Good day, and welcome to the Kennedy-Wilson Second Quarter 2018 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask question. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Daven Bhavsar, Director of Investor Relations. Please go ahead..

Thank you and good morning. This is Daven Bhavsar and joining us today are Bill McMorrow, Chairman and CEO of Kennedy-Wilson; Mary Ricks, President and CEO of Kennedy-Wilson Europe; Matt Windisch, Executive Vice President of Kennedy-Wilson; and Justin Enbody, Chief Financial Officer of Kennedy-Wilson.

Today's call is being webcast live and will be archived for replay. The replay will be available by phone for one week and by webcast for three months. Please see the Investor Relations website for more information. 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 a reconciliation of the most directly comparable GAAP financial measure and our second quarter 2018 earnings release which is posted on the Investor Relations section 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 a 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 McMorrow..

Thanks, Daven. Good morning, everybody and thank you for joining us today. We are pleased to report a record quarter results for Kennedy-Wilson.

We achieved our highest quarterly profits in our history, driven by industry-leading same property results with NOI up 6% across our same property portfolio as well as significant gains from our asset sale program which we reinvested into our share repurchase plan, new acquisitions, and capital expenditures aimed to improve our existing properties.

So starting off with financial results. GAAP EPS was $0.77 for the quarter up from $0.08 in Q2 2017. For the first half of the year, EPS was $0.74 for the year up from $0.09 in 2017. Adjusted EBITDA was $271 million compared to $102 million during Q2 of 2017.

This brings our year-to-date total to $393 million compared to $180 million for the first half of 2017. Adjusted net income for the quarter was $171 million compared to $51 million in Q2 of 2017. For the year, adjusted net income totals $234 million up from $94 million for the first half of 2017.

We had a very strong quarter of property operations with same-store revenue growth of 5% and NOI growth of 6% across more than 18,000 multifamily units, 12 million square feet of commercial space and four hotels. In particular, our Mountain States Apartment portfolio and our Southern California and UK office portfolios showed acceleration.

During the quarter, we had a focused capital deployment plan through which we invested $195 million of our capital, 68% of our capital is spend on share repurchases, 20% on new acquisitions, and 12% on value-add CapEx. In Q2, we repurchased 7.4 million shares at an average price of $17.90.

As of the quarter end, we had $107 million remaining on our $250 million buyback program. We have been executing this buyback on a leverage neutral basis using gains from asset sales to fund our repurchases.

For the year, we have invested $317 million of capital with 48% allocated to share repurchases, 33% to new acquisitions, and 19% to value-add CapEx. On the buy side in Q2, we and our partners completed $212 million of acquisition, which our share was 120 million. For the year, we have bought $510 million of assets, which our share was 272 million.

Three multifamily assets we acquired this year. The Elysian in Dublin and San Jose and Creekview in Salt Lake account for 73% of our total acquisitions.

These three assets although have significant value-add CapEx components to them, so after executing our business plan with these properties, we expect significant increases in NOI compared to the NOI and placed at acquisition. This is typical of how we invest and add value to our properties.

In fact, when you look at the assets we sold this year, we were able to increase NOIs on average by 29% during the roughly four-year old period prior to their sale. On the disposition side, we sold $574 million of assets during the quarter, which our share was 322 million.

For the year, we have been a net seller with $743 million of dispositions, which our share was 454 million. These sales have generated $327 million of cash to KW. The largest sale in the quarter was a six property apartment portfolio, totaling 2,200 units in the Western U.S. that we sold for $422 million.

We had a 41% average ownership in these assets, which were originally built between 1989 and 1999. KW realized an IRR of 35% on the sale of these assets, generating $104 million of cash and realized gains and promotes of $71 million of KW.

We also continue to invest our capital into our CapEx and development initiatives, where we are able to generate attractive returns. During the quarter, we invested $59 million of our cash into various value add initiatives.

We currently expect to spend over $200 million of cash in the next 18 months to invest in our development and unstabilized assets as well as other value enhancing initiatives across our global portfolio.

Turning to the balance sheet, we close the quarter with $447 million of cash and $500 million of availability on our on undrawn revolver or total of $947 million liquidity. In total, our debt has a weighted average interest rate of 3.8%, weighted average maturity of 5.8 years with 77% fixed and 14% hedged to interest rate increases.

Our term loan has a remaining balance of $125 million, which we currently intend to payoff by year end. Now I'd like to discuss or near-term strategic initiatives. Number one is growing our NOI through lease up of unstabilized assets and completing our development initiatives.

In total, of the $52 million of estimated annual NOI that we expect to add by year-end 2021, $36 million is expected to be in place by the end of two thousand and 2019 and over two-thirds of that is either multifamily or pre-leased office developments.

We also continue to harvest gains selectively by selling assets where we have completed our business plan or that strategically don't sit for us a long-term.

We will continue to recycle the proceeds from our outfit sale program into our CapEx initiatives, a buyback program and to fund our various investment platforms that will enable us to grow our business.

Turning to a more detailed portfolio review, we ended the quarter with a stabilized portfolio that is estimated to produce $427 million of annual NOI with 45% coming from the Western U.S. and 55% from Europe. Globally, multifamily and office continues to be our largest sectors making up 72% of the total portfolio.

With our multifamily concentrated in the Western U.S. and Ireland and our office mostly located in the UK and Ireland. In the U.S., our target markets include Greater Seattle, Southern California and the Bay Area as well as Salt Lake City, Portland and Boise. In Europe, our main target markets consist primarily of Dublin, Ireland and the UK.

We believe all of these markets continue to offer an attractive long-term investment opportunity.

In the U.S., we currently have an ownership interest in over 21,000 apartment units, 5.2 million square feet of commercial properties and a development pipeline that includes an additional 2,000 apartment units under construction or in design plus another 2,000 that we are actively pursuing throughout our key Western U.S. markets. Our U.S.

apartment portfolio accounts for three quarters of our U.S. portfolio by NOI and continue to benefit from being well located with end markets, experiencing, sustain job, and population growth, resulting in strong demand for rental housing. Our market rate multifamily portfolio posted revenue growth of 5% and NOI up 6% on a same property basis.

We continue to outperform other large multifamily public real estate companies, which on average had NOI growth of 3% on a same property basis during Q2. The Pacific Northwest, which includes greater Seattle and Portland, accounts for almost half of our U.S.

multifamily portfolio and the region continues to perform well with quarterly revenue and NOI same property growth of 5%. As we highlighted during our Seattle property tour in July, the Suburban Nature and relative affordability of our portfolios position for continued growth.

For example, in Redmond we own an asset that is right next to the Microsoft Headquarters or Microsoft is undergoing a five-year to seven-year campus expansion to add another 8,000 employees. The Seattle market continues to be one of the highest in the country with housing supply tailing to keep up with population and job growth.

With average rents of approximately $1,600 per month a portfolio offers great value compared to the newer assets delivering mostly in the CBD. We recently have been adding to our Mountain State multifamily portfolio which includes our assets in Salt Lake City and Boise, Idaho.

In 2017, Idaho and Utah or ranked number one and number three in terms of U.S. population growth. Both areas continue to benefit from strong underlying economic fundamentals and have a lock of housing for the growing population.

We have seen the results of this come through our same property results with revenue and NOI growth of 8% in the quarter and these markets. Our Vintage Housing multifamily affordable platform continues to perform above expectations. It has been three years now since we invested $78 million into this joint venture in Q2 2015.

In the past three years we have been able to grow our portfolio from 5,500 units to 6,400 units while returning most of the original cash invested. We have only $14 million of cash basis remaining. We are looking to grow this portfolio to 10,000 units over the next few years. Looking at our U.S.

commercial portfolio for the quarter, occupancy grew slightly, while our share of revenue was up 14%, NOI was up 15% on a cash same property basis. This was primarily driven by an office asset in Beverly Hills which entered the same property pool this quarter. That asset had free rent in Q2 2017.

Excluding the effect of free rent in 2017 or Southern California commercial portfolio had revenue growth at 6% and NOI growth of 7% the result of positive leasing at our office and retail assets. In total, our stabilize U.S. office portfolio is 98% leased with an average lease term of 4.6 years. Turning to Europe.

We have a best-in-class portfolio that is concentrated in Dublin, Ireland and the UK. With this, I would like to turn the call over to Mary Ricks, President and CEO of Kennedy-Wilson Europe to provide more detail..

Thanks Bill. Estimated annual NOI for the total European portfolio stood at $236 million at quarter end or roughly 55% of Kennedy-Wilson's stabilized portfolio. This is broadly flat from year end as positive leasing was offset by profitable disposals.

Looking at the $52 million of additional estimated NOI by 2021 that Bill mentioned a significant portion will be generated in Europe from our value add and development initiatives which are primarily in Dublin.

The European portfolio remains underpinned by secure income with long weighted average lease lengths of 6.2 years to first break and 8.4 years to expire rate and strong portfolio occupancy at 92.5. I'd like to highlights four areas for Europe.

One, we are delivering attractive asset management wins across a stabilized portfolio with the UK being a standout performer in the quarter. Two, good progress across our unstabilized assets and development projects continues. Three, the growth potential we previously discussed across our multifamily or PRS portfolio is now coming through strongly.

And four, we generated profits and attractive returns from our non-core sales program. So first, looking at our asset management wins across our stabilized portfolio, we completed 83 commercial lease transactions in the first half of the year across 1.1 million square feet.

This delivered over $6 million of incremental NOI to KW, 9% ahead of previous housing rents. Strong contributions came from new leases and rent reviews across the UK portfolio, with rent reviews delivering an attractive 20% growth above previous rents. The Shelbourne Hotel in Dublin is our single largest NOI contributor for the company.

The value-add CapEx we've made at this iconic asset is paying off as we've seen NOI grow by 120% now since acquisition, with additional CapEx investment underway with the goal of achieving further increases in ADRs and NOI. Second, the team has made good progress with both unstabilized assets and development projects.

We acquired Northbank in Dublin in December 2017, which is a 124 unit property that sits next to our 81 unit Liffey Trust property. These assets are located in the North Docks sub-market, which we see as the next growth opportunity in Dublin.

We are making excellent progress in refurbishing and leasing up vacant units, where renovated units are being well received and we are achieving rents ahead of business plans. We also received planning permission at our exciting 68,000 square foot Hanover Quay office development, which is adjacent to our nearly completed Capital Dock campus.

And our 64,000 square foot Kildare Street office development, initial planning approval was received with final planning consent anticipated by year-end. The Phase 3 development at Clancy Quay is well underway and this new phase of apartments is on track to deliver 259 units with completion expected by Q1 2020.

Once completed, this project will total 845 units and be the largest apartment community in Ireland. Lastly, at our 400 million Capital Dock development after securing the anchor office occupiers JPMorgan and indeed, we are progressing on the marketing of the retail space, which is currently under construction.

The entire Capital Dock development, which is one of the largest single phase developments in all of Ireland will complete by year-end. Thirdly, as you know we've prioritized growing our PRS portfolio where our ambition is to double our units to exceed 5,000 units over the next few years.

In the second quarter, we completed the acquisition of the Elysian in Cork, Ireland and it's a market leading community, adding 206 prime PRS units to our portfolio in Ireland.

The residential element is well leased, but under rented and we are in advance discussions with interested parties on the vacant commercial space, and we will also be implementing the Kennedy-Wilson model of adding tenant amenities to this community.

The quarter was highlighted by the completion of our 50/50 Irish PRS joint-venture with AXA Investment Managers real assets, a global leader in real estate investments and the leading real estate portfolio and asset manager in Europe.

The joint-venture commenced with an initial portfolio of 1,173 units and is expected to grow rapidly to over 1,800 units, including those under contracts and under construction.

This joint-venture will not only contribute to delivering on our growth targets to double our units in excess of 5,000 units, but it is also a significant first step in growing our European third-party investment management platform.

And lastly, our asset sale program delivered $214 million of gross proceeds to KW in the first six months of the year with almost $100 million in Q2 2018.

Much of our disposition effort remains focused on assets where we have completed our asset management plan with the UK continuing to deliver strong returns and comprising about 83% of total European dispositions. Sales for the half year delivered a return on cost of 43%.

Overall, our European portfolio continues to perform well and we expect further good news in the second half of the year. And with that, I'll hand it back to Bill..

Thanks, Mary. So looking forward, I’d like to discuss the current market environment and where we see opportunities. In the U.S., we remain focused on growing our Vintage Housing, affordable platform, where we can leverage tax credit equity and grow the platform with minimal KW equity.

We were targeting an additional 2,600 units by 2021 and we expect to get the platform up to 10,000 units soon thereafter. On the market rate side, we continue to find selective opportunities in our core markets in the Pacific Northwest, Northern and Southern California, Salt Lake City, and Boise.

Additionally, we have plans to build over 600 additional units in our California market rate portfolio, all of which will commence in the next nine months. In total, we anticipate adding 4,000 market rate in affordable U.S. multifamily units over the next few years.

In Europe, we are focused on growing our multifamily presence in Ireland to over 5,000 thousand units will also continuing to evaluate opportunities in the UK. We also look to sell smaller lower yielding and non-core assets that we originally purchased in large portfolios from financial institutions.

And finally, we look to continue to grow our investment management platform through raising a third-party fee-bearing capital both in the U.S. and in Europe. We are currently on track to meet our goal of $1 billion in new fee-bearing equity in 2018 and expect further good progress to report on this platform.

We’re very pleased with our global business and the opportunities in front of us. We remain very well prepared with ample dry powder for any market opportunities that may arise. We delivered a record second quarter while returning significant capital back to shareholders and we remain committed to executing our global strategy going forward.

With all that, I’d like to open it up to any questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mitch Germain of JMP Securities. Please go ahead..

Good morning, any pressure on development costs still or potentially payrolls?.

We haven't seen that Mitch. And as I think we've outlined most of the development that we're doing currently is in Dublin. And so we haven't seen any noticeable increase in costs. I think we've all read, there's seems to be some shortage of skilled workers across the globe, but it hasn't shown up yet in any of our costs..

Great. It sounds like asset sales will continue to be part of the mix in the near-term and I was curious you done – you did a big portfolio in the U.S. on multifamily. I know some of the focus was to sell some of the smaller UK assets.

Is that – how should we think about the population of what will be sold in the back part of the year?.

Well, I'm going to let Mary weigh in on the European side.

But I think we said in the first quarter call that the gross dollars in terms of what we sold this year was probably going to be smaller than the last year, but our ownership interest in the things that we sold this year was probably going to be higher than it was last year and that's actually – exactly what's happened so far.

So Mary, do you want to comment on some of the smaller asset portfolios that we inherited from the two big deals that we did?.

Sure, Yes. I mean the largest deal that Bill’s referring to the Gatsby deal, where we bought 150 assets from six different receivers from an insurance company. So these were assets that that all needed some value add, some CapEx and some letting.

So as we've continued to do that, we will continue to rollout of those smaller assets as Bill mentioned, and really more focus on our larger assets in our CapEx and stabilizing our assets that are not quite stabilized yet.

So when you look at the 10 assets that we sold in the quarter, those are all small assets, averaging roughly £9 million, and then getting – not only have we increased income on those, but we're also getting very good spread between where we purchased those and where we're selling them.

So that’s the demand in the liquidity for the smaller asset, assets really do continue..

Great. That's helpful. And then the last for me actually joint venture. Obviously, they took out a partner of yours in a couple assets and obviously there's a bunch of dry powder for future growth.

Is it the intent to maybe develop – redevelop on balance sheet and then sell a stake into the joint venture? Or is the venture going to be doing development? I guess there’s some flexibility there, but maybe if you can describe the venture itself and what you think AXA brings to the table?.

Bill, do you want me to take that?.

Yes. I would start by saying that, I think as most of you know AXA is one of the largest financial companies in the world. And so it was – I would say an incredible achievement on the part of Mary and her team to get the joint venture put together in the first place. But from there Mary you want to comment..

Yes. I mean the AXA has a great partnership because they're completely like-minded, they see the demand in Ireland for housing as we do. They're smart partners, they're responsive. So very, very good partners. We are super pleased with that joint venture. And so yes, they want to grow the business, the platform as we do.

We'll continue to try and buy that the Northbank and/or lesion type assets which were basically completed. But perhaps there is a piece of land next to for example Northbank, where we could also develop asset.

So Kennedy-Wilson is acting as the Development Manager and the Asset Manager of these assets, deal finding and day-to-day asset management, but with a great partner who like I said really sees the same opportunity as we do..

Great. Thank you. Great quarter..

Thanks..

Thank you..

Our next question comes from Craig Bibb of CJS Securities. Please go ahead..

Hi, guys..

Hi, Craig..

Mary since you are answering a lot of questions, I’ll ask one too.

I think Bill noted that UK office accelerated and I know you guys have actually been seeking planning approval to expand a couple the office properties, could you give us a color there?.

Yes. I mean you're probably talking about in terms of seeking to expand the Friars Bridge Court asset which is 100,000 square foot asset in the Southbank location in London, which is a great location, actually very tight office market there regenerating market with lots of hotels, lots of technology, driving the demand in that submarket.

And so we got planning there a couple years ago to double that footprint, but we do have very, very strong interest in the whole building in the 100,000 square feet. It's currently let right now on short-term leases well below market rents. And so keep your eye on that one because we're pretty close to announcing something that could be interesting..

And that would be to let the whole thing or….

Yes..

Okay.

And were there any other like major – in total your lease up was pretty good in the UK, was there anything else of note in terms of that would have accelerated office in the quarter?.

Yes. We had a great leasing quarter and a lot of it was not only was it leasing at vacant space which the UK team did a great job, but it was also on rent reviews. And so as I mentioned in my remarks, we did rent reviews at 20% above previous housing rents.

And so that that's just kind of indicates, I think that the UK portfolio that we own is somewhat under rented and it's also a lower rent profile.

So when you think about London, oftentimes you think about higher rent, [indiscernible] type rents or city type rents where our rents are quite low which – that I think makes it defensive, but also opportunistic. So we're super pleased with the asset management work fit that our team are executing on and should have a great second half as well..

Okay.

And Bill, did you say Kennedy-Wilson is planning to build 600 market rate multifamily units in California? Is that new?.

That's correct. One of the projects that will commence construction on shortly is in Santa Rosa, which is about 160 units and then we've got another larger project that we're in – will commence on probably later this year in Southern California that will be a site that is a combination of market rate units and affordable units on the same site.

And as I've said on prior calls, the very big misnomer when you talk about the affordable businesses, the quality of that construction and what those buildings look like, and literally unless you told somebody when you drive up to an affordable multifamily asset. You can't tell the difference of whether it's market rate or affordable.

But the one we're going to be starting on Southern California will – as I said we will start later this year..

Okay..

So both of those will take roughly in Santa Rosa one slightly less time, the one in Southern California will take about 30 months to build..

And could you provide an update on the remaining assets under management in Funds V and below, and then when do you expect Fund VI to close?.

Yes, so we just closed out Fund IV and so that one is history now.

We generated gross returns of roughly, Matt 16% on that?.

Yes, that’s right..

And so Fund V is done a star performer, some of the assets that were sold in that six apartment portfolio were actually in Fund Vs. So that that fund is already invested.

But we now – Matt, returned – how much of the capital on that?.

I think we're roughly 50% return on the capital with the majority of the portfolio, still out there to sell over time..

We really expect that one, Craig, to see the results of Fund IV.

As far as Fund VI is concerned, we have about – which is really rough, but we have about $350 million of unspent cash sitting in that fund right now were about slightly under $500 million of capital raise and we expect that as I've said before close out somewhere around $700 million – $750 million..

All right, thanks a lot..

Our next question comes from Eric Miller of Heartland Advisors. Please go ahead..

Yes. Hey, congratulations to the great start to the year, everyone there.

Hey, I have question and Mary was talking about the AXA relationship and now a paraphrase, but I think she mentioned, would see this sort of as a first step in growth in European third-party investment business? Could you give us some sense as possible directions of where you would see that growth would it be with AXA going into different geographies, different property types, would you look at finding somebody like an AXA on a different geography in Europe? Maybe just a little more color on that..

Well, I think initially as Mary said that Eric, the focus was going to be on Ireland and particularly in Dublin, and we've got a new couple of larger properties that we're very focused on right now in terms of adding to the portfolio and I think like we've done, Mary and I’ve been together now for almost 30 years and as we've done over our whole careers what we always try and do is build on these relationships in other places.

And I think really one of the really good examples of this is what we've been able to do with I think I consider name right Mary the other insurance company. So we like with MetLife we started with a lending relationship with that in Ireland primarily. We've done several loans with them in Ireland.

But that led to us you know meeting all of the folks in the U.S. MetLife operation and in the second quarter we just caused our first loan of significance with MetLife in the United States.

So we're always looking to grow these relationships I would say though that we're off to a very, very good in fast start with access in Dublin which is as I said where our main focus is right now..

That’s great.

Hey, what do you think about all the success you've had in fund four and looks like fund five and now starting fund six? Would you try and replicate that in Europe at some time?.

We are and so all of Mary add to that that we now have two people on our team. One that we transferred from the United States just recently to London. But we have two people full time in addition to the efforts that Mary is putting into this that we have two people there full time raising third party capital in Europe.

But Mary you want to amplify on that?.

Yes. I mean we're in the early stages now of just putting all their documentation together and communication with a variety of potential LP's and I would say the interest levels very good. And it's something that we expect to have success with for sure in terms of that fund format in Europe just as we've done in the U.S..

Okay..

For that – since we went public here in roughly 2010. We've had many great partnerships with the whole variety of people, including Fairfax and all of our partners have capacity. And so even though we are clearly in the process of continuing to raise money in these funds formats.

We feel like we have any number of people that are willing to do separate account platforms of size. Depending on whether there are you know meaningful opportunities to invest that money..

Okay. Great. Hey, I got to congratulate you on the timing of the buyback. It's nice to see a buyback executed so well at about 17%, 18% of below where the stocks trading today. So that great job..

Thanks Eric. End of Q&A.

[Operator Instructions] This concludes our question-and-answer session. I'd like to turn the conference back over to Bill McMorrow for any closing remarks..

Well, I'd like to thank everybody as well as we always do for all of our support. We're very happy with where the company is that at this point in the year. As I said we had a great first half and we're looking forward to finishing up this year on a very strong basis. So thanks everybody..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..