Q3 2024 Kennedy-Wilson Holdings Inc Earnings Call
Speaker Change: Hello and welcome to the Kennedy-Wilson third quarter 2024 conference 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. After today's presentation, there will be an opportunity to ask questions.
To ask a question, you may press star, then one on your telephone keypad, and to withdraw from the question queue, you may press star, then two.
Speaker Change: As a reminder, this conference is being recorded. I would now like to hand the call to Daven Bhavsar, Head of Investor Relations. Please go ahead.
Daven Bhavsar: Good morning and thank you for joining us today. Today's call will be webcast live on the Archive for replay. The replay will be available for phone for one week and by webcast for three months.
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 EBIT done and adjusted net income.
Daven Bhavsar: You can find a description of these items, along with the reconciliation, the most directly comparable GAAP financial measure, and our third quarter 2024 earnings release, which is posted on the Investor Relations section.
Daven Bhavsar: of our website. 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.
Speaker Change: I would now like to turn the call over to our Chairman and CEO, Bill McMorrow.
Bill McMorrow: Daven, thank you, and thank you everybody for joining the call today.
Bill McMorrow: Yesterday we reported our results for the third quarter which highlighted improving operating fundamentals in our multifamily portfolio, continued growth of our investment management business, and further progress on our non-core asset sale program.
looking at our key portfolio metrics.
Bill McMorrow: AUM, Assets Under Management, has grown to $28 billion versus $25 billion at $1231.23.
Bill McMorrow: Estimated annual NOI has grown to 492 million and fee-bearing capital grew to a record 8.8 billion.
Bill McMorrow: Rental housing continues to be our major focus with our portfolio today comprised of 60,000 multifamily or student housing units that we either have an ownership interest in or are financing through our credit platform.
Starting in 2014, we embarked on a three billion dollar ground-up development program largely focused on multifamily communities.
Bill McMorrow: Since then, we have completed 9,000 units, including approximately 3,000 marker-rate units.
and 6,000 affordable housing units through our Vintage Housing Venture.
Since 2020, we have invested a total of approximately $500 million of equity capital across our developments.
Bill McMorrow: Generally, in these developments, we are 50-50 partners with an institutional partner.
Bill McMorrow: Today, we're in the final stages of completing that development program, with only $3 million of KW equity remaining to be spent.
Bill McMorrow: who have stabilized two additional multifamily properties in Q3, adding $12 million to estimated annual NOI.
Bill McMorrow: For the year, we have added $29 million to estimated annual NOI from stabilizing approximately 2,000 multifamily units.
And, we currently expect an incremental $60 million from the stabilization of assets undergoing lease up.
Bill McMorrow: The expansion of our investment management business remains a key focus for us.
Year-to-date in 2024, investment management fees have grown by 51% to $69 million.
Bill McMorrow: Fee-bearing capital has grown by 132% over the last four years, and for the first time in our history, our fees are on track to hit approximately $100 million in 2024, compared to $25 million generated in 2019.
Bill McMorrow: Matt will discuss this topic in more detail, but our Q3 growth was driven by the solid momentum we continue to see from our credit business.
We've completed 2.1 billion dollars in new loan originations in 2024 with a strong pipeline of over 1.2 billion of new loan origination opportunities. We are in the process of closing.
Bill McMorrow: Another important focus for us has been the generation of cash through the completion of selling non-core assets.
Bill McMorrow: In Q3, we disposed of another $234 million of assets, including our final wholly owned asset in Spain.
Bill McMorrow: We generated $63 million of cash from our Q3 sales, bringing our year-to-date total cash to KW to $375 million.
Bill McMorrow: In Q4, we have an additional planned asset sales that are expected to generate in excess of $150 million of cash to KW, and which puts us on track to achieve the $550 to $750 million target we laid out last year.
Bill McMorrow: Now I'd like to spend a moment and highlight two important recent strategic announcements we made this past quarter end.
Bill McMorrow: In October, we announced the launch of a new platform in the United Kingdom focused on the single-family rental housing market.
We are partnering with...
Bill McMorrow: the Canadian Pension Plan Investment Board, or CPPIB, one of the world's largest global investors, with approximately $500 million of assets under management.
Bill McMorrow: In the last decade, the UK population growth was more than double the number of homes built.
Bill McMorrow: At the same time, there is a growing demand for high-quality rental homes in the United Kingdom, similar to what we have seen in the U.S.
Bill McMorrow: By leveraging our residential experience in the UK, Ireland and the U.S.
Bill McMorrow: combined with partnering with CPPIB, we saw an opportunity to create a new platform at scale to address the structural undersupply of housing.
Bill McMorrow: The platform is initially targeting $1 billion sterling in asset purchases.
Bill McMorrow: and we're pleased to report that we closed our first two projects and have a meaningful pipeline of new opportunities.
Bill McMorrow: Yesterday we also announced a 175 million dollar euro redemption of our KWE bonds.
which mature in November of next year.
Bill McMorrow: Redemption represents almost 40% of the remaining outstanding balance and will be funded using proceeds from completed and planned asset sales.
As a reminder, this issuance was originally 550 million euros.
75 million of which was retired in 2022.
Bill McMorrow: This redemption will help us lower our overall unsecured leverage as the KW bonds represent our only unsecured maturity until 2028.
Bill McMorrow: Now turning to market conditions, we've seen an improvement in the overall real estate investment sentiment.
Bill McMorrow: As in Q3, we saw a long-awaited beginning of the rate-cutting cycle by central banks.
Bill McMorrow: Additionally, as Justin will describe in just a moment, debt capital markets have improved and liquidity remains robust today for high-quality real estate assets.
Bill McMorrow: The combination of improving liquidity, lower short-term rates, and borrowing spreads are supportive for our global business and a trend we expect to strengthen over the next year.
Bill McMorrow: Across our business, we have seen continued momentum in capital deployment.
Bill McMorrow: Through Q3, we have deployed a total of $2.4 billion in 2024, primarily into our investment management platform.
Bill McMorrow: including 2.1 billion dollars of new loan originations through our credit platform and 350 million dollars of equity purchases of rental housing and industrial acquisitions.
Bill McMorrow: Looking ahead with the lack of high quality and affordable housing affecting all our markets.
Bill McMorrow: Our direct real estate investments include our ownership, as I mentioned, in 39,000 market rate and affordable rental housing communities.
Bill McMorrow: which ended the quarter with a strong occupancy of 94% and generate property level NOI of over $500 million.
Bill McMorrow: We also have capacity for an additional 4,000 units through our newly formed UK single-family platform.
Bill McMorrow: Our credit platform allows us to generate solid returns on invested capital.
Bill McMorrow: In a short period of time, we've become one of the U.S.'s largest lenders for the development of rental housing communities across the country.
Bill McMorrow: Since joining us in July of last year, our construction lending team has completed $2.3 billion in new loan originations.
all related to either multifamily or student housing development.
Bill McMorrow: Our credit platform today totals $8 billion in total commitments, including $850 million in student housing loans.
Bill McMorrow: with developments near universities such as the University of California at Berkeley, University of Michigan, and Texas A&M to name a few.
Bill McMorrow: We have a strong origination pipeline, as I mentioned, of over 1 billion in new loans, which we expect to close prior to year-end.
a base of stable, well-capitalized institutional partners.
Bill McMorrow: as we see positive growing tailwinds for the real estate sector.
including rights normalizing and liquidity continuing to improve.
Speaker Change: 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. As Bill mentioned, our progress on our key initiatives continue to drive our results.
Speaker Change: Investment management revenue grew by 39% to $22 million in Q3, driven by completing another $422 million in new debt originations and overall higher levels of fee-bearing capital.
Speaker Change: Baseline EBITDA totaled $102 million in Q3 and has increased by 4% year-to-date to $309 million despite being a net seller of assets.
Speaker Change: Our unconsolidated portfolio, which includes approximately $5 billion in gross assets at share, saw minor changes in valuation.
Speaker Change: In total, adjusted EBITDA doubled in the quarter to $66 million and has increased by 9% to $349 million for the year.
Turning to our balance sheet and debt profile.
Speaker Change: During Q3, we were able to strengthen our liquidity position by successfully renewing our revolving liability credit.
Speaker Change: which now has a fully extended maturity in September of 2028.
Speaker Change: The total capacity was increased by 10% to 550 million, with $177 million drawn at quarter end.
Speaker Change: Our share of total debt is 96% fixed or hedged, with a weighted average maturity of 4.8 years and a weighted average interest rate of 4.6%.
Speaker Change: Our interest rate hedging continues to generate cash to KW, which is also not reflected as an offset to our interest expense.
Speaker Change: In Q3, we collected $10 million of cash, bringing our year-to-date total to $33 million in cash received by the company.
Speaker Change: At quarter end, our effective interest rate of 4.6% reflected 37 basis points of savings over our contractual rate as a result of our hedging strategy.
Speaker Change: Looking at our debt maturities so far in 2024 we have refinanced 700 million of property level debt with total paydowns of only seven million dollars and the cost of debt changing by only 16 basis points.
Speaker Change: Looking out to next year, roughly half of our maturities are represented by our KWE bonds maturing in November. As Bill mentioned, the redemption announced yesterday will satisfy almost 40% of this maturity, which again was funded using cash proceeds from our previously announced asset sale program as well as existing liquidity.
Speaker Change: Outside of the KWE bonds, 25% of our maturities next year relate to our multifamily portfolio, primarily secured by our high-quality assets in Dublin where debt capital availability remains strong.
Speaker Change: We are already underway at addressing this maturity and have received over 25 proposals, which speaks to the quality of this portfolio.
Speaker Change: All in costs are expected to be in the low fours.
Speaker Change: And 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. Estimated annual NOI for our stabilized portfolio grew in Q3 to $492 million.
Speaker Change: Our portfolio continues to simplify and strengthen as we recycle capital and replace older non-core assets with newly stabilized multifamily communities.
Speaker Change: Today, 70% of our stabilized portfolio is comprised of investments in our high-conviction sectors of multifamily, industrial, and credit.
Speaker Change: As mentioned earlier, rental housing continues to be a thematic focus, and in the quarter, our 39,000-unit multifamily business has grown to 62% of our stabilized portfolio.
Speaker Change: Our share of multifamily NOI is $305 million, which has increased by over 60% over the last five years.
Speaker Change: We have 2,400 units in our lease-up and development pipeline, primarily through our Vintage Housing Venture, which we expect to add $19 million to estimated annual NOI at stabilization.
Speaker Change: We continue to see strong demand for apartments across our portfolio in Q3 as healthy levels of traffic and leasing volume combined with the high cost of home ownership drove occupancy.
Thank you.
Speaker Change: These drivers resulted in same property occupancy growth of approximately 1%, revenue growth of 3.3%, and NOI growth of 3%.
Overall, portfolio occupancy was healthy at 94%.
Speaker Change: New starts have fallen sharply and the near-term outlook shows significantly less new supply. A major positive for our market rate portfolio, which is over 90% suburban.
Speaker Change: In Q3, we saw blended leasing spreads of 2% and ended the quarter with a loss to lease totaling 3%.
Speaker Change: In our California portfolio, we saw a strong recovery from the eviction and delinquency challenges that we faced a year ago.
Same property occupancy in Northern California, grew by 3%.
driving NOI growth of 6%.
Speaker Change: Southern California NOI grew at 3%, supported by lower levels of bad debt and growing occupancy.
Thank you.
In the Pacific Northwest, we've seen recent return-to-office mandates.
Speaker Change: that we believe will positively impact our portfolio in and around Seattle.
Occupancy grew in Q3 by 1.4 percent.
Speaker Change: resulting in revenue growth of 3% and NOI growth of approximately 2%.
Speaker Change: In the Mountain West region, we saw occupancy improve by 2%, leading to revenue growth of 2% and NOI growth of 2.4%.
Speaker Change: The strongest growth came from our portfolio in New Mexico, Nevada, and Arizona, all of which contain assets which are finishing our value-add business plan.
Speaker Change: Nevada and Arizona saw NOI growth of 10% and 14% respectively.
Speaker Change: Our portfolio in Utah, Idaho, and Colorado have been impacted by elevated levels of supply. However, the outlook remains favorable as the worst of the supply pressures are now behind us.
Speaker Change: In our Vintage Housing Affordable portfolio, rental growth rates were in line with the changes in area median income, resulting in NOI growth of 6.5%.
Speaker Change: Moving over to Dublin, demand for apartments remains healthy. The overwhelming majority of apartments in Dublin are non-institutionally owned and there remains a large structural shortage of new housing.
Speaker Change: We have stabilized a total of 758 units thus far, with one additional property currently on track to complete lease-up in early 2025.
Speaker Change: Our portfolio is 95% occupied, and we anticipate our amenity-rich, professionally-managed community to continue drawing tenant demand due to the lack of new supply.
Thank you.
Speaker Change: With regards to our office portfolio, approximately 80% of our stabilized office NOI is derived from our portfolio in Europe, which saw same property revenue and NOI growth at 2%.
Speaker Change: Occupancy for our stabilized portfolio in Europe remains healthy at 93% with a weighted average lease term of 7.3 years to expiration and 4.8 years to break.
Speaker Change: Fundamentals for our office portfolio in Europe are much different than some trends seen throughout the U.S.
Speaker Change: For example, in Dublin, our 9 stabilized properties are almost full, with less than 5% availability at quarter end.
Speaker Change: We have seen additional tenant demand in Q4 as our high-quality, sustainable properties continue to benefit from a flight to quality.
Speaker Change: Similarly, in the UK, we've seen an uptick in leasing activity with several transactions currently under offer totaling 160,000 square feet.
Speaker Change: Our industrial portfolio which totals 12 million square feet continues to see strong demand. In the U.S. our portfolio is 99% occupied and in Europe we've completed 300,000 square feet of leasing which delivered a 44% increase in rent.
Speaker Change: In-place rents in Europe remain 34% below market, which allows us to continue enhancing value as leases mature.
Speaker Change: We look to continue adding to our global portfolio, where we believe the continued long-term rise of e-commerce,
and supply chain resilience will drive demand.
Switching gears now to our investment management business.
Speaker Change: As we've talked about on previous calls, we look to continue simplifying our balance sheet through non-core asset sales.
Speaker Change: and a focus on growing new platforms through our investment management business.
Speaker Change: That business grew to a record $8.8 billion in fee-bearing capital at the end of the quarter, with an incremental $6 billion from future funding and the deployment of our non-discretionary capital.
our new UK single-family rental housing platform.
is a great example of our focus.
Speaker Change: as it allows us to generate attractive returns on equity in a capital light manner while adding another high quality institutional investor to our roster while also growing one of our high conviction areas in the rental housing space.
Speaker Change: Investment management fees totaled $85 million over the past 12 months.
Speaker Change: Our $8 billion credit platform has been a large driver of our investment management business growth over the last few years.
today accounting for 55% of our fee-bearing capital.
Speaker Change: As private credit markets continue to expand rapidly, and with the potential for higher transaction volume, we continue to look for ways to grow our credit solutions.
In short, the combination of several well-capitalized institutional partners coupled
Speaker Change: with more real estate liquidity and improved short-term borrowing costs provides for an ideal setup for our investment management business.
Speaker Change: In closing, we have made great progress navigating a challenging period of time over the past few years.
Speaker Change: However, we always approach these periods as opportunities, and I believe the improvements we have made as a company in the last few years sets us up for solid growth in 2025 and beyond.
Speaker Change: So with that, we can open it up to Q&A, please.
Speaker Change: Thank you. We will now begin the question-and-answer session. To ask a question you may press star 7 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.
To withdraw your question, you may press star, then two.
Speaker Change: At this time, we will pause just momentarily to assemble our roster.
Speaker Change: Today's first question comes from Anthony Paolone with J.P. Morgan. Please go ahead.
Anthony Paolone: you put around fee revenue for next year, about $120 million. Can you talk about how
Maybe what we need to see in terms of originations
Speaker Change: or just other capital being raised to kind of hit that number because it looks like you're going to finish this year with probably over $3 billion worth of debt originations.
Speaker Change: Just curious like what that picture has to look like next year to get to that level of fee revenue
Speaker Change: Yeah, good question Tony. Yeah, so as I mentioned we've got six billion of capital that's not included in our fee-bearing capital that relates to future funding commitments.
as well as commitments from partners such as
Speaker Change: and CPP IB in our various platforms. And so based on the pipeline we're seeing both in the credit business and the equity business, we feel like just deploying the capital we've raised alone, you know, is gonna allow us to continue to grow the investment management business that.
Speaker Change: a very good clip. And so, as we mentioned in the remarks, we think we're gonna end up at close to 100 million in fees for this year. So based on the growth rates we've seen over the past couple of years in our plans, we feel comfortable continuing to grow that business.
at a good pace.
Speaker Change: So is there any sort of like you know large like cliff of maturities that you'll be getting back where you have to you know you may have a higher bar of originations next year is that still you know pushed out a bit such that just keeping the clip you're you're at will will get you there
Speaker Change: I think keeping the clip we're at will get us there. I think there's certainly if we can increase either the debt originations or, you know, continue to grow the investment management business through these equity platforms, we can certainly outperform, you know, the numbers you laid out there. But just kind of doing it at the same pace we did this year would get us there for sure.
Speaker Change: Okay, that's helpful. And then second one just on the new SFR strategy. Can you maybe...
Speaker Change: Give us a little more detail around what cash yields look like for UK single family, maybe like, you know, are there experienced operators over there to kind of help you with the platform and running these assets and just any more color around the economics there.
Speaker Change: Okay, thanks Tony, I'll take that. Mike Begley here, President of European Business.
Um...
Speaker Change: I mean, firstly, I just want to say how excited I am about finding a great partner such as CPPIB with which to scale this business. As Bill and Matt said, rental housing has always been a key part of Kendi Wilson's
Speaker Change: story, a key part of our portfolio and a key part of our expertise.
Speaker Change: and really to find an opportunity to scale this business in the UK is something we've been looking at for a while.
and I think we've got a great partner scale here.
Speaker Change: They've committed $500 million of equity to this venture as an initial commitment.
Speaker Change: We're going to be investing that in a 90-10 split, so we'll be co-investing alongside them. So with leverage, we expect...
Speaker Change: We've got a great pipeline for deploying that, and we're confident we're going to have a really productive year in putting this to work next year. Fundamentally, not enough houses have been being built in the UK for a period extending over years, if not decades.
Speaker Change: plus various other changes in the private landlord market such that there was a real mismatch between demand and supply for rental housing.
Speaker Change: in the UK. So we think the conditions are really well set for rental growth.
In terms of those initial cash yields,
Speaker Change: You know, we're projecting that we're going to be leasing out.
Speaker Change: these houses which we are buying brand new from large UK house builders primarily in cohesive blocks on the edge of key cities mainly in the south of England. We're projecting we're going to yield initially something between high fives pushing towards six and with rental growth we'd be expecting to stabilise north of
six years.
Speaker Change: Okay, and who will operate them and do you think the billion dollars is enough to have scale and be efficient in that business?
[inaudible]
Speaker Change: Yeah, we've got a great team that we've put together with a lot of residential expertise across the Kendi Wilson business.
Speaker Change: UK market. Really proud of the team who put this venture together and who are going to be managing it. In terms of, let's say, property management, rent collection, that type of thing, we're going to outsource that. We've got a best-in-class team there, and we'll evaluate how that works as the platform grows.
Speaker Change: We think this first billion, you know, does give us a first-mover advantage. There are not a lot of people doing this in the UK market. We think that is a credible platform scale. But we think there could be the opportunity to go beyond that.
Speaker Change: and our existing partner has expressed an interest to do that if the opportunity unlocks in the way that we expect it to and we think this could be an opportunity to build an even bigger platform over time.
Okay, thank you.
Speaker Change: Thank you. As a reminder, to ask a question, you may press star then 1.
Speaker Change: Seeing no further questions, I would like to turn the call back to Bill McMorrow for any closing remarks.
Bill McMorrow: Well, thank you everybody for joining us. And as I always say, we're always available any time to answer any questions that might come to mind. So thank you very much.
Speaker Change: Thank you. The conference is now concluded. Thank you for your participation. You may now disconnect.
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