Q2 2024 Kennedy-Wilson Holdings Inc Earnings Call
Good day, and welcome to the Kennedy Wilson Second Quarter 2024 Earnings Call and Webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Operator: and Webcast. All participants will be in listen-only mode.
After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then 2. Please note this event is being recorded.
Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touchstone phone. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Daven Bhavsar, Head of Investor Relations. Please go ahead.
I would now like to turn the conference over to Daven Bhavsar, Head of Investor Relations. Please go ahead.
Daven Bhavsar: Thank you and good morning. Thank you for joining us today.
Daven Bhavsar: Today's call will be webcast live and will be archived for replay. Replay will be available by phone for one week and by webcast for three months. Please see the Investor Relations website for more information. You can find a description of these items along with the reconciliation of the Most Directly Comparable Gap financial measure and our second quarter 2024 earnings release. This was posted in the investor relations section of our website. Statements made during this call may include forward-looking statements.
Daven Bhavsar: Thank you and good morning. Thank you for joining us today. Today's call will be webcast live and will be archived for replay. Replay will be available by phone for one week and by webcast for three months.
Speaker Change: Please see the Investor Relations website for more information. With me today are Bill McMorrow, CEO , Matt Windisch, President, Justin Enbody, CFO , and Mike Pegler, President of Europe . 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 the reconciliation of the Most Directly Comparable GAAP financial measure and our second quarter 2024 earnings release, which is posted on the investor relations section of our website.
Daven Bhavsar: Actual results may materially differ from forward-looking information discussed on this call due to the 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 McMurray.
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 the number of risks, uncertainties, and other factors indicated in reports and filings with the Securities and Exchange Commission.
Bill McMurray: Thank you, Devin. Good morning, everybody.
I would now like to turn the call over to our Chairman and CEO , Bill McMorris.
Bill McMorris: Thank you, Devin. Good morning, everybody. Thank you for joining our call.
Bill McMurray: Thank you for joining our call. Yesterday, we reported our results for the second quarter and the first half of 2024, which highlighted improving operating fundamentals in our multifamily portfolio and solid progress on our key initiatives during what has been a challenging 24-month period of time for real estate, given that inflation rates were at a 40-year high and interest rates at a 22-year high. We saw continued momentum in Q2 within our investment management business and deployed $2 billion of new capital throughout the first half of the year.
Bill McMorris: Yesterday we reported our results in the second quarter and the first half of 2024.
which highlighted improving operating fundamentals in our multifamily portfolio and solid progress.
Bill McMorris: are key initiatives during what has been a challenging 24-month period of time for real estate given that inflation rates were at a 40-year high and interest rates at a 22-year high.
Bill McMorris: We saw continued momentum in Q2 within our investment management business and deployed $2 billion of new capital throughout the first half of the year.
Bill McMurray: The deployment includes $1.7 billion through our credit platform, which is fully related to the construction of new, high-quality, market-rate, multifamily student housing made to best-in-class sponsors, and $300 million on multifamily and industrial acquisitions. We also continue to finish and stabilize our development and lease-up portfolio and, in the quarter, stabilize five multifamily communities, which added $16 million to our estimated annual NOI. We have only two remaining active market rate developments
The deployment includes $1.7 billion through our credit platform.
Bill McMorris: which fully related to the construction of new, high-quality, market-rate, multifamily student housing made the best-in-class sponsors, and $300 million on multifamily and industrial acquisitions.
We also continue to finish and stabilize our development and lease-up portfolio, and in the quarter, stabilize five multifamily communities, which added $16 million to our estimated annual NOI.
Bill McMurray: In total, our development and lease-up portfolio is expected to add $70 million in estimated annual NOI upon stabilization. With our developments largely finishing, our capital spend on development has dropped from averaging $150 million per year in 22 and 23 to only $10 million remaining to be spent in the second half of 24. As a result of our Q2 activity, our estimated annual NOI grew by 5% to $485 million. AUM assets under management grew to $27 billion and are annualizing at a 16% growth rate, and fee-bearing capital grew to a record $8.7 billion, with the ability to grow to $15 billion, including $2.9 billion of future funding from previously originated and closed construction loans and the investment of non-discretionary capital that is available to invest.
Bill McMorris: We have only two remaining active market rate developments.
Bill McMorris: In total, our development and lease-up portfolio is expected to add $70 million in estimated annual NOI upon stabilization.
Bill McMorris: With our developments largely finishing, our capital spend on development has dropped from averaging $150 million per year in 22 and 23 to only $10 million remaining to be spent in the second half of 24.
Bill McMorris: As a result of our Q2 activity, our estimated annual NOI grew by 5% to $485 million.
Bill McMorris: AUM, Assets Under Management, grew to $27 billion and is annualizing at a 16% growth rate.
Bill McMorris: and fee-bearing capital grew to a record $8.7 billion.
Bill McMorris: with the ability to grow to $15 billion, including $2.9 billion of future fundings from previously originated and closed construction loans and the investment of non-discretionary capital that is available to invest.
Bill McMurray: Turning to market conditions, we have seen improving liquidity throughout the year, including several large portfolio transactions within the U.S. apartment sector that were recently completed or announced, highlighting the strong institutional demand for high-quality multifamily housing. While interest rates have been a headwind for real estate over the last few years, we've begun to see significant beneficial shifts. In the U.S., the 10-year bond, as most of you know, has declined by 100 basis points and is expected to touch 5% in October 2023. In Europe, the Bank of England cut rates last week for the first time in four years, and the 10-year bond in Ireland today sits at 2.7%.
Speaker Change: Turning to market conditions, we have seen improving liquidity throughout the year, including several large portfolio transactions within the U.S. apartment sector, which were recently completed or announced.
Bill McMorris: highlighting the strong institutional demand for high-quality multifamily assets.
Speaker Change: All interest rates have been a headwind for real estate over the last few years. We've begun to see significant beneficial shifts.
Speaker Change: In the U.S., the 10-year bond, as most of you know, has declined by 100 basis points and touching 5% in October 2023.
Speaker Change: In Europe , the Bank of England cut rates last week for the first time in four years, and the 10-year bond in Ireland today sits at 2.7 percent.
Bill McMurray: Compared to, I might add, it was close to 16% when we first went there in 2010. Further anticipated decreases in rates by the Fed also provide a supportive backdrop for our valuations and increases in our portfolio. A lower cost of capital and lower base rates should help increase transaction volumes and increase our ability to find opportunities to deploy capital and realize additional cash monetization. This bodes well for our business, where we have created a unique platform that can scale through investing in both real estate equity and debt.
Speaker Change: Versus, I might add, it was close to 16% when we first went there in 2010.
Bill McMorris: Further anticipated decreases in the rates by the Fed also provide a supportive backdrop for our valuations and increases of our portfolio.
Speaker Change: A lower cost of capital and lower base rates should help increase transaction volumes and increase our ability to find opportunities to deploy capital.
Speaker Change: and realize additional cash monetizations.
Bill McMorris: This bodes well for our business, where we have created a unique platform that can scale through investing in both real estate equity and debt.
Bill McMurray: I'm excited about our current position and the numerous opportunities we have to expand our assets under management, with a focus on the following areas. First, growing our Investment Management Platform. Our track record spans over three decades, during which we have navigated many different cycles while at the same time growing our relationship network, which extends from the U.S. to Canada, Europe, and across Asia to include some of the largest sovereign wealth funds, insurance companies, and other large institutional investors around the world. This includes our partners in Japan, where we recently reopened our office and where our history dates back to when we established Kennedy-Wilson Japan back in
I'm excited about our current positioning and the numerous opportunities we have to expand our assets under management with a focus on the following areas. First,
Bill McMorris: Growing Our Investment Management Platform
Bill McMorris: Our track record spans over three decades, in which we have navigated many different cycles, and at the same time grown our relationship network.
Bill McMorris: which expands from the U.S. to Canada, Europe , and across Asia to include some of the largest sovereign wealth funds, insurance companies, and other large institutional investors around the world.
Bill McMorris: This includes our partners in Japan, where we recently reopened our office and where our history dates back to when we established Kennedy Wilson Japan back in 1994.
Bill McMurray: We continue to see a strong desire from our partners to invest with KW in real estate debt and equity in the U.S., United Kingdom, and Ireland. I'm very confident in our ability to continue raising further third-party capital to grow our investment management business. We're currently focused on three key products. First, rental housing. Our portfolio of approximately 60,000 units includes 22,000 units being financed through our construction loan platform and over 38,000 multifamily units, in which we have an approximate 56% ownership. Renter fundamentals remain very healthy, as there remains a shortage of housing throughout the U.S., U.K., and Ireland.
Bill McMorris: We continue to see a strong desire from our partners to invest with KW in real estate debt and equity in the U.S., United Kingdom, and Ireland.
Bill McMorris: I'm very confident in our ability to continue raising further third-party capital to grow our investment management business.
Bill McMorris: We are currently focused on three key products. First is rental housing.
Bill McMorris: Our portfolio of approximately 60,000 units includes 22,000 units being financed through our construction loan platform, and over 38,000 multifamily units in which we have an approximate 56% ownership interest.
Bill McMorris: Renter Fundamentals remain very healthy.
Bill McMorris: as there remains a shortage of housing throughout the U.S., U.K., and Ireland.
Bill McMurray: In the U.S., multifamily demand for a largely suburban portfolio has remained strong, while supply starts have dropped significantly. We also have a very successful track record of investing in and building high-quality rental housing in Dublin and the UK, and we continue to evaluate opportunities in those regions. Second, we look to continue growing our credit platform, where we are generating solid risk-adjusted returns for our shareholders. Q2 marked the one-year anniversary of our acquisition of a $4.1 billion construction loan portfolio from PacWest Bank.
Bill McMorris: In the U.S., multifamily demand for a largely suburban portfolio has remained strong.
Speaker Change: Well, supply starts have dropped significantly.
Speaker Change: We also have a very successful track record of investing in and building high-quality rental housing in Dublin and the UK, and we continue to evaluate opportunities in those regions.
Bill McMorris: Second, we look to continue growing our credit platform.
Bill McMorris: where we are generating solid risk-adjusted returns for our shareholders.
Bill McMorris: Q2 marked the one year anniversary of our acquisition of a $4.1 billion construction loan portfolio from PacWest Bank.
Bill McMurray: Since then, the PacWest Construction Lending Team that joined KW has integrated seamlessly within our KW culture while completing $1.9 billion of multifamily and student housing construction origination, with very high-quality institutional sponsors. We have a strong pipeline of $600 to $700 million that is signed up for and is currently in the process of closing, which will take our closings to $2.7 billion since the acquisition. And third, we look to continue building our existing 12 million square feet of logistics facilities.
Bill McMorris: Since then, the PacWest Construction Lending Team that joined KW has integrated seamlessly within our KW culture while completing $1.9 billion of multifamily and student housing construction originations.
Bill McMorris: with very high quality institutional sponsors.
Bill McMorris: We have a strong pipeline of $600 to $700 million that is signed up and is currently in the process of closing.
Bill McMorris: which will take our closings to $2.7 billion since the acquisition.
Speaker Change: And third, we look to continue building our existing 12 million square feet of logistics.
Bill McMurray: We acquired two industrial platforms in the quarter, totaling $180 million, one in the U.S. and one in the United Kingdom, and we are evaluating several new opportunities in our pipeline in both regions. Our second key initiative relates to our asset sale plan. In July, we sold a retail center in Spain, which was our last wholly owned asset in the country, and generated $35 million of cash to KW. This brings our year-to-date total through the end of July to $330 million of cash generated from asset sales of non-core assets and loan repayment.
Speaker Change: We acquired two industrial platforms in the quarter, totaling $180 million, one in the U.S. and one in the United Kingdom, and we are evaluating several new opportunities in our pipeline in both regions.
Speaker Change: Our second key initiative relates to our asset sale plan. In July , we sold a retail center in Spain, which was our last wholly owned asset in the country, and generated $35 million of cash to KW.
Speaker Change: This brings our year-to-date total through the end of July to $330 million of cash generated from asset sales, non-core assets, and loan repayments.
Bill McMurray: We have a strong disposition pipeline for the second half of the year with proceeds to be used for reducing our unsecured debt and for future co-investment opportunities. I want to thank our entire organization for their hard work as we have continued working as one team across all geographies and business lines, which has set up a firm foundation for the next phase of growth at Kennedy-Wilson. With that, I'd like to turn the call over to our CFO, Justin Enbody, to discuss our financial results.
Bill McMorris: We have a strong disposition pipeline for the second half of the year, with proceeds to be used for reducing our unsecured debt and for future co-investment opportunities.
Speaker Change: I want to thank our entire organization for their hard work as we have continued working on as one team across all geographies and business lines which has set up a firm foundation for the next phase of growth at Kennedy Wilson.
Justin Enbody: With that, I'd like to turn the call over to our CFO , Justin Enbody, to discuss our financial results.
Justin Enbody: Thanks, Bill. I'll start by reviewing our financial results and then discuss our balance sheet. Investment management revenue grew by 37 percent to $26 million in Q2, driven by completing nearly $1 billion in new originations on our credit platform, as well as higher levels of fee-bearing capital. Baseline EBITDA grew by 5% to $105 million.
Justin Enbody: Thanks, Bill. I'll start by reviewing our financial results and then discuss our balance sheet. Investment management revenue grew by 37% to $26 million in Q2, driven by completing nearly $1 billion in new originations in our credit platform, as well as higher levels of fee-bearing capital.
Justin Enbody: We saw minor changes in the values of our unconsolidated portfolio in the quarter, and we saw overhead costs go down by 9% year-to-date. Additionally, post-Quarter-N, as Bill mentioned, we divested the largest asset we held in Spain, and with that, we'll be closing our Spanish offset. In summary, our gap net loss totaled $0.43 per share in Q2, which included $0.46 per share of non-cash items including depreciation and amortization, fair value, and share-based compensation.
Speaker Change: Baseline EBITDA grew by 5% to $105 million.
Speaker Change: We saw minor changes in the values of our unconsolidated portfolio in the quarter, and we saw overhead costs go down by 9% year-to-date. Additionally, post-quarter end, as Bill mentioned, we divested in the largest asset we held in Spain, and with that, we'll be closing our Spanish office.
Speaker Change: In summary, our gap net loss totaled $0.43 per share in Q2, which includes $0.46 per share of non-cash items, including depreciation and amortization, fair value, and share-based compensation.
Justin Enbody: Adjusted EBITDA totaled $79 million for Q2 and $283 million for the year. Now, turning to our balance sheet and debt profile. At quarter end, we had $367 million of consolidated cash. We paid down our line of credit by $67 million in Q2, and today we have $172 million drawn on our $500 million line of credit. Our share of total debt is 98% fixed or hedged with a weighted average maturity of five years.
Speaker Change: Adjusted EBITDA totaled $79 million for Q2 and $283 million for the year.
Justin Enbody: We continue to collect cash as a result of our interest rate hedging activities, which is not reflected in our financial statements as an offset to interest expense. In Q2, we collected $11 million of cash, bringing our year-to-date total to $23 million. Our effective interest rate of 4.6% reflects a 50 basis point saving over our contractual rate as a result of our hedging strategy. Our remaining 2024 debt maturities total $181 million, which is all non-recourse at the property level.
Speaker Change: Now turning to our balance sheet and debt profile.
Speaker Change: At quarter end, we had $367 million of consolidated cash. We paid down our line of credit by $67 million in Q2, and today we have $172 million drawn on our $500 million line of credit.
Speaker Change: Our share of total debt is 98% fixed or hedged with a weighted average maturity of five years. We continue to collect cash as a result of our interest rate hedging activities, which is not reflected in our financial statements as an offset to interest expense.
Speaker Change: In Q2, we collected $11 million of cash, bringing our year-to-date total to $23 million.
Bill McMorris: Our effective interest rate of 4.6% reflects a 50 basis point saving over our contractual rate as a result of our hedging strategy.
Bill McMorris: Our remaining 2024 debt maturities total $181 million, which are all non-recourse at the property level.
Justin Enbody: In Q3, we refinanced the construction loan at one of our recently completed multi-family projects in Dublin, where the effective rate improved from 6.2% to 4.5% fixed for 5 years. We also continued to repurchase stock in the quarter, buying another 600,000 shares, which brought our year-to-date total through July to 1.7 million shares, or approximately 1.2% of our outstanding share count. We have $110 million remaining on our $500 million share repurchase authorization. With that said, I'd now like to turn the call over to our president, Matt Windisch, to discuss our investment portfolio. Thanks, Justin.
Bill McMorris: In Q3, we refinanced the construction loan at one of our recently completed multi-family projects in Dublin, where the effective rate improved from 6.2% to 4.5% fixed for 5 years.
Bill McMorris: We also continue to repurchase stock in the quarter, buying another 600,000 shares.
Bill McMorris: which brought our year-to-date total through July to 1.7 million shares, or approximately 1.2% of our outstanding share count.
Bill McMorris: We have $110 million remaining on our $500 million share repurchase authorization.
Bill McMorris: With that, I'd now like to turn the call over to our president, Matt Windisch, to discuss our investment portfolio.
Matt Windisch: Thanks Justin. We continue to strengthen the quality of our portfolio as we work through disposing of non-core assets while at the same time stabilizing brand new communities. Our stabilized portfolio totals $485 million in estimated annual NOI, which grew by 5% in the quarter. Over the last five years, our portfolio has continued to shift towards multifamily, credit, and industrial, which have increased from 50% to roughly 70% of our NOI. We have also sold down our retail, office, and hotel portfolios, which five years ago accounted for 50% of our portfolio versus approximately 30% today.
Matt Windisch: Thanks Justin. We continue to strengthen the quality of our portfolio as we work through disposing of non-core assets while at the same time stabilizing brand new communities.
Matt Windisch: Our stabilized portfolio totals $485 million in estimated annual NOI, which grew by 5% in the quarter.
Speaker Change: Over the last five years, our portfolio has continued to shift towards multifamily, credit, and industrial, which have increased from 50% to roughly 70% of our NOI.
Matt Windisch: We have also sold down our retail, office, and hotel portfolios, which five years ago accounted for 50% of our portfolio versus approximately 30% today.
Matt Windisch: In total, our 38,000-unit multifamily business has grown to 61% of our stabilized portfolio, producing $525 million of estimated annual NOI at the property level, of which KW's share is $294 million. We have 2,700 units in our lease-up and development pipeline, which we expect to add 29 million to estimated annual NOI at stabilization.
Matt Windisch: In total, our 38,000-unit multifamily business has grown to 61% of our stabilized portfolio.
Matt Windisch: Producing $525 million of estimated annual NOI at the property level, of which KW's share is $294 million.
Matt Windisch: We have 2,700 units in our lease-up and development pipeline, which we expect to add 29 million to estimated annual NOI at stabilization.
Matt Windisch: Our U.S. multifamily portfolio has benefited as a result of our asset management initiatives, where we are focused on driving operational efficiencies and enhancing our assets, as well as strong demand from an overall shortage of homes for sale and the high cost of homeownership. These drivers resulted in same property occupancy growth of 1.9%, revenue growth of 3.6%, and NOI growth of approximately 3%. Overall, portfolio occupancy stood at 94%. On the expense side, rising insurance costs reduced our same-store NOI results in Q2 by approximately 50 basis points. However, we expect that our insurance premiums will be flat to down in the second half of the year based on our July renewal.
Matt Windisch: Our U.S. multifamily portfolio has benefited
Speaker Change: as a result of our asset management initiatives, where we are focused on driving operational efficiencies and enhancing our assets.
Speaker Change: as well as strong demand from an overall shortage of homes for sale and the high cost of home ownership.
Speaker Change: These drivers resulted in same property occupancy growth of 1.9%, revenue growth of 3.6%, and NOI growth of approximately 3%.
Speaker Change: Overall, portfolio occupancy stood at 94%.
Bill McMorris: On the expense side, rising insurance costs reduced our same-store NOI results in Q2 by approximately 50 basis points.
Bill McMorris: However, we expect that our insurance premiums will be flat to down in the second half of the year based on our July renewals.
Matt Windisch: Our Margaret Raitt apartment portfolio in the U.S., which is over 90% suburban, saw blended leasing spreads of 2.6%, similar to what we are seeing in July, and we ended the quarter with a loss to lease totaling 4%. Turning to our regional highlights, in our California portfolio, we continue to make great progress working through delinquencies and re-leasing units. In Q2, we saw occupancy increases, lower bad debt, and stable operating expenses, leading to NOI growth of 5% across our California portfolio. In Northern California, bad debt dropped to the lowest level in two years.
Bill McMorris: Our market rate apartment portfolio in the U.S., which is over 90% suburban, saw blended leasing spreads of 2.6%, similar to what we are seeing in July , and we ended the quarter with a loss to lease totaling 4%.
Bill McMorris: Turning to our regional highlights, in our California portfolio, we continue to make great progress working through delinquencies and re-leasing units.
Bill McMorris: In Q2, we saw occupancy increases, lower bad debt, and stable operating expenses.
Bill McMorris: leading to NOI growth of 5% across our California portfolio.
Bill McMorris: In Northern California, bad debt dropped to the lowest level in two years.
Matt Windisch: The Pacific Northwest also delivered an impressive 4% NOI growth as occupancy grew by 1.4%, while our value-add initiatives in this region continue to positively impact our results. In the Mountain West region, we saw occupancy improve by 2%, leading to revenue growth of 3% and NOI growth of 1%. Our portfolio here is well diversified across six states. Nevada and New Mexico were the strongest in our portfolio, with 9% and 6% NOI growth, respectively.
Bill McMorris: The Pacific Northwest also delivered an impressive 4% NOI growth, as occupancy grew by 1.4%, while our value-add initiatives in this region continue to positively impact our results.
Bill McMorris: In the Mountain West region, we saw occupancy improve by 2%, leading to revenue growth of 3% and NOI growth of 1%.
Bill McMorris: Our portfolio here is well diversified across six states.
Bill McMorris: Nevada and New Mexico were the strongest in our portfolio, with 9% and 6% NOI growth respectively.
Matt Windisch: Our Arizona properties produced NOI growth of 6%, and in Utah, we saw NOI growth of 3%. In Idaho, we have seen supply impact our rental growth, although we anticipate much less new supply coming online in the years ahead. We continue to have conviction in these markets, where our portfolio offers an attractive, lower-cost alternative to higher-rent units in higher-tax, more densely populated cities. Our Mountain West Portfolio's average rents are roughly $1,600 per month, and we believe these markets are set up for solid growth as supply pressures subside.
Bill McMorris: Our Arizona properties produced NOI growth of 6% and in Utah we saw NOI growth of 3%.
Bill McMorris: In Idaho, we have seen supply impact our rental growth, although we anticipate much less new supply coming online in the years ahead.
Bill McMorris: We continue to have conviction in these markets where our portfolio offers an attractive, lower-cost alternative to higher-rent units in higher-tax, more densely populated cities.
Bill McMorris: Our Mountain West portfolio's average rents are roughly $1,600 per month, and we believe these markets are set up for solid growth as supply pressures subside.
Matt Windisch: Moving over to Dublin, our portfolio there remains in strong demand. In Q2, we stabilized two multifamily projects in Dublin, Cooper's Cross Residential and The Grange, which totaled 758 units. These two properties added approximately $10 million to our estimated annual NOI.
Bill McMorris: Moving over to Dublin, our portfolio there remains in strong demand.
Bill McMorris: In Q2, we stabilized two multifamily projects in Dublin, Coopers Cross Residential and The Grange, which totaled 758 units.
Matt Windisch: We have a further 232 units undergoing lease-up at Cornerstone, which we anticipate stabilizing in early 2025. Renter fundamentals remain healthy in Ireland as labor market conditions are tight and there remains a large structural shortage of housing. With regard to our global office portfolio, we saw improving occupancies and lower operating costs lead to 6.5% NOI growth. It is worth noting that U.S. Office represents only 6% of our stabilized portfolio, where we have completed approximately half a million square feet of leasing in 2024, with an average term of almost six years.
Bill McMorris: These two properties added approximately $10 million to estimated annual NOI.
Bill McMorris: We have a further 232 units undergoing lease-up at Cornerstone, which we anticipate stabilizing in early 2025.
Bill McMorris: Renter fundamentals remain healthy in Ireland as labor market conditions are tight and there remains a large structural shortage of housing.
Bill McMorris: With regards to our global office portfolio, we saw improving occupancies and lower operating costs lead to 6.5% NOI growth.
Bill McMorris: It is worth noting that U.S. Office represents only 6% of our stabilized portfolio, where we have completed approximately half a million square feet of leasing in 2024, with an average term of almost six years.
Matt Windisch: The majority of our office portfolio is located in Dublin and in the UK, where the overall leasing market environment is expected to improve in 2024. In Q2, same property NOI increased by 2.2% in our European office portfolio, driven by slight increases in occupancy and lower operating expenses. Stabilized occupancy in Europe remains healthy at 94%, with a weighted average lease term of 7 years to expiration and 5 years to break. In Dublin, our 9 stabilized properties have less than 5% vacancy, with 5 of the properties 100% leased.
Bill McMorris: The majority of our office portfolio is located in Dublin and in the UK, where the overall leasing market environment has improved in 2024. In Q2, same property NOI increased by 2.2% in our European office portfolio, driven by slight increases in occupancy and lower operating expenses.
Bill McMorris: Stabilized occupancy in Europe remains healthy at 94% with a weighted average lease term of 7 years to expiration and 5 years to break.
Bill McMorris: In Dublin, our 9 stabilized properties have less than 5% vacancy, with 5 of the properties 100% leased. We continue to see a flight to quality, which we believe will benefit our portfolio.
Matt Windisch: We continue to see a flight to quality, which we believe will benefit our portfolio. Fundamentals in our industrial portfolio remain very strong, with our portfolio 98% occupied. In Europe, leasing completed in the quarter delivered a 44% increase in rent. Demand from our existing tenants to remain in our properties remains strong, with tenants regularly engaging in early discussions ahead of their lease expiration. In-place rents in Europe remain 19% below market, which allows us to continue enhancing value as leases mature.
Bill McMorris: Fundamentals in our industrial portfolio remain very strong, with our portfolio 98% occupied. In Europe , leasing completed in the quarter delivered a 44% increase in rents.
Bill McMorris: Demand from our existing tenants to remain in our properties remains strong, with tenants regularly engaging in early discussions ahead of their lease expiration.
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Bill McMorris: In-place rents in Europe remain 19% below market, which allows for us to continue enhancing value as leases mature.
Matt Windisch: Switching gears to our investment management business, As we continue to simplify our balance sheet through non-core asset sales, investment management growth is an important focus as it allows us to generate attractive returns in a capital-light manner. We have successfully grown our fee-bearing capital by 93% over the past three years to a record $8.7 billion. A large portion of our investment management growth has been driven by our credit business, which includes $5.1 billion in outstanding loans and $2.9 billion in future funding.
Operator: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded.
Bill McMorris: Switching gears to our investment management business.
Bill McMorris: As we continue to simplify our balance sheet through non-core asset sales, investment management growth is an important focus as it allows us to generate attractive returns in a capital light manner.
Daven Bhavsar: I would now like to turn the conference over to Daven Bhavsar, head of investor relations. Please go ahead. Thank you and good morning. Thank you for joining us today. Today's call will be Webcast live and will be our client for replay. Replay will be available by phone for one week and by webcast for three months. Please see an investor relations website for more information.
Bill McMorris: We have successfully grown our fee-bearing capital by 93% over the past three years to a record $8.7 billion.
Bill McMorris: A large portion of our investment management growth has been driven by our credit business, which includes $5.1 billion in outstanding loans and $2.9 billion in future fundings.
Matt Windisch: Our capital raising efforts span across the globe, with the majority of our capital coming from large institutional insurance companies, sovereign wealth funds, and pensions. Combining these important relationships with an improving interest rate backdrop should strengthen liquidity and improve our ability to deploy capital at scale. In summary, we are emerging from a challenging period of time as a much stronger company positioned for growth. We have greatly increased the strength of our lending capabilities over the last year.
Bill McMorris: Our capital raising efforts span across the globe, with the majority of our capital coming from large institutional insurance companies, sovereign wealth funds, and pensions.
Daven Bhavsar: With me today are Bill McMorrow, CEO, Matt Windisch, president, Justin Enbody, CFO and Mike Pegler, president of Europe. On this call, we will refer to certain non-gap financial measures, including adjusted EBITDA and adjusted net income. You can find the description of these items along with the reconciliation of the most directly comparable gap financial measure and our second quarter, 2024 earnings release, which is posted on the investor relations section of our website.
Bill McMorris: Combining these important relationships with an improving interest rate backdrop should strengthen liquidity and improve our ability to deploy capital at scale.
Bill McMorris: In summary, we are emerging from a challenging period of time as a much stronger company positioned for growth.
Matt Windisch: We continue to finish and stabilize our developments while recycling capital from our non-core asset sales, strengthening our overall portfolio. And most importantly, we have a well-seasoned and invigorated team on the ground, which looks forward to growing the business over the years ahead.
Bill McMorris: We greatly increased the strength of our lending capabilities in the last year. We continue to finish and stabilize our developments while recycling capital from our non-core asset sales, strengthening our overall portfolio.
Daven Bhavsar: 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 the number of risks uncertainties and other factors indicated in reports and filings with the Securities and Exchange Commission.
Bill McMorris: And most importantly, we have a well-seasoned and invigorated team on the field which looks forward to growing the business over the years ahead. So with that, we can open it up to Q&A.
William McMorrow: I would now like to turn the call over to our chairman to CEO Bill McMorrow. Thank you, Devin. Good morning, everybody. Thank you for joining our call. Yesterday we reported our results in the second quarter and the first half of 2024, which highlighted improving operating fundamentals on our multi-family portfolio and solid progress on our key initiatives during what has been a challenging 24-month period of time for real estate given inflation rates were given that inflation rates were at a 40-year high and interest rates at a 22-year high.
Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been answered and you would like to withdraw your question, please press star, then 2. The first question comes from Anthony Paolone on behalf of J.P. Morgan. Please go ahead.
Speaker Change: Thank you. We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.
Speaker Change: The first question comes from Anthony Paolone with J.P. Morgan. Please go ahead.
Anthony Paolone: Okay, thanks. And good morning. I guess my first question as it relates to the debt platform, it seems like the origination thus far has been mostly on the construction loan side, or maybe all of it has been, if I recall. But just wondering, you know, what the prospects are for doing other types of maybe longer-duration debt deals or, you know, taking advantage of some of the repayments to, you know, be the vehicle that turns out some of that debt to add some just broader duration to that book.
William McMorrow: We saw a continuum momentum in Q2 within our investment management business and deployed $2 billion of new capital throughout the first half of the year. The deployment includes $1.7 billion through our credit platform, which fully related to the construction of new high-quality market rate multi-family student housing made the best in class sponsors and 300 million on multi-family and industrial acquisitions. We also continue to finish and stabilize our development at lease-up portfolio and in the quarter stabilize five multi-family communities which added $16 million to our estimated annual NOI.
Anthony Paolone: Okay, thanks and good morning. I guess, first question as it relates to the debt platform, it seems like the origination thus far has been mostly on the construction loan side or maybe all of it has been, if I recall. But just wondering,
Speaker Change: You know, what the prospects are for doing other types of maybe longer duration type debt deals or, you know, taking advantage of some of the repayments to, you know, be the vehicle that turns out some of that debt to add some just broader duration to that book.
Matt Windisch: Tony, this is Matt. It's a great question. We see a great opportunity in the construction lending space within the residential sector, and so that's where our primary focus has been. But the team that we both bought and built within KW is a seasoned team of people with expertise not only in construction lending but in permanent lending, bridge lending, you name it. So, we definitely have the capabilities and expertise to expand beyond our current capabilities in the construction lending space.
Bill McMorris: Tony, this is Matt. That's a great question. You know, we see a great opportunity in the construction lending space within the residential sector, and so that's where our primary focus has been.
Tony: But the team that we both bought and built within KW is a seasoned team of people with expertise not only in construction lending, but...
William McMorrow: We have only two remaining active market rate developments and total our development in lease-up portfolio is expected to add $70 million in estimated annual NOI upon stabilization. With our developments largely finishing our capital spend on development has dropped from averaging $150 million per year in 22 and 23 to only $10 million remaining to be spent in the second half of 24. As a result of our Q2 activity, our estimated annual NOI grew by 5% to 485 million, AUM assets under management grew to 27 billion and is annualizing at a 16% growth rate, and feebearing capital grew to a record 8.7 billion with the ability to grow to 15 billion, including $2.9 billion of future fundings from previously originated in closed construction loans, and the investment of non-discretionary capital that is available to invest.
Speaker Change: and Permanent Lending, Bridge Lending, you name it. So we definitely have the capabilities and expertise.
Matt Windisch: And so we are looking at opportunities to increase the duration of the portfolio and look at longer-term solutions for our customers, and we've got, you know, capital partners that are interested in doing that with us. So, it's a good question, and I think you'll see over the next several quarters an expansion of our business beyond just construction.
Speaker Change: to expand beyond our current capabilities in the construction lending space. We are looking at those opportunities of how we increase the duration on the portfolio and look at longer-term solutions for our customers.
Speaker Change: and we've got you know capital partners that are interested in doing that with us so it's a good question I think you'll see over the next several quarters an expansion of our business beyond just construction lending
Matt Windisch: Okay, thanks. And then, with regard to development, the program there seems to be, you know, winding down, and it's simplifying the story, you know, overall for you guys. Do you think there are incremental starts on the horizon, or do you think this kind of continues to wind down for a while here?
Speaker Change: Okay, thanks. And then, with regards to development, the program there seems to be winding down and it's simplifying the story overall for you guys. Do you think there are incremental starts in the horizon, or do you think this kind of continues to wind down for a while here?
Matt Windisch: No, we're really looking at that business in a different way than we have in the past, where we were, you know, a sizable equity partner in all of these deals. And so we have several new projects that we're looking at right now, but where we're taking both of our really experienced teams here in the United States and in Europe and, for lack of a better word, really repurposing them into a construction management business, where, similar to what we've been doing with the investment management platform, where we will be five to 10% investors in these properties but manage and run all the construction and earn the normal development fees So we have a, we've been doing this now for 10 years, and we've developed a very, very outstanding team of people in both. Europe and here in the United States.
Speaker Change: No, we're really looking at that business in a different way than we have in the past where we were, you know,
Speaker Change: We are a sizable equity partner in all of these deals, and so we have several new projects that we're looking at right now, but where we're taking both of our really experienced teams here in the United States and in Europe .
William McMorrow: Turning to market conditions, we have seen improving liquidity throughout the year, including several large portfolio transactions within the U.S, apartment sector, which will recently be completed or announced, highlighting the strong institutional demand for high-quality multi-family assets. While interest rates have been a headwind for real estate over the last few years, we've begun to see significant beneficial shifts. In the U.S., the 10-year bond, as most of you know, was declined by 100 basis points in touching 5% in October 2023.
Bill McMorris: and, for lack of a better word, really repurposing them into a construction management business.
Bill McMorris: where
Bill McMorris: Similar to what we've been doing with the investment management platform, where we will be 5-10% investors.
Bill McMorris: in these properties, but...
Bill McMorris: Manage and run all the construction and earn the normal Development fees that you would earn in developing any property so we have a We've been doing this now for 10 years
William McMorrow: Europe, the Bank of England cut rates last week for the first time in four years, and the 10-year bond in Ireland today sits at 2.7%. Versus I might add, it was close to 16% when we first went there in 2010. Further anticipated decreases in rates by the Fed also provide supportive backdrop for our valuations and increases of our portfolio. A lower cost of capital and lower base rates should help increase transaction volumes, and increase our ability to find opportunities to deploy capital, and to realize additional cash monetizations. This blows well for our business, where we have created a unique platform that can scale through investing in both real estate, equity, and debt.
Bill McMorris: and we've developed a very very outstanding team of people in both
Matt Windisch: And so, we don't want to slow the development down where it makes sense, but what we do want to do is do it more in the format of an investment management platform where we're the construction manager.
Bill McMorris: Europe and here in the United States and so we don't want to slow the development down where it makes sense but what we do want to do is do it more in the format of an investment management platform where we're the construction manager.
Matt Windisch: Okay, thanks. And then, just if I could ask one last one. It seems like you're making progress towards your disposition goals. I'm just wondering if you could put some brackets around, you know, what all you have in the market, if we should expect anything, you know, more sizable coming or any, you know, exits of other markets or property types or anything.
Speaker Change: Okay, thanks. And then just if I could ask one last one. It seems like you're making progress towards your disposition.
Speaker Change: I'm just wondering if you can put some brackets around, you know, what all you have in the market, if we should expect anything, you know, more sizable coming or any, you know, exits of other markets or property types or anything.
Matt Windisch: You saw that we did sell our Spanish Retail Center in Q3, so that's obviously done. But we have a substantial pipeline of dispositions that we're in various stages of selling. So it's in line with the plan that we announced late last year, and we're confident we can still hit those numbers. And for us in particular, you've seen the shift of the majority of the assets on the balance sheet being U.S. multifamily. So I think with this disposition program, you'll continue to see that shift continue. Yeah, I think
William McMorrow: I'm excited about our current positioning and the numerous opportunities we have to expand our assets under management, with a focus on the following areas. First, growing our investment management platform. Our track record spans over three decades, in which we have navigated many different cycles, and at the same time, growing our relationship network, which expands from the U.S, to Canada, Europe, and across Asia, to include some of the largest sovereign wealth funds, insurance companies, and other large institutional investors around the world.
Speaker Change: So you saw that we did sell our Spanish retail center in Q3, so that's obviously done. But we have a substantial pipeline of dispositions that were in various stages.
Speaker Change: So it's in line with the plan that we announced late last year, and we're confident we can still hit those numbers.
Speaker Change: And, you know, for us in particular, you know, you've seen the shift of the majority of the assets on the balance sheet being U.S. multifamily, so I think with this disposition program, you'll continue to see that shift continue.
Bill McMurray: Yeah, I think Tony, just to add to what Matt said, it's very, very clear that, whether it's in the credit business or the equity side, one of our core strengths is the multifamily business, where we are now involved in almost 60,000 units. And so our view of the housing market is that there are going to be significant opportunities to continue to grow that business over time, and...
Speaker Change: Yeah, I think, Tony, just to add to what Matt said, it's very, very clear that, you know, one of our core strengths is, whether it's in the credit business or the equity side, is the multifamily business where we now
William McMorrow: This includes our partners in Japan, where we recently reopened our office in our history dates back to when we established Kennedy Wilson, Japan, back in 1994. We continue to see strong desire from our partners to invest with KW in real estate debt and equity in the U.S., the United Kingdom, and Ireland. I'm very confident in our ability to continue raising further third-party capital to grow our investment management business. We are currently focused on three key products.
Tony: are involved in almost 60,000 units.
Tony: and so our view of the housing market is that there's going to be significant opportunities to continue to grow that that business over time and
Bill McMurray: So, we have very clearly identified the other non-core assets that we want to get out of, and I think to simplify the company in terms of geography, we're only focused on those three markets, the United States, the United Kingdom, and Ireland. And the other side of the equation is the capital that we're raising in various parts of the world. And as we said earlier in the call, we're very, very focused on raising capital now out of Asia, Canada, and Europe. And so, and we're making really, really good progress in all of those markets.
Tony: So, we have...
Tony: very clearly identify the other non-core assets that we want to get out of and I think to
William McMorrow: First is rental housing, where our portfolio of approximately 60,000 units includes 22,000 units being financed through our construction loan platform and over 38,000 multi-family units in which we have an approximate 56% ownership interest. Rent or fund the metals remain very healthy, as there are remains a shortage of housing throughout the US, UK, and Ireland. In the US, multi-family demand for largely suburban portfolio has remained strong, while supply starts have dropped significantly.
Tony: simplify the company in terms of geography. We're only focused on those three markets, the United States, the United Kingdom, and Ireland.
Tony: And the other side of the equation is the capital that we're raising in various parts of the world. And as we said earlier in the call, we're very, very focused on raising capital now out of Asia.
Tony: Canada, and Europe .
Tony: And so, and we're making really, really good progress in all of those markets.
Speaker Change: Got it. Thank you.
Operator: The next question comes from Josh Dennerlein, from Red Bank of America. Please go ahead.
Speaker Change: Thank you very much.
William McMorrow: We also have a very successful track record of investing in and building high-quality rental housing in Dublin and the UK, and we continue to evaluate opportunities in those regions. Second, we look to continue growing our credit platform, where we are generating solid risk adjusted returns for our shareholders. Q2 mark the one-year anniversary of our acquisition of a $4.1 billion construction loan portfolio from Pac-West Bank. Since then, the Pac-West construction lending team that joined KW has integrated seamlessly with an RKW culture while completing $1.9 billion of multi-family and student housing construction originations with very high-quality institutional sponsors.
Speaker Change: The next question comes from Josh Dennerlein, Red Bank of America. Please go ahead.
Joshua Dennerlein: Hey guys, I just wanted to explore, just like, why you guys include the fair value adjustment and adjusted EBITDA. I guess, what's the rationale for that? Because I feel like it adds a lot of noise to just like the overall earnings power of the company. So just why do you guys feel it's important to include that?
Josh Dennerlein: Hey guys, I just wanted to explore, just like, what's the...
Josh Dennerlein: You guys include the fair value adjustment and adjusted EBITDA. I guess, what's the rationale on that? Because I feel like it adds a lot of noise to just the overall earnings power of the company. So just why do you guys feel it's important to include that?
Justin Enbody: I mean, I think historically, you know, as you mentioned, it's been a little bit volatile. We typically are including everything in that metric, and that's why we introduced baseline EBITDA to be a more recurring operating metric for the users.
Speaker Change: I mean, I think historically, you know, as you mentioned, it's been a little bit volatile. We typically are including everything in that metric, and that's why we introduced baseline EBITDA to be a more recurring operating metric for the users. So now you can, you know, choose which one you'd like to look at.
Justin Enbody: So now you can, you know, choose which one you'd like to...
Justin Enbody: Okay, sorry, I missed that. So, that was new for this quarter, the baseline EBITDA, and that's just... I think one or two, second or third quarter we've had it, but, you know, that was the genesis of it, so it's a good question and hopefully we're just giving you more information. Okay, okay. And then, um, what you guys mentioned opening a Japan office, I guess.
Tony: Okay, sorry, I missed that. So that was new for this quarter, the baseline EBITDA, and that's just... I think one or two, second or third quarter we've had it, but you know, that was the genesis of it, so it's a good question and hopefully we're just giving you more information.
William McMorrow: We have a strong pipeline of $600 to $700 million that is signed up, and is currently in the process of closing, which will take our closing to $2.7 billion since the acquisition. Third, we look to continue building our existing 12 million square feet of logistics. We acquired two industrial platforms in the quarter, totaling 180 million, one in the US and one in the United Kingdom, and we are evaluating several new opportunities in our pipeline in both regions.
Joshua Dennerlein: Yeah. One, I guess, you know, what's the rationale behind that? And then can you help us help us reconcile that with the cost cutting progress? It seems like maybe that's a... Anyway, thank you. Yeah, that's a very good question.
Speaker Change: Okay, okay. And then, um, you guys mentioned opening a Japan office. I guess, one, I guess, you know, what's the rationale behind that? And then can you help us reconcile that with like the cost-cutting progress? It just seems like maybe that's a...
Bill McMurray: Yeah, that's a very good question. You know, we started in Japan in 1994 with no employees. And over a seven-year period of time, up to 2002, we actually became, if not the first, one of the first U.S. real estate companies to ever go public in Japan. That was Kennedy-Wilson Japan, which went public there, and sold almost all of our position in that company over the next couple years after 2002. That company continued to thrive, and it's currently owned; it's a private company owned by one of the large Japanese financial institutions.
Speaker Change: Yeah, anyway.
Bill McMurray: Outside of that business, we also owned almost 50 apartment units, mostly in Tokyo and Osaka, that turned into a very, very successful investment. And we sold that business in 2015. And as luck would have it, we used the proceeds from that to buy our 50% interest in vintage housing here in the United States, which, at the time, just as an aside, had 5,000 units in it and now has 12,000 units in it.
Speaker Change: Thank you. Yeah. That's a very good question.
Speaker Change: You know, we started in Japan in 1994 with no employees.
Tony: And over a seven-year period of time, up to 2002, we actually became
William McMorrow: Our second key initiative relates to our asset sale plan. In July, we sold a retail center in Spain, which was our last wholly-owned asset in the country, generated $35 million of cash to KW. This brings our year-to-date total through the end of July to $330 million of cash, generated from asset sales, non-core assets, and loan repayments. We have a strong disposition pipeline for the second half of the year with proceeds to be used to reducing our unsecured debt and for future co-investment opportunities.
Tony: If not the first, one of the first U.S. real estate companies to ever go public in Japan. That was Kennedy Wilson Japan, which went public there.
Tony: sold almost all of our position in that company over the next couple years after 2002 but that company continued to thrive and it's currently owned it's a private company owned by one of the large Japanese financial institutions
Tony: Outside of that business we also owned almost 50 apartment units mostly in Tokyo and Osaka that turned into a very very successful investment and we sold that business in 2015.
William McMorrow: I want to thank our entire organization for their hard work as we have continued working on one team across all geographies and business lines, which has set up a firm foundation for the next phase of growth at Kennedy Wilson.
Tony: And as luck would have it, we used the proceeds out of that to buy our 50% interest in vintage housing here in the United States.
Justin Enbody: With that, I'd like to turn the call over to our CFO Justin N. Body to discuss our financial results. Thanks, Bill. I'll start by reviewing our financial results and then discuss our valent chief. Investment Management revenue grew by 37% to 26 million in Q2, driven by completing nearly 1 billion in new originations in our credit platform, as well as higher levels of the bearing capital, baseline EBITDA grew by 5% to 105 million.
Tony: which at the time, just as an aside, had 5,000 unit centers and now has 12,000 unit centers.
Bill McMurray: But we've always maintained very, very, very deep and strong relationships with many, many Japanese, large Japanese financial institutions and companies in Japan, and we have one existing joint venture in the Bay Area with a major Japanese construction company. And then you might remember that in the first quarter of this year, we closed our first multifamily equity investment with a very large Japanese development company in Vancouver, Washington. And so what this has all led to is kind of, I'd say, a re-...
Tony: But we've always maintained very, very, very deep and strong relationships with many, many Japanese, large Japanese financial institutions and companies in Japan.
Tony: and we have one existing joint venture in the Bay Area with a major Japanese construction company.
Justin Enbody: We saw minor changes in the values of our unconsolidated portfolio in the quarter, and we saw overhead costs go down by 9% year-to-date. Additionally, post-corder Anne is Bill mentioned. We divested in the largest asset we held in Spain, and with that we'll be closing our Spanish office. In summary, our GapNet lost total of 43 cents per share in Q2, which includes 46 cents per share of non-cash items, including depreciation and amortization, fair value and share-based compensation. Adjusted EBITDA totaled 79 million for Q2, and $283 million for the year.
Tony: And then you might remember that in the first quarter of this year, we closed our first multi-family equity investment with a very large Japanese development company in Vancouver, Washington.
Tony: And so what this has all led to is a kind of, I'd say, a rigged
Bill McMurray: Examination of all these deep relationships that we've built over the last 30 years, and Japanese institutions are very global in nature. And it's obviously not surprising anybody that Japan is faced with, you know, a declining population at this point in time.
Tony: Examination of all these deep relationships that we've built over the last 30 years
Tony: and the Japanese institutions are very global in nature.
Justin Enbody: Now turning to our valent sheet and debt profile. At quarter end we had 367 million of consolidated cash. We paid down our line of credit by 67 million in Q2, and today we have 172 million drawn on our $500 million line of credit. Our share of total debt is 98% fixed or hedged with the weighted average maturity of five years. We continue to collect cash as a result of our interest rate hedging activities, which is not reflected in our financial statements as an offset to interest expense.
Tony: And it's obviously no surprise to anybody that Japan is faced with, you know, a declining population at this point in time.
Bill McMurray: We'll see how that all goes, but it has always been the case that Japanese companies, irrespective of where the yen is at, want to invest on a long-term basis outside of Japan. And so we made a decision earlier this year to, I'd say, intensify our capital raising effort there based on these long-term relationships. But to do that kind of business in Japan, you have to have a physical presence, so we've reopened our office there.
Tony: We'll see how that all goes, but it has always been the case that Japanese companies, irrespective of where the yen is at, they want to invest on a long-term basis outside of Japan.
Speaker Change: And so we made a decision really earlier this year to, I'd say, intensify our capital-raising efforts.
Justin Enbody: In Q2 we collected 11 million of cash, bringing our year-to-date total to $23 million. Our effective interest rate of 4.6% reflects a 50 basis point saving over our contractual rate as a result of our hedging strategy. Our remaining 2,024 debt maturity total 181 million, which are all non-recourse at the property level. In Q3 we refinanced the construction loan at one of our recently completed multi-family projects in Dublin, where the effective rate improved from 6.2% to 4.5% fixed for five years.
Speaker Change: there
Tony: Based on these long-term relationships, but to do that kind of business in Japan, you have to have a physical presence there.
Tony: And so we've reopened our office there. I would also add, in this long-winded answer, that we've had several Japanese companies now that have come into our fund business, discretionary fund business, including...
Bill McMurray: I would also add in this long-winded answer that we've had several Japanese companies now that have come into our fund business, discretionary fund business, including one large Japanese company that came into our fund business just a couple weeks ago. So we've had real success raising capital. I think one thing I'd add...
Justin Enbody: We also continue to repurchase stock in the quarter, buying another 600,000 shares, which brought our year-to-date total through July to 1.7 million shares, or approximately 1.2% of our outstanding share count. We have $110 million remaining on our $500 million share repurchase authorization.
Tony: just a couple weeks ago.
Matt Windisch: I think one thing I'd add to that is just the team that we have covering that region was already employed by the company, so there's no, we didn't add employees or anything like that as part of that. So there's not a significant change in the GNA related to opening this.
Tony: And so we've had real success raising capital there.
Speaker Change: I think one thing I'd add to that is just the team that we have covering that region were already employed by the company so there's no, we didn't add employees or anything like that as part of this.
Tony: So there's not a significant change in the GNA related to opening this office.
Matthew Windisch: With that, I now like to turn the call over to our president, Matt Windish, to discuss our investment portfolio. Thanks, Justin. We continue to strengthen the quality of our portfolio as we work through disposing of non-core assets, while at the same time stabilizing brand new communities. Our stabilized portfolio totals $485 million in estimated annual NOI, which grew by 5% in the quarter. Over the last five years, our portfolio has continued to shift towards multifamily, credit, and industrial, which have increased from 50% to roughly 70% of our NOI.
Joshua Dennerlein: Well, no. No. Good background. Thank you.
Speaker Change: Oh no, no, good background, thank you.
Operator: Once again, if you have a question, please press star then 1. The next question comes from Tayo Okusanya with Deutsche Bank. Please go ahead. The next question comes from Tayo Okusanya of Deutsche Bank.
Speaker Change: Once again, if you have a question, please press star then 1. The next question comes from Tayo Okusanya with Deutsche Bank. Please go ahead.
Tony: The next question comes from Tayo Okusanya with Deutsche Bank. Please go ahead.
Matthew Windisch: We have also sold down our retail office in hotel portfolios, which 5 years ago accounted for 50% of our portfolio versus approximately 30% today. In total, our 38,000 unit multifamily business has grown to 61% of our stabilized portfolio. Producing 525 million of estimated annual NOI at the property level, of which KW share is $294 million. We have 2,700 units in our lease-up in development pipeline, which we expect to add 29 million to estimated annual NOI at stabilization.
Operator: Yeah, we got you. Oh, hi. I can hear you. Good morning.
Tayo Okusanya: Hello, can you hear me?
Tayo Okusanya: I wanted to ask about the credit platform and how you think about the growth outlook for the business. If rates are coming down going forward, do you think that will result in more construction loans? Do people all of a sudden want to start borrowing? Or do you think about it as some other sources of more attractive funding for potential developers, and they move towards a different product? How do you think the business evolves in a world where we have declining interest rates?
Tayo Okusanya: Yeah, we got you. Hi, I can hear you.
Tayo Okusanya: Okay, good morning.
Tayo Okusanya: I wanted to ask about the credit platform.
Speaker Change: And how do you think about, you know, the growth outlook for the business, just given, again, if rates are coming down going forward?
Speaker Change: Do you think that results in kind of more construction loans, if people all of a sudden want to start borrowing?
Speaker Change: Or do you kind of think about it as maybe some other sources of, you know, maybe more attractive funding for potential developers?
Matthew Windisch: Our US multifamily portfolio has benefited as a result of our asset management initiatives, where we are focused on driving operational efficiencies and enhancing our assets, as well as strong demand from an overall shortage of homes for sale and the high cost of homeownerships. These drivers resulted in the same property occupancy growth of 1.9%, revenue growth of 3.6%, and NOI growth of approximately 3%. Overall, portfolio occupancy stood at 94%. On the expense side, rising insurance costs reduced our same-store NOI results in Q2 by approximately 50 basis points.
Speaker Change: They kind of move towards a different product How do you think of how business evolves in a world that we have a declining interest rate?
Matt Windisch: That's a good question. I mean, we've seen a significant slowdown in starts on apartment construction. And so what's happened for us is we've had a combination of a smaller number of people that are actually developing, but there are also a lot fewer financial institutions and lenders in the market. So the pie has shrunk dramatically from where it was three or four years ago in terms of the overall size of the construction lending market.
Speaker Change: That's a good question. I mean, we've seen a significant slowdown in starts on apartment construction. And so what's happened for us is we've had a combination of
Speaker Change: There's a smaller number of people that are actually developing, but there's also a lot fewer financial institutions and lenders in the market, so the pie has shrunk dramatically from where it was three or four years ago in terms of the overall size of the construction lending market.
Matt Windisch: That being said, we've been able to capture a very sizable market share, just given that a lot of traditional lenders are not currently active in the space. With the prospect of rates coming down, a couple things could happen, and our thesis really is that you will see more people start to build. The cost of building will be reduced because of lower interest costs. And also, you know, the value of these assets once completed should go up, and the takeout financing should be more attractive.
Speaker Change: That being said, we've been able to capture a very sizable market share, just given that a lot of the traditional lenders are not currently active in the space.
Matthew Windisch: However, we expect that our insurance premiums will be flat to down in the second half of the year based on our July renewals. Our Margaret Rate apartment portfolio in the US, which is over 90% suburban, saw blended leasing spreads of 2.6%, similar to what we are seeing in July, and we ended the quarter with a loss to lease totaling 4%. Turning to our regional highlights, in our California portfolio, we continued to make great progress working through delinquencies and releasing units.
Speaker Change: The prospect of rates coming down, a couple things could happen and our thesis really is that you will see more people start to build.
Speaker Change: because the cost of building will be reduced because of...
Speaker Change: Lower interest costs and also, you know, the value of these assets once completed should go up and the takeout financing should be more attractive.
Matt Windisch: So you should see a pickup in new starts for people building, you know, apartment buildings. At the same time, I think it's likely you'll see new entrants come into the market, given those factors. So our hope is that the market will continue to grow and we'll be able to maintain, you know, our strong market share. So I think it bodes well for us that the overall size of the opportunity will be larger. And I think we've got a competitive cost of capital and a great team that has executed with these borrowers during times when others weren't there stepping up like we are.
Speaker Change: You should see a pickup in...
Matthew Windisch: In Q2, we saw occupancy increases lower bad debt and stable operating expenses, leading to NOI growth of 5% across our California portfolio. In Northern California, bad debt dropped to the lowest level in two years. The Pacific Northwest also delivered an impressive 4% NOI growth as occupancy grew by 1.4%, while our value add initiatives in this region continued to positively impact our results. In the Mountain West region, we saw occupancy improved by 2%, leading to revenue growth of 3% and NOI growth of 1%.
Speaker Change: New Starts for people building apartment buildings. At the same time, I think it's likely you'll see new entrants come into the market.
Speaker Change: given those factors. So our hope is that the market will continue to grow and we'll be able to maintain our strong market share. So I think it bodes well for us that the overall.
Tony: The size of the opportunity will be larger.
Speaker Change: And I think we've got a competitive cost of capital and a great team that has executed with these borrowers during times where others weren't there stepping up like we are.
Tayo Okusanya: Gotcha. Does it change the profitability of the business? Because you're probably now going to be making loans at lower rates? It's not a secret...
Speaker Change: Gotcha. Does it change profitability of your business? Because you're probably now going to be making loans at lower rates.
Matthew Windisch: Our portfolio here is well diversified across 6 states. Nevada and New Mexico were the strongest in our portfolio, with 9% and 6% NOI growth respectively. Our Arizona properties produced NOI growth of 6% and in Utah, we saw NOI growth of 3%. In Idaho, we have seen supply impact our rental growth, although we anticipate much less new supply coming online in the years ahead. We continue to have conviction in these markets where our portfolio offers an attractive, lower cost alternative to higher rent units in higher tax, more densely populated cities.
Matt Windisch: It's not a significant change for Kennedy-Wilson because, you know, we're putting up a relatively small amount of capital into the loans themselves, and we're earning fees based on the origination and asset management and servicing of the loans. So, for Kennedy-Wilson, it won't be a significant change in the return. That, that, that.
Speaker Change: It's not a significant change for Kennedy Wilson because, you know, we're putting up a relatively small amount of capital into the loans themselves, and we're earning fees based on the origination and asset management and servicing of the loan. So, for Kennedy Wilson, it won't be a significant change in the return.
Tayo Okusanya: That's helpful. I guess that's it for me. Thank you.
Speaker Change: I guess that's it for me. Thank you.
Operator: The next question comes from Allen Parseau with Elkhorn Partners. Please go ahead. Hi guys, et al.
Speaker Change: The next question comes from Alan Parseau with Elkhorn Partners. Please go ahead. Hi guys at all. I have two quick follow-up questions.
Matthew Windisch: Our Mountain West portfolios average rents are roughly $1,600 per month, and we believe these markets are set up for solid growth as supply pressures subside. Moving over to Dublin, our portfolio there remains in strong demand. In Q2, we stabilized two multifamily projects in Dublin, Cooper's Cross Residential and the Grange, which totaled 758 units. These two properties added approximately 10 million to estimated annual NOI. We have a further 232 units undergoing lease up at Cornerstone, which we anticipate stabilizing in early 2025.
Allen Parseau: Hi guys, at all. I have two quick follow-up questions. One is on Japan and that area, and if there is a way for you to elaborate on the amount of funds you've been able to raise to this point, get into your fund development and different fund issues. And then two, if you could quantify your sale of the Spanish property and give us an idea of what you made, lost, or whatever on that property, and how much you should save from closing, and eventually that Spanish office.
Alan Parseau: One is on Japan and that area, and if you could, if there is a way for you to elaborate on the amount of funds you've been able to...
Speaker Change: to this point get into your
Speaker Change: fund development and different fund issues. And then two, if you could quantify your
Speaker Change: ***FART***
Speaker Change: sale of the Spanish property.
Matthew Windisch: Renter Fundamentals remain healthy in Ireland as labor market conditions are tight and there remains a large structural shortage of housing. With regards to our global office portfolio we saw improving occupancies and lower operating costs lead to 6.5% NOI growth. It is worth noting that US office represents only 6% of our stabilized portfolio where we have completed approximately half a million square feet of leasing in 2024 with an average term of almost six years.
Speaker Change: and give us an idea of...
Speaker Change: What you made lost or whatever on that property and how much you should save from closing eventually that Spain office.
Bill McMurray: Yeah, as far as Japan is concerned, Alan, I mean, we're in the I'd say early stages of raising capital, but we're having, you know, very meaningful discussions with, I'd say, a dozen Japanese, major Japanese companies. The reference, if I didn't say the number, the reference I was making in our Fund 7 discretionary, we've had $100 million of capital come from Japan. And so this is in the early stages. And as you can see, we haven't intentionally deployed in the last 12 months.
Speaker Change: Thank you.
Speaker Change: Yeah, as far as Japan is concerned, Alan, I mean, we're in the, I'd say, early stages of raising capital, but we're having
Matthew Windisch: The majority of our office portfolio is located in Dublin and in the UK where the overall leasing market environment has improved in 2024. In Q2 same property NOI increased by 2.2% in our European office portfolio driven by slight increases in occupancy and lower operating expenses. Stabilized occupancy in Europe remains healthy at 94% with an weighted average lease term of 7 years to expiration and 5 years to break. In Dublin our 9 stabilized properties have less than 5% vacancy with 5 of the properties 100% lease.
Speaker Change: I'd say very meaningful discussions with, I'd say, a dozen major Japanese companies.
Speaker Change: The reference, if I didn't say the number, the reference I was making into our Fund 7 discretionary, we've had $100 million of capital come from Japan.
Speaker Change: And so this is early stages, and as you can see, we haven't intentionally, in the last 12 months, we haven't deployed
Bill McMurray: Hardly any capital went into the equity investment side of the business. We felt a much better use of capital was to grow the credit business. The returns were just better.
Matthew Windisch: We continue to see a flight to quality which we believe will benefit our portfolio. Fundamentals in our industrial portfolio remain very strong with our portfolio 98% occupied. In Europe leasing completed in the quarter delivered a 44% increase in rents demand from our existing tenants to remain in our properties remain strong with tenants regularly engaging in early discussions ahead of their lease expiration. In place rents in Europe remain 19% below market which allows for us to continue enhancing value as leases mature switching gears to our investment management business.
Speaker Change: Hardly any capital into the equity investment side of the business. We felt a very much better use of capital was to grow the credit business. The returns were just better.
Bill McMurray: But, you know, with these rates coming down, it's clearly going to benefit the equity side of the business, both in terms of the valuation of our own assets but also our ability to, you know, get positive leverage on acquisitions. That was really the reason, over the last 12 months, we've... We really barely moved the dial in terms of acquisitions of new equity-oriented investments. Oh, the overhead issue.
Speaker Change: But, you know, with these rates coming down, it's clearly going to benefit the equity side of the business, both in terms of the valuation of our own assets, but also our ability to, you know, get positive leverage on acquisitions.
Speaker Change: And that was really the reason over the last 12 months we've really barely moved the dial in terms of acquisitions of new equity-oriented investments.
Matthew Windisch: As we continue to simplify our balance sheet through non core asset sales investment management growth is an important focus as it allows us to generate attractive returns in a capital light manner. We have successfully grown our fee bearing capital by 93% over the past three years to a record $8.7 billion. A large portion of our investment management growth has been driven by our credit business which includes 5.1 billion in outstanding loans and 2.9 billion in future fundings.
Bill McMurray: You know, we, we, uh... have been very, very, very good, I would say, over the last nine months. All said, re-assessing some of the overhead costs of the company, repurposing people, repurposing places where we had people but where we could use them better in a different location. And so, we've got further, I'd say, you know, another... 5% to go in terms of what's already identified and has pretty much taken place in terms of our overhead, but Spain, you know, it represents a real cost savings for us. I would say it's kind of in the order of, About a million to a million and a half dollars a year.
Speaker Change: the overhead issue we
Speaker Change: have been very, very, very good, I would say, over the last nine months of reassessing some of the overhead costs of the company.
Speaker Change: repurposing people, repurposing
Matthew Windisch: Our capital raising efforts span across the globe with the majority of our capital coming from large institutional insurance companies sovereign wealth funds and pensions. Combining these important relationships with an improving interest rate backdrop should strengthen liquidity and improve our ability to deploy capital at scale.
Speaker Change: Arrrrghh.
Speaker Change: places where we had people but where we could use them better in a different location.
Speaker Change: And so, we've got further, I'd say, you know, another
Speaker Change: 5% to go in terms of, that's already identified and has pretty much taken place in terms of our overhead.
Matthew Windisch: In summary we are emerging from a challenging period of time as a much stronger company positioned for growth. We greatly increased the strength of our lending capabilities in the last year. We continue to finish and stabilize our developments while recycling capital from our non core asset sales strengthening our overall portfolio. And most importantly we have a well seasoned and invigorated team on the field which looks forward to growing the business over the years ahead.
Speaker Change: But Spain, you know, it represents a real cost savings for us. I would say it's kind of in the order of
Speaker Change: About a million to a million and a half dollars a year.
Bill McMurray: and the amount of profit or loss from the sale of the property.
Bill McMorris: That's right Bill, yeah.
Bill McMurray: Yeah, well, you know, you get your profit in two ways. We have very attractive financing on that property from one of the Spanish banks. And it was, you know, there was a significant excess cash flow from that property for probably the five or six or seven years that we owned it. So the returns ended up being very good, but most of the return really came from the distribution of cash over the time we had. So the third-quarter impact from the sale itself is going to be negligible in terms of
Bill McMorris: And the amount of profit or loss from the sale of the property? Yeah, well, you know, you get your profit in two ways. We had very attractive financing on that property from one of the Spanish banks. And it was, you know, there was a significant excess cash flow from that property for...
Operator: So with that we can open it up to Q&A. Thank you. We will now begin the question and answer session. To ask a question you may press star then one on your touch to on phone. If you are using a speaker phone please pick up your handset before pressing the keys. If at any time your question has been answered addressed and you would like to withdraw your question please press star then two.
Speaker Change: probably the five or six or seven years that we owned it. So the returns ended up being very good, but most of the return really came from the distribution of cash over the time we held it.
Anthony Paolone: The last question comes from Anthony Falone with JP Morgan. Please go ahead.
Speaker Change: So the third quarter impact from the sale itself is going to be negligible in terms of a gain.
Matthew Windisch: Ok thanks and good morning. I guess first question as it relates to the debt platform, it seems like the origination thus far has been mostly on the construction loan side or maybe all of it has been, if I recall, but just wondering what the prospects are for doing other types of maybe longer duration, type debt deals or taking advantage of some of the repayments to be the vehicle that turns out, some of that debt to add some just broader duration to that book.
Speaker Change: Okay, great. Thank you.
Bill McMurray: This concludes our question-and-answer session. I would like to turn the conference back over to Bill McMurrow, CEO, for any closing remarks. Please go ahead.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Bill McMurrow, CEO , for any closing remarks. Please go ahead.
Bill McMurray: Well, thank you everybody for listening in today. We're very pleased with where we are, and, as always, if there are any other questions that you've got, any of us are available to talk with you at any time. So, thank you.
Bill McMurrow: Well thank you everybody for listening in today. We're very pleased with where we're at and as always if there are any other questions that you've got any of us are available to talk with you at any time so thank you.
Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Matthew Windisch: It's Tony, this is Matt, that's a great question. We see a great opportunity in the construction lending space within the residential sector and so that's where our primary focus has been, but the team that we both bought and built within KW is a season team of people with expertise not only in construction lending but in permanent lending, bridge lending, you name it. So we definitely have the capabilities and expertise to expand beyond our current capabilities in the construction lending space and so we are looking at those opportunities of how we increase the duration on the portfolio and look at longer term solutions for our customers and we've got capital partners that are interested in doing that with us.
Speaker Change: The conference has now concluded.
Operator: [music]
Speaker Change: Thank you for attending today's presentation. You may now disconnect.
Operator: The Ultimate Parody Site!
William McMorrow: So it's a good question and I think you'll see over the next several quarters an expansion of our business beyond just construction lending. Okay, thanks. And then with regards to development, the program there seems to be winding down and it's simplifying the story overall for you guys. Do you think there are incremental starts in the horizon or do you think this kind of continues to wind down for a while here? No, we're really looking at that business in a different way than we have in the past where we were a sizable equity partner in all of these deals.
William McMorrow: And so we have several new projects that we're looking at right now, but we're taking both of our really experienced teams here in the United States and in Europe. And for lack of a better word, really repurposing them into a construction management business where similar to what we've been doing with the investment management platform where we will be five to ten percent investors in these properties but manage and run all of the construction and earn the normal development fees that you would earn in developing any property.
William McMorrow: So we have a we've been doing this now for ten years and we've developed a very very outstanding team of people in both Europe and here in the United States. And so we don't want to slow the development down where it makes sense. But what we do want to do is do a more in the format of an investment management platform or where the construction manager. Okay, thanks. And then just if I could ask one last one, it seems like you're making progress towards your disposition goals.
William McMorrow: Just wondering if you can put some brackets around, you know, what all you have in the market if we should expect anything, you know, more sizable, coming or any, you know, exits of other markets or property types or anything. Yep. So, you saw that we did sell our Spanish retail center in Q3, so that's obviously done, but we have a substantial pipeline of dispositions that were in various stages of selling, so it's in line with the plan that we announced late last year, and we're confident we can still hit those numbers.
William McMorrow: And, you know, for us in particular, you know, you've seen the shift of the majority of the assets on the balance sheet being U.S, multi-family, so I think with this disposition program, you'll continue to see that shift continue. Yeah, I think Tony just to add to what Matt said, it's very, very clear that, you know, one of our core strengths is whether it's in the credit business or the equity side is the multi-family business where we now are involved in almost 60,000 units, and so our view of the housing market is that there's going to be significant opportunities to continue to grow that business over time.
William McMorrow: And so where we have very clearly identified the other non-core assets if we want to get out of, and I think to simplify the company in terms of geography, we're only focused on those three markets, the United States, the United Kingdom and Ireland. And the other side of the equation is the capital that we're raising in various parts of the world. And as we said earlier in the call, we're very, very focused on raising capital now out of Asia, Canada, and Europe. And so we're making really, really good progress in all of those markets. Got it. Thank you.
Justin Enbody: The next question comes from Justin O'Leane with Bank of America. Please go ahead. Yeah, hey guys, I just wanted to explore just like what's the, you guys include the fair value adjustment and adjusted EBITDA. I guess what's the rationale on that? Because I feel like it adds like a lot of noise to just like the overall earnings power of the company. So just why do you guys feel it's important to include that?
Justin Enbody: I mean, I think historically, you know, as you mentioned, it's been a little bit volatile and we typically are including everything in that metric and that's why we introduced baseline EBITDA to be a more recurring operating metric for the users. So now you can, you know, choose which one you'd like to look at. Okay, sorry, I missed that. So that was new for this quarter, the baseline EBITDA. And that's just, I think the second or third quarter we've had it. But, you know, that was the genesis of it. So it's a good question and hopefully we're just giving you more information. Okay, okay.
Justin Enbody: And then what, sir, you guys mentioned opening a Japan office? I guess, yeah, one, I guess, you know, what's the rationale behind that? And then can you help us reconcile that with like the cost-cutting progress?
William McMorrow: Just, just, you know, maybe that's a, yeah, anyway, thank you. Yeah, that's a very good question. You know, we started in Japan in 1994 with no employees, and over a seven-year period of time up to 2002, we actually became, it's not the first, one of the first US real estate companies to ever go public in Japan. That was Kennedy-Wilson Japan, which went public there. We sold almost all of our position in that company over the next couple of years after 2002.
William McMorrow: But that company continued to thrive, and it's currently owned, it's a private company owned by one of the large Japanese financial institutions. Outside of that business, we also loaned almost 50 apartment units, mostly in Tokyo and Osaka, that turned into a very, very successful investment, and we sold that business in 2015. And as luck would have, we used the proceeds out of that to buy our 50% interest in vintage housing here in the United States, which at the time, just as an aside, had 5,000 units in it, and now has 12,000 units in it.
William McMorrow: But we've always maintained very, very, very deep and strong relationships with many, many Japanese, large Japanese financial institutions, and companies in Japan. And we have one existing joint venture in the Bay Area with the major Japanese construction company. And then you might remember that in the first quarter of this year, we closed our first multi-family equity investment with a very large Japanese development company in Vancouver, Washington. And so what this has all led to is a kind of, I'd say, a re-examination of all these deep relationships that we've built over the last 30 years.
William McMorrow: And the Japanese institutions are very global in nature. And it's obviously no surprise to anybody that Japan is faced with a declining population at this point in time. We'll see how that all goes, but it has always been the case that Japanese companies are respective of where the yen is at. They want to invest on a long-term basis outside of Japan. And so we made a decision really earlier this year or two, I'd say, to intensify our capital raising efforts there, based on these long-term relationships.
William McMorrow: But to do that kind of business in Japan, you have to have a physical presence there. And so we've reopened our office there. I would also add, in this long-winded answer, that we've had several Japanese companies now that have come into our fund business discretionary fund business, including one large Japanese company that came into our fund business. It's just a couple weeks ago, and so we've had real success raising capital there.
William McMorrow: I think one thing I'd add to that is just the team that we have covering that region, we're already employed by the company, so there's no, we didn't add employees or anything like that as part of this. So there's not a significant change in the GNA related to opening this office. Oh no, no, good background, thank you. Once again, if you have a question, please press star, then one.
Tayo Okusanya: The next question comes from Tayo Okusanya, with Deutsche Bank. Please go ahead. Hello, can you hear me? Yeah, we got you. Hi. Hi, I can hear you. Good morning.
Matthew Windisch: I wanted to ask about the credit platform. And how do you think about the growth outlook for the business, just giving it again? If rates are coming down, going forward, do you think that results in more construction loans? Do people always want to start borrowing? Or do you think about it as they become other sources of more attractive funding for potential developers? And they kind of move towards a different product? Like how do we kind of think of how the business evolves in a world that we have declining interest?
Matthew Windisch: That's a good question. I mean, we've seen a significant slowdown in starts on apartment construction. And so what's happened for us is we've had a combination of a smaller number of people that are actually developing. But there's also a lot fewer financial institutions and lenders in the market. So the pie has shrunk dramatically from where it was three or four years ago in terms of the overall size of the construction lending market. That being said, we've been able to capture a very sizable market share just given, you know, that a lot of the traditional lenders are not currently active in the space.
Matthew Windisch: I think with the prospect of rates coming down, a couple things could happen. And our thesis really is that you will see more people start to build because the cost of building will be reduced because of lower interest costs. And also, you know, the value of these assets once completed should go up and the takeout financing should be more attractive. So you should see a pickup in new starts for people building apartment buildings.
Matthew Windisch: At the same time, I think it's likely you'll see new entrants come into the market, given those factors. So our hope is that the market will continue to grow and we'll be able to maintain our strong market share. So I think it bodes well for us that the overall size of the opportunity will be larger. And I think we've got a competitive cost of capital and a great team that has executed with these borrowers during times where others weren't there stepping up like we are. Gotcha.
Matthew Windisch: There will change profitability of the business because you're probably now going to make new loans at lower rate. It's not a significant change for Kennedy-Wilson because, you know, we're putting up a relatively small amount of capital into the loans themselves and we're earning fees based on the origination and asset management and servicing of the loans. So for Kennedy-Wilson, it won't be a significant change in the return. That's helpful.
Tayo Okusanya: I guess that's it for me. Thank you.
Alan Parsow: The next question comes from Alan Parsow with Elkorn Partners. Please go ahead. Hi guys, at all. I have two quick follow-up questions. One is on Japan and that area. And if there is a way for you to elaborate on the amount of funds you've been able to, to this point, get into your fund development and different fund issues. And then two, if you could quantify your sale of the Spanish property and give us an idea of what you made lost or whatever on that property and how much you should save from closing eventually that Spain office.
Alan Parsow: Yeah, as far as Japan is concerned, Alan, I mean, we're in the early stages of raising capital but we're having, you know, I'd say very meaningful discussions with, I'd say it does in Japanese, major Japanese companies. The reference, if I didn't say the number, the reference I was making into our fund seven discretionary, we've had $100 million a capital come from Japan. And the, so this is early stages and as you can see, we haven't intentionally in the last 12 months, we haven't deployed hardly any capital into the equity investment side of the business.
Alan Parsow: We felt the very much better use of capital was to grow the credit business. The returns were just better. But, you know, with these rates coming down that it's clearly going to benefit the equity side of the business both in terms of the valuation of our own assets, but also our ability to, you know, get positive leverage on acquisitions. And that was really the reason over the last 12 months. We've really barely moved the dial in terms of acquisitions of new equity oriented investments.
Alan Parsow: For the overhead issue, you know, we have been very, very, very good, I would say over the last nine months of reassessing some of the overhead costs of the company, repurposing people, repurposing, where we had people, but where we could use them better in a different location. And so, and we've got further, I'd say, you know, another 5% to go in terms of, that's already identified and has taken pretty much taken place in terms of our overhead.
Alan Parsow: But Spain, you know, it represents a real cost savings for us. I would say it's kind of in the order of about a million to a million and a half dollars a year. And the amount of profit lost from the sale of the property. Yeah, well, you know, you get your profit in two ways. We had very attractive financing on that property from one of the Spanish banks. And it was, you know, there was a significant excess cash flow from that property for probably the five or six or seven years that we owned it.
Alan Parsow: So the returns ended up being very good, but the most of the return really came from the distribution of cash over the time we held it. Yeah, so the third quarter impact from the sale itself is going to be negligible in terms of a game. Great, thank you.
Operator: This concludes a question and answer session.
William McMorrow: I would like to turn the conference back over to Bill McMurray. See you for any closing remarks. Please go ahead.
William McMorrow: Well, thank you everybody for listening in today. We're very pleased with where we're at. And as always, if there are any other questions that you've got, any of us are available to talk with you at any time.
William McMorrow: So thank you.
Operator: The conference has now concluded. Thank you for attending today's presentation.
Operator: You may now disconnect.
Thank you.