Kennedy-Wilson - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 headline results were weak on GAAP due to fewer asset sales and non-cash items: total revenue $128.3m, GAAP EPS -$0.30, and Adjusted EBITDA $98.2m (vs $203.2m in Q1 2024 driven by a $106m gain last year).
• Operations and fee engine improved: Baseline EBITDA rose 5% YoY to $108.3m; investment management fees grew 17% YoY to $25.0m; same-property multifamily NOI rose 4.3% on occupancy and rent gains.
• Balance sheet actions are a 2025 catalyst: management expects >$400m of asset-sale/recap proceeds in 2025 (≈$200m targeted for Q2) to reduce unsecured debt (including KWE notes due November); 96% of debt fixed/hedged; weighted-average rate 4.7% and maturity 4.8 years.
• The investment platform continues to scale in rental housing credit: $724m Q1 originations with >$1b Q2 pipeline; fee-bearing capital stands at $8.7b; UK/Ireland financing conditions supportive (recent €-portfolio refi at ~4.1%).

What Went Well and What Went Wrong

• What Went Well

  • Fee momentum and core earnings power: Baseline EBITDA up 5% YoY to $108.3m; investment management fees up 17% YoY to $25.0m as credit platform originations accelerated. Quote: “We deployed or committed approximately $1 billion of capital in Q1… pipeline totaling $2.5 billion… all within the rental housing sector” — CEO Bill McMorrow.
  • Multifamily fundamentals: same-property NOI +4.3% YoY on 0.6 pts occupancy and 3.1% revenue growth; blended leasing spreads +1.5% with renewals +3% and new lease rents flipping positive from Q4.
  • Liability management progress and hedging: completed $510m (JV share) Irish apartment refi at ~Euribor+1.95% (~4.1% current), 96% of debt fixed/hedged, WAM 4.8 years; $5m cash received from hedges in Q1 (not netted in interest expense).

• What Went Wrong

  • GAAP optics and YoY comp: GAAP EPS -$0.30 vs $0.19 in Q1 2024, largely due to the non-repeat of prior-year gains on sale (Q1’24 had $106.4m gain) and non-cash charges; Adjusted EBITDA fell to $98.2m from $203.2m YoY.
  • Revenue miss vs consensus: SPGI consensus revenue $227.1m vs actual $128.3m; SPGI Primary EPS consensus -$0.19 vs reported GAAP EPS -$0.30 (Primary EPS methodology differs). Values retrieved from S&P Global*.
  • Credit spread pressure: management noted 30–40 bps spread compression amid more competition from insurers/banks/private lenders, though underwriting quality remains high.

Transcript

Operator (participant)

Good afternoon, and welcome to the Kennedy-Wilson First Quarter 2025 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Daven Bhavsar, Head of Investor Relations. Please go ahead.

Daven Bhavsar (Head of Investor Relations)

Thank you, and good morning. Thank you for joining us today. Today's call will be webcast live and will be archived for replay. Replay will be available by phone for one week and by webcast for three months. Please see the Investor Relations website for more information. With me today are Bill McMorrow, CEO; Matt Windisch, President; Justin Enbody, CFO; and Mike Pegler, President of Europe. On this call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA and adjusted net income. You can find a description of these items along with the reconciliation of the most directly comparable GAAP financial measure in our First Quarter 2025 earnings release, which is posted on the Investor Relations section of our website. Statements made during this call may include forward-looking statements.

Actual results may materially differ from forward-looking information discussed on this call due to the number of risks, uncertainties, and other factors indicated in reports and filings with the Securities and Exchange Commission. I would now like to turn the call over to our Chairman and CEO, Bill McMorrow.

Bill McMorrow (Chairman and CEO)

Thanks, Daven, and thank you, everybody, for joining the call. Yesterday, we reported our results for the first quarter of 2025, reflecting a solid start to the year and continuing the momentum we saw in 2024. Justin will discuss our results in detail in just a moment. We deployed or committed approximately $1 billion of new capital in Q1, driven primarily by originations within our credit platform. Activity has picked up in Q2 with our current committed pipeline totaling $2.5 billion of loan originations and real estate equity acquisitions, all within the rental housing sector. That should drive our total capital deployment to $3.5 billion for the first half of 2025, compared to $4 billion for all of 2024.

During the quarter, we saw strong fundamentals within our rental housing business and continued growth of our investment management fees, while making progress on a number of non-core asset sales and recap initiatives, a meaningful portion of which should be completed in Q2. I will discuss this in further detail in just a moment. On today's call, I'll review our portfolio and the progress we've made across our 2025 strategic initiatives, and in particular, our asset sales and unsecured debt reductions. Starting with our portfolio, assets under management have grown by 26% in the past two years to $29 billion, producing approximately $575 million in estimated annual NOI and fees to KW. Rental housing, our core sector, represents 66% of our assets under management, comprised of approximately 65,000 units that we either have an equity ownership interest in or are financing.

We expect this sector to grow to over 80% of our assets under management over the next three years. Real estate market fundamentals continue to see an improvement in Q1. In the U.S., real estate transaction volumes increased by 23%, and we have not seen any material changes in sentiment in Q2. We believe the best risk-adjusted returns are found in the rental housing sector, given the demand tailwinds driven by a housing shortage across all KW markets, single-family affordability issues, and declining new supply that began in 2024 through a combination of absorption and fewer new construction starts. This healthy backdrop was evident in our Q1 results, where we were able to increase our same-property multifamily occupancy to 95% and grew same-property revenue by 3% and same-property NOI by 4.3%. Capital deployment in Q1 was focused primarily on rental housing credit.

We completed an additional $725 million in new loan originations, 100% of which relate to construction of new multifamily or student housing projects. Our debt business is on track to surpass $6 billion in new loan originations since we completed the purchase of the reg ional bank portfolio in the summer of 2023, making KW one of the top construction lenders in multifamily and the student housing sector. We also completed approximately $200 million of real estate acquisitions, which related to the expansion of our U.S. apartment and European single-family rental and industrial platforms. Investment management growth continues to be a key initiative for KW. Fees grew by 17% in Q1 to $25 million. Over the last 15 years, we have extensively grown our group of strategic partners to include some of the world's largest institutional investors, spanning North America, Asia, the Middle East, and Europe.

Our longtime partners, who are very well capitalized, are actively looking to deploy capital with KW across both equity and debt investment opportunities at an increasing rate. Given our strong Q2 pipeline, I am confident of our ability to reach our fee revenue growth targets of 20%-25% annually. As market volatility has increased this year, we are also seeing a corresponding increase in attractive investment opportunities. With our own capital base and the support of our major global strategic partners, we are well positioned to capitalize on any opportunities that may emerge. This approach has served us well over the last 35 years, where we have demonstrated our ability to navigate periods of uncertainty similar to what we see today. Shifting to our asset management sale, our asset sale program, the disposal of identified assets is an important focus in the near term.

In Q1, we progressed a number of sale and recap initiatives, keeping us on track to generating between $400 million-$450 million of cash from asset sales and recaps by year-end, including $150 million-$200 million we currently expect to close by the end of Q2. These proceeds will be used to reduce our unsecured debt, including our KWE bonds due in November, which we have already paid down by $250 million over the last two years. We will also look to reduce our line of credit balance while also recycling capital into higher return opportunities in our investment management platform. We are entering the second quarter with an existing portfolio that is well positioned, a strong pipeline of activity centered around rental housing, simplifying our business through asset sales, delivering the balance sheet, and increasing free cash flow.

Importantly, we believe we have a best-in-class team that is well-equipped to drive growth across our core platforms and rental housing, credit, and industrial. With that, I'll turn the call over to Justin Enbody.

Justin Enbody (CFO)

Thanks, Bill. I'll begin with a review of our Q1 financial results and then discuss our balance sheet. GAAP EPS for the first quarter totaled a loss of $0.30 per share compared to income of $0.19 per share in Q1 of 2024, which included $0.47 per share related to the sale of the Shelburne Hotel. Baseline EBITDA for Q1 came in at $108 million, a 5% increase year over year. This brings our trailing 12-month baseline EBITDA to $412 million. Our consolidated or co-investment portfolio is now 90% comprised of multifamily, industrial, and credit investments that we own with partners. In Q1, this portfolio saw minor valuation increases, primarily as a result of positive cash flow growth from our multifamily assets. Turning to our balance sheet, as Bill mentioned, we anticipate reducing our unsecured debt in the near term as we execute our asset sale plan.

In particular, we have $330 million remaining on our final tranche of our KWE Euro bonds, which mature in November. Additionally, we have $200 million of cash expected from Q2 asset sales and recap activity that is well underway. We also have $163 million of consolidated unrestricted cash and $277 million of undrawn availability on our $550 million credit facility. Looking at our 2025 secured maturities, in Q2, as previously announced, we successfully completed a $510 million refinance of our Irish apartment portfolio with a rate today of 4.1%. As a reminder, our Irish apartment portfolio is owned in a partnership that's 50/50 with AXA. The strong demand received for this financing reflects the underlying strength and asset quality of our best-in-class portfolio of apartments in Dublin. This maturity represented approximately 40% of our 2025 secured mortgage maturities entering the year.

We are actively working through the remaining 25 secured maturities, which represent only 3.5% of our total debt. Our total debt is 96% fixed or hedged, with a weighted average maturity of 4.8 years and a weighted average effective interest rate of 4.7%. Interest rate hedges generated $5 million of cash received during Q1, which, as a reminder, are not included as an offset to interest expense. With that, I'd now like to turn it over to Matt Windisch for a portfolio update.

Matt Windisch (President)

Thanks, Justin. Our stabilized portfolio generates estimated annual NOI of $473 million and remains highly concentrated in rental housing and industrial, which together account for 72% of our stabilized NOI. We anticipate that these two sectors will grow as a percentage of our overall NOI as we look to expand within these two asset classes through both our real estate and credit platforms, while also disposing of non-core assets. Our apartment investments continue to be the foundation of our portfolio. Since 2010, we have completed over $15 billion of apartment transactions. In the U.S., strong apartment demand was apparent in Q1, as seen through growth in both occupancy and rents. Blended leasing spreads increased to 1.5%, including 3% growth on renewals. Importantly, on new leases, the change in rent flipped from being negative in Q4 to positive in Q1, with an improvement of over 300 basis points.

Our apartment portfolio is well positioned as we head into the strong summer leasing months due to a number of factors. The loss to lease totals 3.3%. We continue to see solid leasing traffic at our properties, and the challenges of the availability and affordability of single-family homes is creating strong tenant retention. In fact, in Q1, turnover was some of the lowest on record, with an annualized rate of 28% compared to 35% in Q1 of 2024. Let me highlight a few regional stats. Our Pacific Northwest portfolio saw the strongest NOI growth of 6.6%, with our assets in and around Seattle benefiting from return-to-office mandates from the likes of Amazon and others. We also saw declining real estate taxes in the quarter. The Mountain West has seen the strongest population supply pressures, I should say, in our portfolio over the last two years.

The majority of the supply has now been delivered, while new starts have fallen to a decade low in many markets, which should be supportive of future rental growth. In California, our portfolio continues to recover, with our Q1 results driven by reduced delinquencies and the highest same-property occupancy growth across our portfolio. Complementing our market-rate portfolio is our 13,000-unit vintage housing affordable portfolio. As a reminder, this portfolio utilizes low-income housing tax credits for the development of high-quality rental housing for families and seniors below median income levels in their respective counties. In Q1, we achieved 5.5% NOI growth, primarily as a result of higher median incomes, as well as lower levels of bad debt. We continue to actively look for opportunities to expand our affordable housing portfolio, given the growing need for accessible housing across all of our markets.

In Ireland, same-property NOI in our apartment portfolio was up 3.5%, driven by occupancy growth and strong operating expense management. Our stabilized portfolio is 99% occupied, with our one remaining lease-up asset, which is 75% leased as of today and on track to stabilize in Q2. Our portfolio here is comprised of 3,500 high-quality, highly amenitized Class A units that continue to benefit from the long-term structural undersupply of housing. Moving over to our office portfolio, our stabilized assets remain resilient with an occupancy of 90%. Same-property NOI grew at almost 1% in Q1. 75% of our portfolio is located in Europe, primarily in the U.K. and Ireland, where office dynamics are healthier than the U.S., with stabilized occupancy totaling 92%. In Dublin, office leasing saw the strongest Q1 activity in the last three years. The Irish economy was once again the fastest-growing economy in the Eurozone in Q1.

Our high-quality Irish stabilized office portfolio has a robust occupancy of 96%. At our Cooper's Cross asset, momentum remained strong after signing Wells Fargo as our first tenant in January. We anticipate continued demand for modern, well-located, sustainable space driven by return-to-office mandates and limited new supply. In the U.K., viewings for our available office space continue to pick up, with leasing completed in Q1 resulting in a 17% increase from previous rents. We continue to remain confident in the continued demand for our high-quality space, with our largest two London assets essentially with no vacant space. Turning to our investment management business, Q1 saw $25 million in fee revenue, which is an increase of 17% from the prior year, reflecting strong performance in our credit platform and continued growth in our equity platforms.

Fee-bearing capital currently stands at $8.7 billion and is positioned to grow meaningfully as we have capital that has already been raised or committed that we expect to deploy during the balance of 2025. For example, in our credit platform, we have $4.5 billion in future fundings. We expect that capital to be funded over the next couple of years, and as we put it to work, it will be reflected in our fee-bearing capital base. During the second quarter, we expanded our credit solutions to include mezzanine debt and preferred equity investments through a partnership with a large Japanese developer, Tokyu Land, in which our ownership in the platform is 10%. This strategic expansion enhances our ability to capture growing opportunities within the credit space, particularly within our key core sectors, and supports the continued growth of our investment management platform.

We also have incremental investment capacity in our new U.K. single-family rental platform, which we launched in Q4 alongside our partner CPPIB. This platform is currently targeting $1.3 billion in assets. We have a strong pipeline in advanced stages totaling $375 million, which would bring the platform to over 40% committed in a few short months. We are already seeing strong demand from our initial delivered units and look forward to scaling this platform and providing much-needed high-quality housing in the quarters ahead. In closing, we continue to make progress in our initiatives, including executing our non-core asset sale plan, reducing leverage, and simplifying our company by focusing in on our core sectors of rental housing and industrial. We have also laid the groundwork to continue scaling our capital-light investment management platform. With that, operator, we can open it up to Q&A.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then One on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Anthony Paolone with JPMorgan. Please go ahead.

Anthony Paolone (Executive Director)

Thank you. First question relates to fee-bearing capital. I think you mentioned that you still feel strongly about the 20-25% annual growth. Just wondering about your conviction level of achieving that this year when you kind of look out and you talked a bit about the pipeline of capital to be deployed, but not sure what you're also getting paid back on to kind of net to that growth.

Matt Windisch (President)

Yeah, Tony, I think in terms of the number that Bill put out there on fees, that's really a growth in fees as opposed to specifically fee-bearing capital. We grew at 17% quarter-over-quarter here from Q1 to Q1. We do believe, based on the pipeline we have and the future funding, that we will be able to achieve that growth in fees. As we mentioned before, the future funding commitments do not show up in fee-bearing capital, so there can be timing differences on payoffs and when money is funded. Between the recurring investment management fees, origination fees, etc., we do feel comfortable with that number we put out there.

Anthony Paolone (Executive Director)

Okay. Got it. Just as liquidity comes back to CRE, can you comment on your partner capital costs or required returns and the ability to continue to lend if it gets competitive? Do their capital costs come down as well? Do you feel like you can move with the market if things get more competitive?

Matt Windisch (President)

Yeah. I mean, we have a healthy pipeline of deals. We have already signed up some of those at lower spreads than we were able to achieve a year ago. We definitely have, certainly in Q1, seen more competition from life insurance companies, banks, and some other private lenders. I think that is where the relationships come into play. There is a lot of repeat business we are doing with existing sponsors and borrowers. We do have some flexibility. We have moved pricing down somewhat. We still think we will be competitive in the space. It is a fair point. There has been a bit more competition. Historically, some of these lenders are more active in the first half of the year, and then they run out of allocations.

If you look at last year, for example, we had a lot more in terms of closings in Q3 and Q4 when some of these lenders were stepping away from the market. We feel confident, given the relationships and the platform, that we can continue to grow this business.

Anthony Paolone (Executive Director)

Okay. And then just last one, if I can. Where does the stock buyback fit in right now, if at all, just especially given that it sounds like you're going to have a pickup in dispositions here in the next couple of quarters?

Bill McMorrow (Chairman and CEO)

I think, Tony, it is a good point. I mean, we still have capacity left in that program. The focus of our cash usage right now is to focus on paying back our unsecured debt and particularly the 2025 bond. When you think about it in totality, we will have continued to grow the company, and we will have paid back close to $800 million worth of unsecured debt by the time we get that done, including the line of credit. I think that is where we are planning on using most of our cash. We will just have to see. If the stock continues to behave like it has and we have gotten through the 2025 payoffs, then that is clearly something that we would reconsider because we obviously think that the stock is highly undervalued at the current prices.

Matt Windisch (President)

I would just add to that, Bill, that I agree that the discount seems significantly overdone given that two-thirds of our portfolio sits in multifamily, and the private market valuations remain in the low fives. Certainly, in the private market, we've seen no movement over the past couple of months, even with all the public market volatility. If you think about the NAV gap that we see out there, I think as we continue to simplify the business, reduce leverage, grow the fee business, and grow the recurring cash flow, we hope to see that gap shrink. As Bill said, depending on the size of the disposition program, if we can get above our targets, I think there'll be some excess liquidity to potentially utilize the stock buyback.

Anthony Paolone (Executive Director)

Okay. Thank you.

Operator (participant)

The next question is from John Agalon with Bank of America. Please go ahead.

John Agalon (Analyst)

Hi. Thank you. Just going back to the dispositions for the $150-$200 million expected to close this quarter, can you let us know how much already is closed? or a little bit more around timing, any color around kind of potential cap rates? You mentioned you may be looking to do even more than $400 million this year. Just curious if that's already being marketed or put out in the sales process.

Bill McMorrow (Chairman and CEO)

Yeah. Good question. I will start by answering it slightly differently. As I said in my remarks, the capital deployment piece of that, that's the loan originations and particularly the multifamily assets that we're purchasing right now. Those are all contractually obligated right now. You are going to see all of that close here in the second quarter, which was somewhere around $2.5 billion, which I think to the point that Matt made, some of that, although it is unfunded, there are some portions of this that will immediately become fee-bearing capital. On the disposition side, I would answer that by just telling you we are well down the road on the Q2 dispositions, but almost all of those are going to close in the latter part of June.

John Agalon (Analyst)

Thank you. Anything around kind of the cap rates on that?

Bill McMorrow (Chairman and CEO)

I'd rather not really comment on that because until they're a reality and they're done, it's really not appropriate to comment on that. I would say that in general, I think that particularly in the apartment sector, there is plentiful global capital that is chasing multifamily. Like us, most people see the supply declining, particularly here in the U.S. and in other markets. We all see the issue of housing affordability on the purchasing side, particularly with the Fed making the decision that they're going to continue to maintain this level of interest rates, which is actually very surprising to many of us. You've got car loans interest rates at a historic high. You've got housing interest rates at pretty much a historical high. You've got credit card rates at a historical high.

It is forcing people to make a decision to rent rather than buy. We think there are really, really good tailwinds around our multifamily business.

Matt Windisch (President)

I would just add one thing to that. Part of the disposition plan relates to European assets. The interest rate environment, the U.K. just cut rates. They have cut rates in the eurozone a couple of times now. We are dealing with a slightly different interest rate environment for some of the assets that we have on our plan. Our hope, which we think will prove out, is that you will see favorable cap rates on those when we exit, just given the different interest rate dynamics in some of those markets.

Bill McMorrow (Chairman and CEO)

Yeah. That's really an important point Matt just made. I think when you think about the AXA transaction, to keep repeating this, the significance of it, there were 35 banks and lending institutions that bid on that financing in Europe. To his point, we closed that financing with two banks, but the interest rate is 4.1%, which is at least 100-150 basis points below what you would be doing similar financing here in the U.S. Given the uncertainty, it's very interesting. I think that the United Kingdom and Ireland, which is performing so exceptionally well, the country of Ireland, they're being viewed really in Europe as a safe place to park capital.

John Agalon (Analyst)

Great. Thank you for the time, Bill and Matt.

Operator (participant)

The next question is from Omotayo Okusanya with Deutsche Bank. Please go ahead.

Omotayo Okusanya (Managing Director and Head of US REIT Research)

Hi. Yes. Good afternoon. First question around loan origination. Can you just give us a sense of what rates you're originating loans at right now and whether that has changed at all over the past few quarters?

Matt Windisch (President)

Yeah. Yeah the rates. We have seen the past few quarters have been pretty steady. If you kind of look at where rates were maybe a year ago, and in particular, coming into the beginning of this year, we have seen definitely some downward pressure on spreads to the tune of 30-40 basis points on average. What we have seen, though, is the quality of the projects that are being built, the quality of the sponsorship, all of those things remain at the very, very high level. Just given a bit more competition, there is some pricing pressure. We do think the spreads we are achieving in this business are still very strong relative to alternatives in the credit space. Obviously, we are very wholly focused on the residential side of things, student housing and rental apartments. We feel very strong about the business.

There has been some pricing pressure, but we still find it very attractive.

Omotayo Okusanya (Managing Director and Head of US REIT Research)

Gotcha. That's helpful. In this quarter, just the loan prepayments as well just seemed like a little bit higher than I think we're typically used to. Just kind of curious why you're kind of sort of increasing prepayment speed. Is there anything thematic going on there?

Matt Windisch (President)

Yeah. I'd say from the construction lending business, the prepayments were as expected. We did have one pretty large payment on actually an office loan that we had originated several years ago that we got paid off on, which was about $200 million. That was, I'd say, somewhat out of the ordinary in terms of what we'd see going forward. That landed in Q1, which pushed the payoffs up a bit. In terms of the construction lending side, it was as it is kind of what we anticipated in terms of payoffs.

Omotayo Okusanya (Managing Director and Head of US REIT Research)

Yes. That's helpful. The affordable housing piece of your business on the vintage side, is there any exposure to things like Section 8 housing or Section 8 vouchers or things that may ultimately get impacted by some of these changes being made by the Trump administration?

Matt Windisch (President)

Yeah. Good question. There are really two parts to, I'd say, the reliance on government benefits in this business. The first relates to the financing of the projects themselves. This really has to do with private activity bonds and tax credits. There was some initial concern that this could be in play, but our understanding now is there is very little to no concern around the availability of private activity bonds in this space. We feel very comfortable with tax credits and the bonds being available in the markets we operate in. The second part relates to rental assistance payments through HUD. There is a portion of the portfolio, it's a relatively small portion of the portfolio where our tenants are using Section 8 housing. From our understanding, there could be—we have not seen anything, any impact to date, none.

There's a potential for some slowness in payments given cuts to the employment at some of these agencies. We don't have any short-term or medium-term concerns about the capital coming into our tenants and their ability to pay rent. We're not overly concerned about this, but it is something we're monitoring very closely.

Omotayo Okusanya (Managing Director and Head of US REIT Research)

Could you cite the exposure by any chance?

Matt Windisch (President)

About 15% of the tenants have some sort of HUD backing.

Omotayo Okusanya (Managing Director and Head of US REIT Research)

Okay. On that side of the business. Okay. Thank you very much.

Matt Windisch (President)

Just in the affordable space we're talking about, yeah. 15%.

Justin Enbody (CFO)

That's at 15,000 units, right?

Matt Windisch (President)

Correct. That's right.

Omotayo Okusanya (Managing Director and Head of US REIT Research)

Thank you.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Bill McMorrow for any closing remarks.

Bill McMorrow (Chairman and CEO)

Thank you, everybody, for joining the call. As always, we're always available to talk to anybody offline. Thank you very much.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.