A New Stock Idea
We have another European real estate play. The venerable US real estate investment and services firm Kennedy Wilson (KW, est. 1977) just over a year ago spun off its European investment operations into a new London listed entity, Kennedy Wilson Europe plc, KWE on the main London Stock Exchange, and KWERF on the pink sheets. The ipo raised £1 billion of equity, the 2nd largest London real estate ipo ever. KW is based in Greenwich (CT).
The new share is what to buy, benefiting from some existing holdings parent KW made earlier in Britain, Ireland, Jersey, and Spain, and also from external management by KW's services arm. KW services manages real estate for outside owners and has experience in arms-length dealings. KW is the major shareholder in KWE. There are also Japanese property investments totally owned by parent KW for now. Initially, US KW owned 13.4% of KWE. This has fluctuated since.
The new KWE group was set up in Jersey, a tax haven, to generate cash-flow and capital gains for its shareholders, including KW. Its first acquisition occurred almost immediately, of 14 properties around Britain about which few details were released. Since this left the shareholding by parent KW of the US at 12.2%, it probably did not come from the US KW property portfolio but from an outside firm.
A month later KWE acquired a high quality mixed use portfolio of 26 UK properties in an off-market transaction totaling approximately £144 mn which included unleased sites. This counted as the KWE seed portfolio with 5 retail properties, 7 office properties, a warehouse, and 13 industrial estates. The price was ~£223 mn, but again the seller's name was not given. In the interval, KW of the US bought a further 1% of KWE. Then in May it took a new tack, buying a portfolio of 5 real estate loans from Lloyd's Bank along with claims on the assets backing them, called the Avon portfolio
In June KWE bought the Fordgate Jupiter Portfolio in the U.K., the Central Parkand Opera property portfolios in Ireland, and the Liffey Trust Building in Dublin in separate deals costing a total of ~£685 mn (including some £202 mn of assumed non-recourse debt).
In Sept. it bought the Elliott portfolio of real estate funded by another troubled UK bank, Royal Bank of Scotland. We know RBS because we own preferreds of the 82% govt-owned British bank. As a result, the ipo funds had all been invested.
So in Oct. a secondary raised more money to invest and further booted the parent KW stake to 14.9% of KWE, presumably to support the offering. The fluctuating KW stake in KWE, a mark of the link between the two, is a strength rather than a weakness, in my view.
As of the secondary, KWE had portfolio assets of £1.2 bn on which it generated income of £85.3 mn. The total portfolio amounted to 6.4 mn sq ft, and was 89% occupied. The breakdown by country was heavily skewed to the UK and Ireland (accounting for 69% of the properties by valuation). However KWE stressed its plans to move on Spain and Italy for future deals. Like banks in Britain and Ireland, those in continental Europe also have non-core real estate holdings they need to cash out of, for which KWE is the logical buyer.
Along with real estate diversification, KWE also improved returns. Leasers of the former Lloyd's holdings (properties at Luton and Croydon airports near London) got extensions at terms improved for KWE and less good for Conoco Phillips (COP) and DHG. Presumably similar upgrades are in store under other renegotiated leases.
KWE's most recent huge bold deal was buying a mixed-use real estate portfolio of 180 UK properties from the property finance sub of Aviva plc, a major British insurer, in a transaction totaling £503 mn ($758 million). KWE closed the acquisition on 163 of the 180 properties, with value at ~£444 mn ($669 mn). The remaining 17 properties will close subject to conditions. Funding for the deal will mostly come from a secured loan from Aviva itself, for £352 mn ($530 mn). More than half the properties acquired are in England, predominantly in London and the southeast, the hottest UK markets, mostly (62%) in retail, food, and convenience stores. The rest consists of leisure, industrial, office, and hotel sites.
There followed a purchase at a £61.5 mn for a portfolio of hotels with a gross yield on cost of 9.3% funded from KWE cash, a bargain. The distressed seller had bought a hotel portfolio in 2006-7 just in time for the global financial crisis for £131.5 mn and owed £99.8 mn. The package includes 7 Park Inn hotels in England (Northampton, Lakeside, Telford, Bedford, Harlow, Birmingham West, and Nottingham) and one in Wales (Cardiff) totalling 1,107 rooms. The hotels are leased to Rezidor Hotel Group (REZIF) until 2030. Rezidor is a Nasdaq OMX Stockholm exchange-listed hotel firm, majority owned by Carlson which owns Park Inn and Radisson hotel brands, and retains another dozen UK Park Inns and 155 globally.
Since its Feb. 2014 listing, KWE bought a total of £1.9 bn ($2.9 bn) in properties which collectively generate ~£130 mn ($196 mn) of net rental income, according to the secondary offering. We do not yet have a KWE annual report for 2014. To end-2014, according to the parent KW annual report, KWE acquired 82 direct real estate assets with ~6.6 mn square feet and 5 loan portfolios. This total of $2.4 bn in purchases KWE currently expects to produce $141 mn of annualized net operating income (net rental income for property portfolios, EBITDA for hotels and interest income for loan portfolios). Parent KW gets management fees from KWE, half in the form of KWE shares, equal to 1% of KWE’s adjusted net asset value. This was $2.1 bn on Dec. 31. The Aviva and hotel deals are not included.
KW also may get performance fees but none were paid in 2014. However, KW collected $14 mn in management fees, half of which were taken in KWE stock. KW ended 2014 owning 14.9% of KWE.
Bloomberg estimates that the current price of KWERF is 12.5x earnings and the forward p/e ratio a delicious 10.9x. The current yield is 2% paid quarterly from profits. This is a speculative stock in part because it is a start-up, in part because we lack a full year report. It was downrated to hold from buy by Deutsche Bank which cut the price to a tempting level. There are 135 mn shares out of which 114 mn float in London and on the pinks.
In Friday KWE, in London in 1500 share lots, was costing GBX 1103 (UK pence). That comes to nearly $25,000 so I prefer to buy the pink sheet share in the USA, where KWERF trades around $16.50, about 107% of book value.
Disclosure: None.