Vladimir_Timofeev
Kennedy-Wilson (NYSE:KW) is a skilled and experienced real estate investor, developer, and operator. The company has a sterling track record of getting into markets at favorable times, improving upon the assets, and then either milking for cash flow, or selling at a profit. KW made its name originally in the late 1990s with some prudent investments in Japan, and has continued to take a global perspective, with most of its current investments in Europe and the United States. The company has excellent properties, acquired cheaply, and improved upon in the right geographies, and a management team that should be able to thrive in a more disrupted real estate environment. The stock is hovering near its 52-week low on concerns of higher rates and a recession, but I believe there is tremendous value and yield over the next 3-5 years for the patient investor.
Kennedy-Wilson has shown its acumen in previous recessions, acquiring many of its premier properties via distressed loan purchases, sometimes in bulk transactions, especially in Europe during the Great Recession. The company had great timing purchasing and then selling various properties in the suburbs of Seattle and Northern California. Recently, KW got in early and in size in the thriving Idaho real estate market. Because of their track record of success, various institutional investors such as Prem Watsa’s Fairfax Financial (OTCPK:FRFHF) invest with them via their asset management business to leverage that expertise, generating attractive and mostly recurring revenue streams for KW.
On May 4th, Kennedy Wilson reported a very strong 1st quarter, generating $160MM of adjusted EBITDA, which was up 25% YoY. GAAP EPS of $.24 was up from $.04 a year ago. Adjusted net income of $85MM was up from $47MM. Consolidated revenues increased by 25% YoY to $125MM. Kennedy Wilson operates 37,600 units worth of very high quality, mostly suburban multifamily communities. The number of units has grown by 25% over the last two years, including over 4,500 units under development, with roughly half expected to be done by 2023, with the remainder in 2024. The global multifamily portfolio now generates over half of KW’s estimated NOI, up from 39% four years ago. In Q1, the company purchased four additional communities, totaling 1,150 units through its co-investment portfolio for a gross purchase price of $370MM. These units included another 450 units in the Pacific Northwest and roughly 700 units in the Mountain West, which are the two largest areas of concentration in the United States for KW.
Strong operating performance led to stellar same-property NOI growth of 13%. New lease spreads were 16% and renewals were 12%, while occupancy was over 95%. Same property revenue grew by 11% in the quarter, up 14% in the Mountain West. The Mountain West is an attractive market as it has been growing like wildfire with the work-from-home shift, and rents are roughly $1,400 on average, which still makes it relatively affordable, especially if someone is moving from California or another expensive state. KW is expanding from Boise to Scottsdale, Albuquerque, and Las Vegas. In the vintage affordable housing portfolio, same property revenue and NOI was up 5%. Rents are tied to the change in area median income, which is on track to see major gains as wages have increased. KW is adding another 2,000 units to this existing 9,000 units in this portfolio, resulting in double the original 5,500 units the company acquired in 2015.
KW has made tremendous investments in the UK and Ireland, particularly in Dublin, where KW saw same property occupancy improve by 6.5% to over 97%. Same-property NOI grew by 9%. The massive best-in-class facilities at Capital Dock is now 94% leased. Dublin has a growing population, as many multinational companies have relocated there for its educated workforce and favorable tax environment. There is still a structural undersupply of housing and KW is planning to complete an additional 1,000 units by 2024.
KW also has an extensive Office portfolio, where over 70% of Office NOI comes from European assets. In Q1, the company acquired Waverleygate in Edinburgh for $105MM, bringing another 204,000 square feet property into the equation. The property is already 96% occupied, including blue chip tenants such as Amazon, Microsoft, and the Scottish government. The company expects to increase the initial NOI of $5.4MM over time, as current in-place rents are roughly 35% underpriced in a tight market that only has a 2% vacancy rate. The company’s modus operandi is to refurbish facilities and add various wellness facilities such as gyms and gardens, making properties more attractive and fashionable to work or live in. KW is also very environmentally sensitive, actively working to reduce energy consumption, which is seen very favorably by tenants, especially in this ESG world. In Q1, KW stabilized its 68,000 sq foot Hanover Quay development in Dublin, leasing the entire building to a Fortune 500 fintech tenant on a 15-year lease, resulting in a yield on cost in excess of 6%.
In total, between global development and lease-up, which is 40% multifamily and 39% office, KW expects to add $101MM of estimated NOI. Approximately 90% of that incremental NOI is attributed to assets that will finish construction or lease-up by the end of 2023. These developments are being completed on an average of a 6% development yield, which is quite a bit better than recent cap rates, although of course higher interest rates can pressure things a bit. KW’s concentration in the European Office market has been favorable in obtaining very cheap financing, and the ECB is yet to commence interest rate hikes. KW’s iconic 5-star Shelbourne hotel in Dublin was majorly impacted by the pandemic/lockdowns, but is now seeing tremendous traction, with management indicating that it did $1MM of monthly NOI at the end of March, with a bright outlook for the summer. Management thinks it should generate $10MM of NOI this year. A weak Euro could draw many American tourists to Europe, as the dollar approaches parity with it. One thing I like about KW is that it isn’t tied to any particular asset, as it sold its Ritz-Carlton hotel in Lake Tahoe in 2019.
The company was very active on investment transactions during Q1, completing almost $1 billion of transactions, and growing its assets under management to $23 billion, up from $22 billion the previous quarter. These new transactions along with impressive organic net operating income growth has the company now estimating that its annual NOI grew by 6% to $461MM at the end of Q1, which is up 19% YoY. Fee-bearing capital grew by 6% sequentially to $5.3B and is now up 29% YoY.
The company completed a $300MM perpetual 4.75% preferred equity investment from longtime partner (12 years) Fairfax Financial in Q1, which is callable by KW at any time at an initial strike price of $23. This raised reasonably attractive capital and just as importantly Fairfax increased its commitment to KW’s debt platform by $3B, bringing the total to $5B of lending capacity. KW’s co-investment portfolio allows the company to leverage its expertise and procuring, developing, and managing real estate, using other companies’ equity. In Q1, the co-investment portfolio saw another quarter of strong investment performance and increasing asset values, which resulted in $105MM in income from unconsolidated investments in Q1, up from only $18MM a year ago. Total investment management fees totaled $39MM, up from $7MM a year ago, which included performance fees. Most of the growth has been coming from the debt platform and the European logistics portfolio. The debt platform completed another $246MM of loans, growing outstanding loans to $2.2, after successfully realizing $200MM in sales since launch. KW is earning robust double-digit returns from this platform, and 80% of loans are floating rate, positioning the company to earn more with rates increasing.
KW has done a very good job with its balance sheet, proactively refinancing debt at opportune times. The company refinanced all its unsecured debt in 2021, extending the maturities from 2024 to between 2029 and 2031, while also lowering borrowing costs. Less than 10% of its secured debt matures next year. 94% of KW’s debt is either fixed or hedged using interest rate derivatives. The weighted average cost of debt is only 3.6% with a weighted avg. term to maturity of 6 years. With interest rates doubling since the start of the year, these moves have shown to be very prudent, once again putting a feather in the cap of management. KW ended Q1 with $962MM of cash and available lines of credit, putting it in a great position to be opportunistic as opportunities open up.
At a recent price of $18.81 and 150MM diluted shares outstanding, KW has a market capitalization of approximately $2.82B. KW pays a $.96 annual dividend, equating to a 5.1% yield. The company estimates its annual NOI at $461MM, with 52% Multifamily, 33% Office, 9% Retail, and 6% Hotel/Loans/Industrial. 59% of NOI is in the Western U.S., 20% UK, 18% Ireland, 3% Italy & Spain. Suburban assets comprise 73% of Multifamily and Office NOI, which has helped KW during this work-from-home environment. The development and leasing pipeline is expected to add $101MM in NOI over the next 3 years. In addition, the company has $5.3B in fee-bearing capital and a $4.7B pipeline of capital from announced platforms. In 2021, KW produced $928MM of adjusted EBITDA, $509MM of net income, and $2.24 earnings per share.
KW has 31,664 Multifamily units generating $240.6MM of estimated annual NOI, and 10.4MM sq. ft. of Office space generating $150MM of estimated annual NOI. The company has 10.9MM sq. ft. of Retail and Industrial generating $51.5MM, and 1 Hotel producing $8.5MM. There is $148.4MM invested in loans, yielding $10.3MM. The Lease-up, Development, Residential and Other Portfolio has a total gross asset value of $1.55B. The Investment Management business produced $185.5MM in asset management and performance fees over the last 12 months. KW has $6.947B of net debt on the balance sheet.
Using a relatively conservative 16.67 multiple on adjusted NOI of $461MM gets a valuation of $7.684B. Using a 1.25 multiple on the Development asset value of $1.55B gets us a value of $1.9375B. Providing a 7x multiple on the $185.5MM of investment management fees, generates a valuation of $1.3B. These figures total up to an asset value of $10.92B, offset by $6.947B of net debt, equating to an NAV of 3.97B, which would put the target price at roughly $26.46, offering 40% of upside along with that 5.1% yield. This is only a slight premium to KW’s 52-week high of $25.30, so it certainly isn’t outlandish by any means. I’m confident KW will take advantage of the downturn by either buying back its own stock, or through highly accretive real estate transactions. For long-term investors, KW can be a very attractive option to get diversified and opportunistic real estate exposure, offering a dividend yield exceeding most cap rates on similar quality assets.
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