KW - Kennedy Wilson

[giofranchi]

I have long thought KW deserves its own thread in the Investment Ideas section, and I have found this recent investment thesis about KW by Broyhill Asset Management. Imo it is very well done! A good way to start the discussion about KW. :)

 

Gio

KW-Kennedy-Wilson.pdf

[karthikpm]

They have been great partners with Fairfax and WL Ross - particularly in ireland and now in other areas. I sold my KW after holding for 3 years since I was worried about how much equity they have been issuing and consequent dilution.  I still think they are good operators.

[Guest hellsten]

Thanks. Pretty good report, but it was not always clear which countries in Europe they consider cheap.

 

I'm copy-pasting parts here, so I can offload my memory for better things:

* KW Services provides real estate services to property owners and lenders, with a focus on financial

institutions. This operating segment has five main lines of business - investment management,

property services, research, brokerage, and auction and conventional sales – which generate revenue

through recurring fees and commissions.

 

* KW Investments includes fund management and advisory services for portfolio investments,

property acquisitions and note purchases

 

Their track record seems good:

Since 1999, KW has generated an internal rate of return of approximately 40% and a 1.6x equity multiple on

97 realized investments before promoted interests. That last part is important. The nice thing about investment

companies that manage external capital is that if they are good at what they do, they benefit from both the

appreciation of their own capital and from sharing in the profits generated for its limited partners. This last

part can be substantial, particularly when one considers KW’s 40% average ownership interest across all

investments.

 

The deals in Ireland were done with Prem, and BKIR which I was following pretty closely at one point:

After scooping up distressed assets in the wake of the US housing crisis, KW made their first trip to Dublin

in 2010, amidst a highly distressed European banking system, and subsequently purchased the Bank of

Ireland’s real estate investment management division

 

Valuation doesn't seem low, but they expect NAV to increase 10% per year:

Given the company’s track record and timing of investments at home and across the pond, we think a 1.8x

multiple (including promoted interest), on the current book is conservative. Based upon the total shares

outstanding at year-end, this values KW Investments at $24. Adding $3 in short term investments, netted

against $7 in total liabilities gets us to a current net asset value of $20 and within spitting distance of the

stock’s recent low.

 

The report says Europe has a bright future. I would like to point out that Europe is not just UK, Spain, and Ireland.

 

At least one European country has very recently achieved the same as Japan in 1989:

 

The bubble in Japan reached its peak in 1989 as banks developed hundred-year mortgages

 

Great to see Europe reaching new heights, but I would be a bit worried about real estate values in (some parts) of Europe ;D

 

Spain is interesting:

we see a long runway for growth in European real estate investments as banks have just

begun shedding real estate loans and related assets

 

KW’s recent investments in Spain could be its most profitable venture yet.

 

In line with KW’s time tested business model, management dusted off the Irish playbook and launched its

operations in Spain in 2012 through the real estate auction business followed by a major strategic acquisition

last year.

[berkshire101]

KW is one of my larger positions.  Love the company and the management!  It's crazy how much their growing year over year.  I think they're fairly priced at the moment at around $25 per share.

[ItsAValueTrap]

If I had to invest in real estate, I would look at everything based on cap rates- unleveraged returns on invested capital.  Buy properties at high cap rates and sell them at low cap rates.  It's just like value investing.  Use leverage if you like.

 

If you calculate the cap rates for KW, you will see that they are atrocious.

[berkshire101]

If I had to invest in real estate, I would look at everything based on cap rates- unleveraged returns on invested capital.  Buy properties at high cap rates and sell them at low cap rates.  It's just like value investing.  Use leverage if you like.

 

If you calculate the cap rates for KW, you will see that they are atrocious.

 

High cap rates are great and such, but they're typically associated with lower quality assets.  It's the same with investing.  Most of the time, you do get what you paid for.  A city like Seattle has much better prospects than some small town in the middle of Ohio.  The demand is higher there thus the lower cap rate. 

 

With real estate, most of the money is made through leverage.  If you look at real estate historically, prices are flat adjusted for inflation.  If you can control a piece of real estate with minimal capital invested and have it cash flow then the returns magnify significantly.  The enterprise value of KW is $4.3 billion.  It's adjusted EBITDA was $261.0 million for the nine month ended in September 30, 2014.  That's around 17 times earnings?  They're growing earnings at +50% rates year over year.  Of course, they're issuing shares to grow.  But the company has been around for 20 plus years so I assume management knows what they're doing.  You don't just grow a company from $1 million to $2 billion in market cap without some competence right?

[Rainforesthiker]

Buy properties at high cap rates and sell them at low cap rates. 

 

Don't you want to buy properties at low cap rates and sell them at high cap rates?  :)

[ItsAValueTrap]

If I had to invest in real estate, I would look at everything based on cap rates- unleveraged returns on invested capital.  Buy properties at high cap rates and sell them at low cap rates.  It's just like value investing.  Use leverage if you like.

 

If you calculate the cap rates for KW, you will see that they are atrocious.

 

High cap rates are great and such, but they're typically associated with lower quality assets.  It's the same with investing.  Most of the time, you do get what you paid for.  A city like Seattle has much better prospects than some small town in the middle of Ohio.  The demand is higher there thus the lower cap rate. 

 

With real estate, most of the money is made through leverage.  If you look at real estate historically, prices are flat adjusted for inflation.  If you can control a piece of real estate with minimal capital invested and have it cash flow then the returns magnify significantly.  The enterprise value of KW is $4.3 billion.  It's adjusted EBITDA was $261.0 million for the nine month ended in September 30, 2014.  That's around 17 times earnings?  They're growing earnings at +50% rates year over year.  Of course, they're issuing shares to grow.  But the company has been around for 20 plus years so I assume management knows what they're doing.  You don't just grow a company from $1 million to $2 billion in market cap without some competence right?

 

If you invest based on cap rates, you are looking at fundamentals.  You are looking at the yield on your investment.  You are looking at undervaluation.

 

You are talking about buying real estate because its "market value" will go up and therefore you have paper gains.  Speculating on price appreciation is not the same as buying undervalued assets.

 

most of the money is made through leverage

I don't want to be the guy who mistakes luck for skill.  If you use dangerous amounts of leverage and make a lot of money, are you skilled or lucky?  I would say that you are lucky.

 

In my opinion, the skilled real estate investor is the guy who invests at very high cap rates and doesn't blow up.

 

You don't just grow a company from $1 million to $2 billion in market cap without some competence right?

 

If you have a dot-com company that goes to a $2B market cap, does it mean that you are skilled?  Again, I would say that the skilled real estate investor is the guy who invests at very high cap rates and doesn't blow up.  I would not mistake skill for the ability to raise capital (or the ability to get your share price higher).

[PB]

Anyone know if you have to deal with PFIC with KWE?

[bizaro86]

Buy properties at high cap rates and sell them at low cap rates. 

 

Don't you want to buy properties at low cap rates and sell them at high cap rates?  :)

 

Nope. Buy at high cap rates and sell at low cap rates (if your plan is to make money). $1000/year of net operating income from a property at a 10% cap rate would be worth $10,000. At a 2% cap rate it would be worth $50,000. Lower cap rates produce higher property values, which is why real estate often goes up with low interest rates.

 

 

[gfp]

I just got a note in my email that KWE is a PFIC, as disclosed in their prospectus.  An IRA would probably be a good place for it if you wanted to own it.  Also, as the email I received went to a bunch of people, heads up that there may be some brief heavy selling in this name tomorrow (lse:KWE and OTC:KWERF)

 

Anyone know if you have to deal with PFIC with KWE?

[gfp]

The morning after my last post here proved to be a good opportunity in KWERF.  Today there were some insider purchases in Kennedy Wilson.  I noticed the JV with Fairfax sold some of the japanese apartment buildings at a large gain.

 

CEO bought $250k worth -

http://www.sec.gov/Archives/edgar/data/901819/000140810015000098/xslF345X03/wf-form4_143164598361097.xml

 

CFO bought $50k worth -

http://www.sec.gov/Archives/edgar/data/1408100/000140810015000097/xslF345X03/wf-form4_143164596964341.xml

[no_free_lunch]

Just hit a 52 week low and off about 1/3 from their all-time high.  Is anyone still looking at this?  Is it worth the time to figure out?  I have done some basic research but with their relatively short history and most recent acquisition it is tough to figure out if they have been successful or not.

[berkshire101]

I have a own position.  It's a complicated company to analyze, but the story is getting better.  And with the recent KWE acquisition, the NOI is more wholly-owned so it's getting easier to analyze.  Hopefully within the next 1-3 years the valuation metrics will be similar to a traditional REIT. 

 

One thing I don't like is the compensation.  Management is a bit overpaid.  They have delivered on the numbers, just not the stock performance. 

[no_free_lunch]

Thanks bershire, maybe I will have a deeper look.

 

I am okay with the share price doing it's thing, I won't fault management for that.  However, are you comfortable that IV per share has been going up?  I guess NOI has been but it looks like BV per share has been fairly stagnant.  I am just not sure if the book value reflects reality or if it is artificially depressed due to assets held at cost.  I have gone through the investor presentation a bit but honestly they could be more transparent.  Too much focus on NOI and not enough on NAV in my opinion.

 

This is a bit of a special situation right now, with the takeout of KWE they have really complicated things (for the short term).  This is not necessarily a bad thing for the actual company.  It is entirely possible that this has created an opportunity.

[berkshire101]

Thanks bershire, maybe I will have a deeper look.

 

I am okay with the share price doing it's thing, I won't fault management for that.  However, are you comfortable that IV per share has been going up?  I guess NOI has been but it looks like BV per share has been fairly stagnant.  I am just not sure if the book value reflects reality or if it is artificially depressed due to assets held at cost.  I have gone through the investor presentation a bit but honestly they could be more transparent.  Too much focus on NOI and not enough on NAV in my opinion.

 

This is a bit of a special situation right now, with the takeout of KWE they have really complicated things (for the short term).  This is not necessarily a bad thing for the actual company.  It is entirely possible that this has created an opportunity.

 

With real estate, you calculate NAV mostly based on cap rate.  NAV is calculated as NOI divided by cap rate. So stated book value on the balance sheet isn't a real reflection of NAV since real estate held at cost basis.  Typically real estate appreciates overtime, but the cost basis can be reduce with depreciation. 

 

KW has been complicated in the past since they didn't own 100% of their properties the majority of the time.  It was mostly held in private equity funds.

 

They have more debt with the KWE acquisition, so NAV dropped quite a bit.  But hopefully that gets reduced overtime with the refinancing and paying down.

 

Operationally, NOI growth has been the best in the industry.  And they're one of the first to enter their markets to take advantage of the recovery and value add. 

[morob]

https://www.valueinvestorsclub.com/idea/kennedy_wilson_/141055#description

 

this is a great and recent write-up on KW

[BPCAP]

$16.50...what's wrong with the company, if anything?  At this price, I'm finally going to do a deep dive. 

 

What's the biggest risk or drawback on the company?  Barron's thinks it's Brexit exposure.  At first glance, it looks like higher interest rates with a big debt load (debt is generally under 5 years and must be refinanced). 

Thoughts?

 

 

[StevieV]

$16.50...what's wrong with the company, if anything? 

 

I recently initiated a position.  So, hopefully, nothing is wrong with the company.  I believe it is being hit by rate concerns.

[BPCAP]

I don’t like how compensation  is tied to EBITDA.  EBITDA is “BS” earnings in most cases, and in real estate, there are heavy “I”, “D” and “A” expenses.  Especially for a biz like this, what’s important is how management increases net worth per share.  I’d like that to be the measuring stick, or at least a see real return on investment used.  EBITDA should not be the measure, or adjusted EBITDA, it’s uglier version.

[Spekulatius]

Several value funds own this and some think it’s a great business. I don’t like the higjly levered balance sheet. Their properties generate $406M in NOI and supposedly have a NAV of $7.7B, implying a 5.2% cap rate. Seems pretty rich, but a lot of it  is residential RE, which is richly valued right now. $5B in net debt or 12x NOI make me cringe. They do have a RE asset management business that generates cash flow, but still. based on above posts, I assume that management is incentivized to grown the company fast and not so much to reduce debt.

 

I can get comfortable that this is a safe stock too hold due to its leverage.  Credit rating is BB+.

[Viking]

CVS, ENB, KW

 

Viking,

 

Any thoughts on how and to what extent the virus will impact KW's business?  More multi-family in their portfolio than anything, but still have commercial and retail exposure.  Multi-family should be less impacted, but some changes from people shifting where they live.

 

Possibly some opportunities as well.

 

SteveV

 

KW is a starter position for me. They have made a lot of money for FFH over the years (investing in real estate not through the shares - which is a watchout). They look well positioned to benefit if we get a correction in some real estate segments; they are very opportunistic with lots of deep pocketed partners (insurance and pension companies). But as with all things real estate it will likely take years to play out.

 

In the very near term they will continue to be impacted by covid. The path of the virus is still unknown so its ultimate impact on their various business segments and results will take time to be seen. They have some exposure to hotel, retail and commercial. My guess is the 35% drop in the share price discounts a chunk of that risk.

 

It normally takes me 6 to 9 months to decide if i like a company/business and i am just getting started with KW. I like the 6% dividend (get paid as i learn) although i am not sure how safe it is (it was not discussed on the Q2 call so my guess is it is somewhat safe).

 

If interest rates stay at zero then more and more companies/pension funds will be searching for yield. This should be good for real estate as a category. And benefit companies like KW who also have assets they are looking to monetize. If they are able to make a few assets sales earnings (and shares) should improve. They are trying.

[no_free_lunch]

I hate to post links to something behind a paywall but I would recommend this article.  Does a good job of breaking KW apart, covers history and attempts to be neutral from what I can see.  The article pegs NAV some where in the $22-23 range with that price likely moving beyond $25 once covid abates.  If CAP rates grind down then that is just gravy.  Downsides include their inability to fully cover the dividend the past 9 months and high leverage.

 

I have no position in KW, other than via my small FFH exposure.  However, it does seem like a stock that at some point could move 50+% up.  I might make it a small position.

 

https://seekingalpha.com/article/4387495-update-on-kennedy-wilson-still-fairly-attractive