Good day. And welcome to the Kennedy-Wilson First Quarter 2021 Earnings Conference Call and Webcast. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Daven Bhavsar, Vice President 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 of Kennedy-Wilson; Matt Windisch, Executive Vice President, Kennedy-Wilson; and Justin Enbody, Chief Financial Officer, Kennedy-Wilson..

Thanks, Daven, and good morning, everybody, and thank you for joining us today. I’m pleased with the Q1 earnings that we reported yesterday. As the fundamentals in our markets continue to recover from the pandemic, the strong momentum we had into Q4 carried into an active start for the year.

We anticipate that the global economy will continue to rebound and the strong institutional demand for well located real estate assets bodes well for our existing portfolio and our strategic growth initiatives. And we have built an extremely robust investment and leasing pipeline that will drive growth for us for the balance of the year and beyond.

Starting with our financial results in Q1. We had a GAAP loss per diluted share of $0.04, compared to a loss of $0.07 in Q1 of last year. Adjusted net income grew by 5% to $47 million.

These results include the impact of a one-time $15 million loss on the early extinguishment of corporate debt in Q1 related to the refinance of our 2024 bonds, which will result in $10 million of annual interest savings.

Excluding this one-time loss GAAP net income would have been $0.04 per diluted share and adjusted net income would have been $58 million. Finally, adjusted EBITDA grew by 14% to $128 million. Our stabilized portfolio end of the quarter were $389 million of estimated annual NOI.

The operational performance across our largely suburban multifamily and office portfolio, which accounts for 82% of our estimated annual NOI was strong as we continue to remain high -- maintain high occupancy and once again collected 97% of our rents..

Thanks, Bill. In our multifamily portfolio occupancy remained steady at 95% from year end, suburban assets account for 90% of our multifamily NOI and our average monthly rents stood at $1,675 per month. Our largest market rate multifamily region is in the Mountain States. The performance in this region continues to be very strong..

Thanks, Mary. I’d now like to discuss the progress we were making at our development and lease-up projects. Our development pipeline is building to on average a 6% yield on costs in markets where assets are trading at significantly lower cap rates..

The first question will be from Anthony Paolone of JPMorgan. Please go ahead..

Great. Thank you. We’ve heard a lot of anecdotes about where cap rates are for apartments across the country. But you all have a fairly unique footprint.

Can you comment on where cap rates are in some of your Mountain States, perhaps, Dublin and also for your more affordable product?.

Yeah. Well, I think, Tony is, as an overview, these low interest rates that you can finance out, of course, have caused cap rates to decline.

And also, as I think, we all know, there’s hundreds of billions of dollars of capital globally, that is looking for act real estate as an asset class, which has also had an effect as you can see from the sale that we did in Friars Bridge Court.

I would say that, we’re very fortunate in the sense that we got into most of the markets that we’re in today a long time ago and so we have very, very good footprints there.

And but it -- it’s competitive on the buy side today and our real strength, I think, on the buy side has been the relationships that we’ve created over these three decades that most of us have been together. And so we’re always trying to find that off market opportunity.

And I think, the other part of it to -- the decisions that we made as far as new construction really started almost seven years ago. And it takes a long time to fill the pipeline, so to speak, and then have projects finish, like, Clancy Quay. We bought Clancy Quay in 2013 and there were only 420 units there.

And as I said in my remarks, now we’re going to have 865 units. But we’re -- in that particular case we’re stabilizing Clancy at close to a 7% cap rate, brand new and that property, although, we have no plans to sell it would sell at a cap rate today well below 4%.

So the decisions that we made, our business has a business you have to try and get into these markets early, you have to get a good footprint in these markets and then the decisions that we’ve made to do these -- the new construction is really proven out to be a great, great plus.

And as I said, most of this construction that we’re doing is going to come online here in 2020, before 20 -- at the end of 2023 and some into 2024. But so many of these rights which everybody is saying are going to stay level, the cap rates we’re going to continue to be at the levels where we are at today. But we’re still finding opportunities.

We are in both on the buy side and on the new construction side. We’re starting two new projects. One next to our project in Santa Rosa, what we’re calling Santa Rosa Phase 2, which land adjacent to Santa Rosa Phase 1. So that project 1 zone will have 300 units out. We also just bought a property in Boise, Idaho called Jasper.

But next to that -- that projects 240 and it’s next to that is land for another 240 units, which we’re going to start on this summer. So while the markets competitive, we’re still finding opportunities that make sense for us to buy.

And then the last thing it’s also longwinded answer, we’re -- unless it’s in a vehicle that has a short-term hold horizon, we’re locking in spreads on by using fixed rate debt, that generally is in the 10-year term here in the United States and Europe more than the five-year to seven-year term.

But that that is the key and my opinion is that you’ve got a lock in your spreads and not try and take advantage of rates. And I’d say, Mary, to the last piece of a winner really think about it as our asset management capability. And there was a lot of uncertainty starting last March of 2020, when we all went remote.

But we’ve demonstrated that we collect rents at a very, very high level and unlike a lot of our peers, and I’m not critiquing them, we’ve actually had rent rolls in the markets that we’re in.

So it’s a combination of all of these factors, I think, that give me an awful lot of confidence in the future, even with the competition and these lower cap rates..

Got it.

And are your investor partners, are they adjusting down return expectations or adjusting to an environment where there’s an enormous amount of liquidity or how does that conversation work with you as you’re raising capital?.

Yeah. I mean, I think, that -- I started saying three years or four years ago on these calls, that the days of underwriting, when you’ve got basically zero cost of debt in certain parts of the world, the days of underwriting initial yields to 15% to 20% or 25% returns that we may have gotten eight years or nine years ago was actually a fool’s game.

And so everybody has had to adjust their return expectations. But it’s separated. We’re a value-add player. We’re always trying to buy things that we can add value to, whether that’s through better management or building or just -- on the buy side. That’s our DNA is to find things we can add value to.

Having said that, we have partners, particularly in the insurance industry and others that have lower their yield expectations to satisfy their own needs. And so that’s allowed us to get into a space, particularly in the fee-bearing capital world, where we’re doing what I would consider to be more core returns.

So, clearly, there’s a segment of the institutional investment world that has lowered their expectation to more core returns. But seeking core risk adjusted returns where they’re not going way out on the limb in terms of the risks they might be taking.

So the good news at Kennedy-Wilson is we’ve got every flavor of capital, we’ve got capital we can put to work and core returns and we’ve got capital that we can put to work in value-add returns, and we’ve got capital that we can put to work in the debt platform.

And so, there’s nothing really in each of those assets or categories that that we don’t have capital for. And I would say to, Mary, the last piece is that, the relationships that we’ve built, these relationships take years and not decades to build, because they’re all built on trust.

And so we’ve just got very, very strong institutional partner relationships that will fulfill every bucket of return..

Yeah. No. That’s -- and I would also say, Tony, that the core plus vehicle that we have in the industrial space in Europe right now is growing immensely. And I think our partners and ourselves understand really that that asset class and really that band of returns sort of the 9 to 11 leverage.

And going in -- we might be going in at a 5, but we’re growing that to say a 6 and we’re seeing tremendous demand in all of our markets and a lot of those fields we’re sourcing off market. And I’m just looking at a pipeline right now we have $300 million worth of new industrial assets throughout Europe that we’re evaluating.

So, yeah, really excited about the growth in that platform..

Yeah. Great. Thanks for all the context there..

Okay..

The next question is from Derek Johnston of Deutsche Bank..

Hi. Good morning. KW expertise is distressed opportunities and specialist situations that really seem to have been elusive this cycle so far. There have been a lot of funds raised across the industry explicitly to target these scenarios.

I mean, has it gotten more competitive to source deals and if the government intervention really did eliminate a lot of distress this cycle, where do you go from here? Do you still expect to see some distress just be a bit more delayed and which of your core sectors stand out is likely having more opportunities office, multifamily or other banks?.

Yeah. Well, I think, they’re clearly hasn’t, except really two sectors, really the hotel and -- market and retail. All of the other asset classes, and of course, depends on where you’re at geographically and what governmental restrictions came down in terms of your ability to collect rent.

But other than those two asset classes, there hasn’t been really any distress to speak of. And I think it’s a combination of factors. It’s not just the government intervention and the rates being kept to low. But it also has been the banking system really has been in the best financial condition, frankly, that I’ve ever seen.

And so, most distressed markets, generally, are driven by the banks having challenges. But globally, at least the markets that we’re in the banks are well capitalized and in very good shape and so they were, I don’t know, if tolerance the right word, but they were willing to work with all other borrowers that may have had issues.

I don’t think you’re going to see a lot of distress in this market here over the next couple of years.

I think an awful lot depends what’s going to happen with interest rates and you can -- I’ve never been very good at forecasting that, but you can take any kind of wage you want today and where you think interest rates are going based on what you think or your expectations for inflation.

And so, I don’t see near-term any real distress and so our real opportunity is just the footprint that we already have in growth markets. And we’re very fortunate to be in the Western United States, where there’s significant job growth going on, that’s driven in large part by the tech sector and all the ancillary businesses to that.

You have very high barriers to entry in most markets that we’re in in terms of entitlements and scarcity of really good land. And I think the same thing is really true in Ireland and we have a very positive view on the recovery that’s going to take place in the United Kingdom.

And so, we’re -- as Mary said in her remarks, we’re redeploying some of the capital from the Friars Bridge sale at very attractive cap rates and per square foot prices. So that’s a longwinded answer, but I don’t see on the near-term, except for the two asset classes that I mentioned, I just don’t see much distress..

No. I mean, it all makes a lot of sense actually. And it’s a good segue kind of into my second question. So you mentioned developments targeting a 6% yield. What compression due to the highly elevated material costs and labor inflation, as well are you underwriting? So, I mean, is the impact, like, 100 basis points or 150 basis points in your opinion.

As I feel you would historically develop at higher yields? Really just trying to get a sense of possible multifamily development yield compression if you could? Thank you..

Very good question. It’s no news to anybody that you’re saying commodity prices across the Board to increase oil, steel, cop and everything. And so, but we’re lucky. We have really two extremely capable teams that run our construction -- construction side of our business.

And what we’ve always done on these projects is really lock in our costs before we start construction. And so a very, very, very high percentage of our construction is underway, already has the costs locked in and fixed. And in a lot of cases, we get a little bit ahead of ourselves in terms of ordering some of the key raw materials.

We might just have them sitting there on site or in warehouses. So we’re in very good shape on the cost side of everything that we’re doing right now.

The other advantage that we’ve had there is that the cost structures of building in the Mountain States particularly are much better than they are, for example, here in California and the land costs per unit are lower. And so, we’re very cognizant of the issues that you’re talking about. But -- then and when I say 6%, that that’s just a target.

I mean, as I said, Clancy, which is the largest individual multifamily project in Ireland, which is almost 900 units now. We’re stabilizing a super high quality property there at 7%. And so what we’ve always tried to do when we’re underwriting these things is start with a conservative number that we know we can achieve.

And then, hopefully, market conditions and rent conditions allow us to kind of outperform even our own expectations, so….

We’re seeing that actually, Clancy III, we are -- that Bill mentioned in his remarks at 70% let, we’re doing seven units a week ahead of budget. So as Bill said, those are target numbers.

But given the supply/demand dynamics and I think given that product that we’re bringing to the market, with the amenities and the professional management, and the locations are really critical. A lot of what we own is around outdoor space. We’re providing dog parks and kids areas to play.

So all these things that the market really needs, I think, people are really willing to pay for that..

Yeah. And I think to Derek to Mary’s point that she just made. I mean, to give you an example with the Clara in Boise, I can’t remember whether those March or April, in one of those months, we had -- we leased 67 units in one month. And all of those leases were done ahead of what we thought our initial underwriting was.

And so, to Mary’s point, and if you saw, if you could be on the ground and see Clara, it’s a super highly amenitized project. I mean, the main buildings in terms of a clubhouse, the fitness centers, the pools are just help the first class.

And so that’s really what we’ve tried to do both here and in Ireland is we amenitized these properties that are extremely high level.

And I would say to, again, just comp, not complimenting ourselves, but just to our construction management teams, our asset management teams, both here and in Europe, across all asset classes are really fantastic teams that have been together for a long period of time.

And I’ve said that the biggest thing not that I needed to relearn this, but going into this pandemic, where we’re all working remotely, the advantage of having the same team of people with us, that had been together in many cases for a couple decades.

In my case with Mary and I three decades, it took a lot of the mystery out of what we each needed to do every day. So, okay, that’s about it..

I think, Bill, just one last thing Derek, that asset management is what is giving us those value-add returns. So what we’re not necessarily seeing distress in our markets.

So we’re not making really the money when we’re buying a deal, let’s say, we’re not buying something at a big discount, but we’re adding the value and putting up what would seem to be value-add and/or returns that you would get in a distressed kind of market.

So that’s really -- the return is really being driven by growing income at these particular assets and then finding a spot and finding the right buyer to sell those and putting up in many cases 40% IRR. So I would say that’s really where we’re adding values to our asset management teams..

Great. Thank you, Bill and Mary..

Thank you..

The next question is from Sheila McGrath of Evercore ISI..

Good morning. Your Mountains State multifamily has outperformed significantly and California is more challenged. Just wondering once you re-stabilize the California multifamily, given the business climate in California and some out migration of businesses.

Would you consider lightening up on the California multifamily exposure and just allocating more capital to the Mountain States?.

Yeah. That’s a very good question, Sheila. I think that the California will make a comeback. It will come back big and I think there’s a lot of reasons that, we’ve faced some of the issues here in California that are not worth getting into a political speech about. But I think that you’re going to see, it always has and it will come back.

You have an extremely strong jobs base here in California.

What was really the biggest impact you’re in California, we operate in almost 16 different jurisdictions here in California was the, I would call it, sometimes confusing overlay of rules that were put down in terms of rent collections in those 16 jurisdictions and then rent collection decisions that were made at the state level and so, I think, that was one of the biggest issues.

But clearly over the last 15 plus years, our decision was made to diversify ourselves away from California that, but that decision was made 15 years ago. And so when you look at our foothold, for example, in the Seattle market, both in our market rate apartments, in our Vintage portfolio and in the office properties that we own in various vehicles.

They’re generally suburban Seattle. Very few were Downtown Seattle. But that decision that we made 15 years ago, where we’re now one of the largest property owners in the Seattle market was turned out to be an extremely sound decision.

Just as the decision we made, I think, the first deal we bought in Salt Lake City was probably 10 years ago, around there. And so we’ve always had this idea that we wanted to have diversification away from California.

But was primarily driven by what we saw going in South -- around Southern California, where you had saw fortune 500 companies being purchased by out of state companies. And so today you’ve got more fortune 500 companies located in Seattle as a headquarters than we do here in Los Angeles and so that was kind of what drove these decisions.

I would say that we’re -- we have two the Santa Rosa project that we’re going to build on here in California. We continue to look at California assets, but most of the assets we’ve been buying here in California have been in our fund business that Mary runs. And Mary, you might comment on..

Yeah. I mean, what -- we’re really focused on California markets, if we are going to buy in California that are surrounding, like, really tech centric areas. We’re seeing those certain sub-markets continue to grow. And we’re also seeing life science.

We just bought an asset in Fremont, California, one life science tenant that is looking to go public right now. So there’s a lot of great and positive really stories around life science and technology still going on in California. But we’re definitely being selective with what we’re buying..

I’m just going to ask if….

Okay..

I was just going to say that….

Okay..

…as of today roughly 20% of our NOI is in California and that’s down from over 50% if you go back five years or six years. Then if you look at the development pipeline, it’s roughly 10% California. So pro forma for that, we’re going to be down to 15%.

So, like, Bill and Mary said, we do strongly believe in those markets, but we have been redeploying capital out of California into the Pacific Northwest in the Mountain States over the past 10 years..

Right. I -- and I think, Sheila, the Matt -- point Matt’s making is, these were decisions that were really made 10 year or 15 years ago, it had nothing to do with the political environment in California or the pandemic. And….

Okay..

And I think we clearly learned, in addition to what I said about, our people at Kennedy-Wilson earlier that having divert, not product diversity, but having diverse geographic locations in this crisis or call it that we all went through here the last 15 months, served us really, really well.

And convinced me that, they’re -- not that I needed convincing that there are still more opportunities, Sheila, than in other I would call it smaller markets around the Western United States. And I think I mentioned earlier, we’re about to start a pretty good sized development with a partner in Bozeman, Montana.

And we -- we’ve -- we still see other markets in the Western United States that are as attractive or more attractive than California..

Okay. That’s helpful. And then just I know you touched on the industrials adventure. But you did double your investments the portfolio size there. Just talk about your thoughts on industrial KW’s history in that segment and were any of your U.S. funds invest in that property type.

Also, how were you able to source that kind of volume in Europe, when it is like the most sought after asset class?.

Yeah. No. Good question, Sheila. I just think the relationships that we have in that space. We’ve been doing deals in the industrial space since we really began in Europe. It was just a smaller part of our business. But we have really, really deep relationships in all those markets and the team’s done a great job.

And our focus really has been last mile well connected assets with low sight cover, established distribution locations. A lot of what we are buying is off-market. We’re executing very quickly, doing exactly what we say we’re going to do. So we continue to see a huge demand in the logistics space. I think, in Q1 in the U.K.

there was 9 million square feet of take up. So that we just continue to see major, major growth in those markets. And we’re seeing it as we’re redoing our leases with our existing tenants and are signing new deals. And we’re doing that oftentimes above what we underwrote.

So I think we’ll continue to grow that business, I’m sure of it, in Europe, and then in the U.S., we are looking to do deals as well, in a similar kind of fashion, sort of smaller boxes, where we’re assembling a portfolio, we’re looking at that in our value-add fund right now in the U.S., we have a couple of deals under offer.

Again, Mountain States really focused where the growth is going and that’s just, really those markets are booming in the logistics distribution space. So we’re excited..

Okay.

Last question, when is the Shelbourne opening and was it fully shut for all of first quarter?.

I love that you asked that. I can always count on you, Sheila, to ask about the Shelbourne. It was shut for all of the first quarter and we are going to be reopening. We’ve been effectively close for basically over a year and we’re focused on really the Irish traveler doing a lot of staycations.

But we have had a lot of international travel rebook into this year, later this year and 2022. So we have currently 11% of total room nights for 2021 are already spoken for it at pre-COVID rates. And then really, like I said, the beginning of the reopening will be focused on staycations.

And then as Ireland and Europe opens up, which we’ve been hearing about and we’re excited about, we think later this year, we’re going to see a lot more international travelers..

Okay. Thank you..

Thank you..

The next question will be from Jamie Feldman of Bank of America Merrill Lynch..

Thank you. I apologize if this has been addressed I got cut off for a little bit. But just to kind of take a step back, leasings picking up, while we’re seeing the headlines on return to office. I just want to get your kind of big picture views of what you think will really be different going forward, maybe focused on the U.S.

specifically?.

As far as office, Jamie, you mean?.

Yeah. I guess I should have been more clear. Yeah. Office usage and then also on the residential side, I mean, we’ve seen the flight to the Mountain Estates, do you think that’s permanent? Do you think there’s other cities in the U.S.

that maybe become more interesting to people as they look for lower costs of living and I saw Google’s have -- Google’s article in the journal this morning about or their press release yesterday that people can work from anywhere at least a certain percent? What does that do to like Midwestern markets or lower cost of living markets? Just curious where your head is given you see so much?.

Well, I mean, look, it’s just a personal belief that remote working will never last long-term. You just -- the things you’re missing without people being together are critical to any business succeeding. So I mean our company is no different than any, we’re reopening the office full time, June, beginning of June.

We’re going to start with a Tuesday, Monday -- Tuesday, Wednesday, Thursday policy.

But we all need to be in the office and we need to travel and we are businesses one that to you need to be with people and it’s still a little anecdotal conversations that we all know on this call that you have with peer or outside relationships that actually lead you to opportunities. So the office market is not over.

I do think that there are certain types of offices in the near-term are going to perform way better than others. And clearly the suburban, low rise, and when I say, low rise, I’m talking like under 10 storey type of building are going to perform better over time than the high rise center city kinds of locations.

And whether that’s a long-term trend or not, I don’t know. But I’m highly, highly confident that people are all going to go back to work.

And then you’ve seen the announcements from JPMorgan, Goldman Sachs and you can go on and on down the line, and the only ones that have made these, I would say, out of the box kind of comments have done the tech companies. And even those I don’t see long-term being completely remote.

I mean, yes, there might be a day, a week or two days a week where people work remotely, but eventually people will need to be together. As far as, so -- anyway, I’m positive, as far as the outlook for office, particularly suburban office low rise. And as far as other markets in the Western United States, I mean, we’ve gone into other markets.

We have our eyes on a couple that I rather keep to myself for now. We always like to get there first. But there’s a couple others that we think have real, real opportunities. And I would say too, in general, in the State of California, some of the best markets are ones that you might not have expected.

We have properties we own in Santa Maria, for example, which is kind of a coastal market, but that market has performed extremely well. And so I think even in the State of California, you’re going to see these suburban multifamily markets continue to do well, after all there’s 40 million people in the State of California.

They’ve got to live somewhere.

And I do think, though, it is a long-term trend that you’re going to see the 25-year to 35-year olds and the 55 and olders moving to more --people vote with their wallets and you’re going to see them moving to these more affordable markets that have lower tax basis, income tax basis and have lower rents, and in the mind of the individual have a higher quality of living.

So the markets that we’re in are, in my opinion, are going to continue to grow long-term..

Okay. That’s very helpful. And then I know it’s a ways off and may never ever happen.

But how do you think the repeal of a 1031 would impact real estate in general in your business?.

I mean, we were debating all that this morning. There’s a lot of negotiation that’s going to go on on this entire tax bill. How it’s going to turn out, I -- again, like, anybody, I have no idea. The 1031’s have been in existence since 1920. Although, there’s a lot of discussion around it.

The 1031’s impact a lot of industries besides the real estate industry, you’ve got the farm -- farmers, you’ve got all kinds of industries that it impacts. And so what ends up happening, I never try and think about things that I don’t know, what are -- what’s going to -- what the outcome is going to be. We are obviously mindful that it’s going on.

But I don’t know. It’s been around for an awful long time and we’ll just have to wait and see. I think that with the amount of capital though that is the -- wants to invest in real estate, whether the 1031 stays around or doesn’t stay around. It’s not going to have a big impact on values..

Okay. Thank you. I appreciate your thoughts..

And this concludes our question-and-answer session. I would now like to turn it back over to Bill McMorrow for any closing remarks..

Okay. Well, listen, as I said at the beginning of my prepared remarks, we appreciate the interest and the support that we get from all of you. And as I always say, any questions that you think have a follow-up, Mary, myself, Daven, Matt, Justin, any of us are here to continue the dialogue. So have a great day and thank you for your time today..

Thank you. The conference is now concluded. Thank you all for attending today’s presentation. You may now disconnect your lines. Have a great day..