KW - Kennedy-Wilson: Office Is Different In Europe

2023-03-24 05:16:52 ET

Summary

• Kennedy-Wilson is an underfollowed real estate asset management company that has significant growth potential.
• Their office holdings are misunderstood and may be overshadowing their valuable multifamily portfolio.
• Kennedy-Wilson offers geographic exposure to markets not otherwise available through other publicly traded real estate companies.

Per our routine, I walked into Dane Bowler's office late this morning and inquired, "What are you working on?' He replied that he was trying to understand why Alexandria Real Estate Equities' ( ARE ) share price was continuing its precipitous decline. This is a typical exchange in our offices, but, in reality, it was Fed Day and we were just burning time until Jerome Powell delivered the 25 basis point rate hike everyone was anticipating.

The exaggerated decline in shares of productive growth companies like ARE is a real curiosity and this circumstance stretches to dozens of issues. Consider Camden Property Trust ( CPT ), the multifamily stalwart whose shares fell below $100 today. Or how about American Tower ( AMT ) whose shares traded north of $303 in 2021 but somehow, in our ever-expanding telecommunications economy, closed today at $192. My nature gravitates to the obscure, so Kennedy-Wilson ( KW ) comes to mind and that is what we will talk about now.

I first stumbled upon Kennedy-Wilson in the summer of 2021 because Apartment List had identified Boise, Idaho as the volcanically hottest apartment market in an overheated US apartment market. KW was, and remains, the only publicly traded real estate company with significant exposure to the Boise market. KW shares traded as high as $25.30 in March of 2022, as low as $13.97 in the last 52 weeks, and settled today at $16.11.

Kennedy-Wilson is something of an enigma among real estate companies and defies classification. It is not a REIT, it identifies under the REOC (Real Estate Operating Company) acronym, but if it was a REIT it would be relegated to the diversified REIT category. By KW's own description, they are 54% multifamily, 30% office, 7% retail, and a miscellaneous remainder of retail, hotel, and industrial. They are geographically 62% western United States, 18% Ireland, 17% United Kingdom, with the balance in Spain and Italy.

Complicating things further, Kennedy-Wilson is a growing asset manager, akin to Blackstone ( BX ), Brookfield Asset Management ( BAM ), and KKR & Co. ( KKR ). At the close of 2022, Kennedy-Wilson boasted $5.9B Asset Management AUM for which they provided real estate equity investment and lending platforms.

Why are shares in decline?

This posed question was the premise of the article and I've struggled to answer it. Historically, diversified REITs have claimed to experience less than full valuation of their share prices because, for example, even though they were 50% industrial (the hottest sector), they were 50% something else. It occurs to me that while KW is more than half multifamily (a coveted sector), they are 30% office (the real estate pariah); maybe the office stink overrides the apartments' rising cashflow.

It's different in Europe

While office grows progressively more frightening, a late February Wall Street Journal article leads me to believe that office vacancies are not necessarily a global trend. It seems that in Europe and Asia, multi-generational families living in smaller homes than we enjoy here in the States are, post-pandemic, more willing to report back to the office for duty. While KW is 30% office, they are materially Irish and UK office.

Europe accounts for fully 69% of Kennedy-Wilson's $145MM office Net Operating Income and it is supported by long duration, net leases.

As for US office exposure, KW has assets in CBD San Francisco and Los Angeles, but their leases and occupancies are currently strong. If Kennedy-Wilson's office portfolio is the source of its depressed share price, it might be misplaced and overweighted.

Multifamily

A chart above describes that Kennedy-Wilson has interests in more than 37,000 apartment units. KW's multifamily portfolio is both domestic and international and within ubiquitous housing shortages, all markets demonstrate strong housing demand.

Though KW is not identified as a multifamily REIT, it has the portfolio to rank high among that set.

Kennedy-Wilson's 37,781 apartments would rank it eighth in the list of multifamily REITs above. Also of note, its Mountain West and Dublin geographic footprint doesn't really fall into the Venn diagram of any of the apartment REITs. If you want to blanket the housing demand of a broader globe, KW's markets present a unique, otherwise unavailable piece to the puzzle.

Valuation

With a $2.2 billion market capitalization and a scatter shot investment focus, Kennedy-Wilson has not garnered nor maintained much analyst coverage. Its gyrating earnings history looks more like a private equity firm than a REIT. Today's closing share price values KW at a 28.6% discount to current "consensus" NAV. KW's $0.96/share dividend translates to a 5.95% yield, far superior to the multifamily REIT average and REITs in general.

Contrasting Kennedy-Wilson against a multifamily or diversified REITs is an apples and oranges comparison, at best. Considering their business lines, targeted geographic markets, and capital resources, I believe the NOI growth that KW management forecasts could be realized. I am long and, at $16 a share, I will likely get longer.

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