker 6

Okay. Appreciate that. And then maybe just turning to your office portfolio, I think you had a move out in one of your Bellevue assets during the quarter. Just kind of curious on like re leasing opportunities there, how you're thinking about the asset? And then maybe there are any other kind of move outs we should be thinking about, prospects for re leasing?

Speaker 4

Yes. So Josh, that was the main asset that in terms of vacancy within the U. S. Portfolio. So we did have a tenant move out at the beginning of Q4.

Speaker 4

What I'd say there is we have a very, very low basis in that asset. We've owned it for a long time. Obviously, the Seattle market is challenged right now. That all being said, the leasing activity kind of if you look at Q4 to even Q1 overall has definitely picked up. And I think there we have the ability, just given our basis, to do deals.

Speaker 4

And so we're confident that we're going to be able to get that property leased over the next 12 to 18 months. We've got the right team working on it and we'll get it done. The other thing I'd mention is there's one other building there that is currently occupied as part of that complex and we're in discussions to potentially sell that asset and get cash that would in essence pay down the entire debt on that entire three building portfolio. So we feel pretty good about that asset.

Speaker 2

Yes, I mean, Matt, the only thing I would add, that asset came to us through a sale of an apartment building that we exchanged into that asset. So to add to Mass point, we have an attractive cost basis in the asset and it was somewhat of a, I don't know if I'd call it unique, but the tenant that left, it's an extremely large technology company based in the Seattle market that has built out their own campus. And so it had nothing no reflection on the asset. It was just the business plan of that particular tenant.

Speaker 6

Thanks for the color guys.

Operator

Thank you. Our next question comes from Tayo Okusanya, Tayo from Deutsche Bank. Go ahead please.

Speaker 7

Yes. Good morning everyone.

Operator

A lot

Speaker 7

of positive commentary just around opportunities to grow the loan book. Again, you guys are one of the few names out there that actually have kind of capital to do that. I'm assuming again you're going to price accordingly for that. But on the flip side, I wonder does capital start becoming too expensive for someone who wants to take a loan and actually there's going to be less construction activity going forward, so less opportunities actually originate loans. Just kind of curious how you think through those two things to help us kind of get a better sense of just how much the loan book could grow over the next 12 months?

Speaker 4

Yes. Good question, Tayo. Yes, I mean, I'd say certainly construction activity overall is has reduced from where it was a couple of years ago. Obviously, rates are higher, construction costs have gone up. So there's no question that housing starts, as an example, are slowing.

Speaker 4

I think if you think about that side of it, there's the flip side too that if you look at the traditional lenders in the space, the regional banks of the world, some of the private credit funds that use back leverage where we're doing this all unlevered, have been less active in the market. And so what we feel like is that the overall pie may be shrinking, but we think with our expertise and the team we brought on from Pacific Western Bank and our reputation in the market, we're going to continue to get a bigger and bigger piece of that pie. So we feel confident. The pipeline kind of speaks for itself. We have over $1,000,000,000 we've already signed up and we're in closing on.

Speaker 4

So we feel like we can continue to grow the book. I mean the other side of it too is in terms of payoffs. Some people who are looking for permanent financing are not paying off as quickly as we expected. And I think that's a good thing because now we have fully leased properties that are still being we're still getting paid construction loan spreads on those. And so I think in terms of the runoff of the book, it may be a bit slower certainly for the first half of this year.

Operator

Okay. And this concludes our question and answer session. And I would like to turn the conference back over to Bill McMorrow for some closing remarks.

Speaker 4

Thank you everybody.

Speaker 2

And as I will say too, we're always available any of us to have for any further follow-up with you. So thank you very much and have a great day.

Operator

This has concluded the conference. Thank you for attending today's presentation. You may now disconnect and have a great day.

Remove Ads
Powered by Quartr
Earnings Conference Call
Kennedy-Wilson Q4 2023
00:00 / 00:00
Remove Ads