Founded in 1988, Kennedy Wilson (KW) is a global real estate investment company with 350 employees across 17 offices and which has created three public companies in the US, Japan and the UK. Kennedy Wilson Europe was established when the company acquired Bank of Ireland Real Estate Investment Management in 2011.
The company predominantly owns multi-family (apartments) and office assets across the western US, London and Dublin and offers real estate services to institutional and financial companies across the globe. The group has c.$9.5bn of gross assets under ownership and a further $3bn+ of assets under management on which they collect a fee.
KW’s asset base is no better exemplified then by reviewing their Dublin portfolio which includes the Shelbourne Hotel, Capital Dock, Baggot Plaza, Clancy Quay and Vantage, Central Park. We estimate that KW’s Irish portfolio is both larger and superior in quality to that of Green REIT (Ireland accounts for 23% of the group’s portfolio). The quality of their stock is consistent across their global portfolio.
Kennedy Wilson is both chaired and led by William McMorrow who bought the company in 1988 when it had just $57,000 of capital. Mary Ricks, who was previously CEO of KW Europe, is the group President.
Included in KW’s portfolio are c.29,000 apartments, 192 commercial properties and several hotels. Combined these assets generate close to $500m in gross rental income and c.$36m in EBITDA from 5 owner-operated hotels. In total, they have over 50m square feet of real estate under ownership or management (a significant portion is owned).
In 2017, KW made an approach and subsequently combined with Kennedy Wilson Europe to create a multi-billion global diversified real estate company. The company saw value in Kennedy Wilson Europe as its shares traded at a steep discount to NAV and sterling had sold off post the Brexit referendum, which created an opportunity. The acquisition was paid for in shares and a cash consideration.
We estimate that KW is on course to deliver $410m (or approximately $500m in gross rent) of operating income from its tenanted real estate assets in 2019. Given the low vacancy and high-end asset quality, applying a conservative 6.25% gross yield we estimate a valuation of $8bn to KW owned assets. In addition, KW owns a further c.$300m of hotel assets and c.$1.2bn of development assets. With no consideration for an uplift in asset value for completed developments as they are fully let. We estimate that their current owned real estate portfolio extends to $9.5bn in value.
In addition, KW’s third-party advisory and services arm, which has $2.4bn of fee bearing capital, generated $71m of fee income in 2018. Applying an 8x EBITDA valuation for this division would imply a valuation of $300m. Combined with its real estate assets, the listed KW vehicle could conservatively be worth up to $9.8bn.
With an estimated $5.5bn in net debt estimated for year-end 2019, of which 94% of its debt is at a fixed rate (3.9%) or hedged with 5 years to maturity, KW’s estimated net asset value (NAV) by August 2020 is $4.3bn. This implies that KW is trading at a c.29% discount to NAV based on a conservative valuation approach. We see strong rationale for the $250m buyback that is ongoing given the buyback should create value for shareholders over the medium term.
We would therefore use the weakness in KW to pick up their shares which we view as offering c.20% total return over the next twelve months with a 4% annual dividend payable quarterly.
Darren McKinley is Senior Equity Analyst with Cantor Fitzgerald Ireland.
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