2023-05-07 07:18:30 ET
Summary
- Kennedy-Wilson's stock trades near its 52-week low as concerns around commercial real estate have devastated the sector.
- Currently, the dividend yield is 6.4%, and the stock has meaningful upside based on its net asset value.
- KW's Office exposure is concentrated in Europe, where the dynamics are far better, with high occupancy rates and long lease-terms.
Kennedy-Wilson ( KW ) is a real estate development and investment company with concentrations in apartments, logistics, hospitality, and floating rate loans. KW has an excellent track record of being early into growing regions and asset classes, and then creating value through improving the buildings so that they can earn higher rents. The stock has suffered as higher interest rates have led to an increase in cap rates. While mostly a Multifamily operation, market participants might not be fully appreciating the different dynamics between KW’s European Office assets, compared to the Office market in the U.S., as they are night and day in terms of occupancy. KW has made major progress on its development pipeline and should really start harvesting those cash flows over the next two to three years, with capex having already peaked. Long-term investors looking to buy high-quality assets at a deep discount to intrinsic value should take a look at KW, where they get paid handsomely as they wait for a revaluation of the stock.
Kennedy-Wilson’s assets under management totaled $23B, which is up $5B since the end of 2020. Fee-bearing capital grew to $6B in Q1. Most of KW’s fee-bearing capital is from insurance companies and sovereign wealth funds with long-term investment outlooks. As banks have pulled back, there is a major growth opportunity for KW’s platform to acquire assets at attractive prices. Current distress is really the opportunity KW has been waiting for to grow this platform. Higher rates and spreads have resulted in very strong unlevered risk-adjusted returns in excess of 20%, inclusive of the management fees. Consolidated revenue increased by 6% on the back of higher levels of rental and hotel income. KW’s share of property NOI, loan income, and base management fees increased by 4% to $127MM in Q1, or $508MM on an annualized basis. This improvement in the key underlying trends that will drive future growth was temporarily offset by decreases in the level of non-cash unrealized fair value adjustments and performance allocations on a YoY basis. GAAP EPS totaled a loss of $.30 per share, and adjusted EBITDA was $91MM in the quarter.
The balance sheet ended the quarter with $349MM of consolidated cash and $249MM drawn on the $500MM line of credit. KW has taken steps to protect itself from rising interest rates, with 97% of debt either fixed or hedged. Less than 3% of debt is maturing this year and the weighted average maturity is 5.6 years, with an effective interest rate of 4.3% when considering the caps and swaps. KW has been patiently investing in its developments, which will ramp up in bearing fruit as the year progresses. Starting in July and through year-end, KW will be delivering nearly 1,500 multifamily units in the U.S. and Dublin, as well as the exciting 150-room Oceanfront Kona Village resort, which is seeing very strong bookings prior to its opening in July. A mixed-use property is also opening in Dublin, comprising 471 multifamily units and two office buildings totaling 400,000 square feet. Dublin continues to benefit from many leading Tech and other companies expanding there, so both office and apartment leasing remains strong. The majority of the development pipeline will be completed by the middle of 2024, and it is expected to generate $97MM of additional NOI to KW, 70% of which is expected to be stabilized by the end of 2024.
Multifamily represents 54% of the global portfolio and generates $270MM of annual NOI for KW. The portfolio holds over 32,000 stabilized units with another 5,000 units in lease-up or development that should add $45MM to multifamily NOI. The global market rate portfolio generated same-property revenue growth of 6% and NOI growth of 5% in Q1. Operating expenses increased by 8.4% due to increased labor costs, but were down 3% sequentially. At quarter end, in-place rents were 7% below market. The Mountain West and Pacific Northwest generated same-property NOI growth 9% and 10%, respectively. States like Utah, Colorado, and New Mexico are showing robust NOI growth, once again highlighting management’s ability to identify attractive markets early. In Dublin, KW has 50% ownership in over 2,500 units, with occupancy levels at 99%. Another 1,000 units are under development in Q3. In the vintage housing affordable portfolio, which totals 9,2000 stabilized units and another 2,400 in development, occupancy is 97% and same property NOI growth has been 5%.
Occupancy in the multifamily portfolio is a healthy 94% and the industrial portfolio is 98% occupied. 90% of KW’s apartment assets are suburban and are located in cities and states with lower costs. KW usually prioritizes upgrading the amenities in its buildings, providing a nice alternative for quality tenants that maybe just can’t yet afford a house. Both the U.S. and Ireland continue to face an undersupply of housing, which underlies the tailwind behind multifamily. KW was very early in going big in Mountain states such as Idaho, and by being early, it was able to buy cheap and benefit from rising rents. Industrial vacancy rates in the UK industrial portfolio were only 2.7%. The company completed 637,000 square feet of leasing with an average term of 7.6 years. These transactions produced rental growth ahead of expectations, with in-place rents growing by 50%. Management indicated that rents are 30% under market rates, providing a stable runway for future growth.
The majority of KW’s stabilized office assets are owned through partnerships and funds within the co-investment portfolio. The consolidated portfolio has 3.9MM square feet and is centered in attractively located and high-quality buildings, with modern amenities. The company completed 380,000 square feet of global office leasing through April with a weighted average term of 6.2 years, which is more than double the leasing activity from the same period last year. 70% of office NOI comes from European assets, predominantly in the UK and Ireland, which lack a supply of Grade A office assets. Those countries haven’t had a great deal of speculative development, so there is less of an overhang than in the U.S. Global same-store office NOI was up by 6%. The European office portfolio is in excellent shape with 95% occupancy, an 8-year weighted average lease term to maturity, landlord-friendly lease structures with 97% of office lease in Europe, fully repairing and insuring, similar to triple net leases in the U.S.
In Q1, KW completed $113MM of new debt originations in its debt platform. This is a very attractive business that earns high returns and puts the company in a position where in a worst-case scenario, they can take the keys to the property upon any default and then go to work improving it, which is what they do best. Since the IPO in 2009, KW has completed over $9B in debt investments. The company launched a global logistics portfolio in 2020, which has now grown to $1.7B. The company also deployed $60MM of capital into its development projects in the quarter, and over the last three years, KW has spent $500MM on these long-term projects. The company also sold $118MM of wholly owned assets, generating $82MM of cash to the company.
At a recent price of $14.98, KW is trading near its 52-week low of $13.97. In valuing the company, we will look at the individual components and then subtract the net debt. Total estimated annual NOI is $495.9MM, and I’ll use a 15x multiple to account for higher interest rates, which would equate to an asset value of $7.4385B. The lease-up, development projects, and residential portfolio has a gross asset value of $1.796B, which we will value at 1.25x, totaling an asset value of $2.245B. The investment management business can be tougher to value given that it is reliant on both management and performance fees, with the latter being highly variable. With $6B of fee-bearing capital and assuming just a 2% fee combined between management and performance, one gets $120MM of annualized revenue. If we put a 7x multiple on that, the value would be $840MM. The total asset value is $10.525B. KW’s total net debt at the end of Q1 was $7.459, which puts the NAV at $3.065, which would equate to an NAV per share around $22. I’d argue that these are very conservative valuations accounting for the higher interest rate environment, which has increased cap rates. I also believe there is enormous upside in the investment management platform, which has been the fastest growing area of the company. At 14.98, the stock yields 6.4% based on the $.96 annual dividend. Commercial real estate is out of favor right now and KW’s stock has suffered, but I believe the current share price offers a very attractive risk-reward framework for the long-term investor.
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Kennedy-Wilson's 6.4% Dividend Yield And Potential Upside Make For A Compelling Buy