Summary
- The last 2 years were less spectacular than the previous decade, but the company is steadily carrying out its plans.
- Kennedy-Wilson has positioned itself well to benefit from coming lower cap rates.
- My estimate of normalized owner earnings (or AFFO) is ~$2, so the stock looks quite attractive trading at $14-15.
- Compared to many REITs, the expected returns are higher, but so are the debt levels.
Almost 2 years ago, I took a closer look on Kennedy-Wilson (KW). In the article, I highlighted many positive aspects from the company's history, and I'd like to revisit how the story has changed over the last 2-3 years. The financial reports are fairly consistent since the last corporate reorganization in 3Q2017, so they can be used for a detailed evaluation (unlike the older reports).
"Sell simplicity, buy complexity" still seems to be the name of the game if one ponders replacing cash or typical REITs with KW. In the meantime, the company entered several joint ventures that do not make the analysis any easier, mostly related to its asset management business: e.g. the AXA platform for apartment rentals development and the newly started platform for acquiring loans. They also issued convertible preferred stock to Eldridge in the process. Note that the conversion price is $25, way above the current share price of ~$15, and the full effect of the conversion would be an increase in share count of less than 10%, so I will ignore the potential dilutive effect in my calculations.
Insider ownership is still high. Apart from the new outside investor Eldridge Industries mentioned above, Fairfax (OTCPK:FRFHF) still holds its 9% stake and cooperates with KW closely; for instance, the new real estate debt platform is mostly financed by Fairfax. The CEO considers $14 a price to buy and acquired 75,000 shares in August 2020, in addition to the more than 10 million he already owns.
Fee-bearing assets under management increased from $2 billion to $3.8 billion over the last 2 years, tracking closely the goal of adding $1 billion a year. This growth, however, is not translated into fees; the reported quarterly fees from asset management wildly fluctuate between $30 million and $80 million because most of the fees are performance-related and thus dependent on timing of asset sales.
Per share NOI, which grew from $1.23 to $2.90 between 2014 and 2017, has not increased since then (and naturally suffered the coronavirus hit in 2020, but that is likely to be reverted soon).
Share repurchases are ongoing and scaled appropriately according to the share price. In 2018, $175 million was invested at $18 per share on average, in 2019, it was $21 million at $21, and in 2020, $44 million below $15. The problem is that share-based compensation has a run rate of $30-35 million a year, and thus, only the rather large buyback during 2Q2018 had a meaningful effect on reducing share count.
