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Text: This is Devan Bhavsar, and joining us today from Kennedy-Wilson are Bill McMorrow, Chairman and CEO; Mary Ricks, President; Matt Windisch, Executive Vice President; and Justin Enbody, Chief Financial Officer.
Please see the Investor Relations website for more information.
I'm very pleased with our strong third quarter results, which saw EBITDA -- adjusted EBITDA increased over 165% compared to Q3 of 2020 and the record results we have posted for the first nine months of the year.
Adjusted EBITDA totaled $741 million thus far in 2021, compared to $261 million for the first nine months of 2020.
We've made tremendous progress this year on our two key initiatives, growing our in-place annual NOI and growing our fee-bearing capital.
We had a very active quarter, completing $1.8 billion of investment transactions, bringing our year-to-date total to $4.4 billion.
Our assets under management has grown by 17% in 2021 to a record $20.5 billion, from $17.6 billion at the end of 2020.
We have a strong pipeline of new transactions that we expect to close by the end of the year, which would further increase our AUM and result in a record year of capital deployment for KW.
I'd like to start by providing some perspective on what we are seeing in our markets, as real estate fundamentals continue to improve in the quarter.
Global transaction volumes remain healthy, with Q3 volumes in the U.S. increasing 150% from last year's levels, according to Real Capital Analytics.
Institutional demand for real estate remains high, with trillions of dollars of capital globally that continue to search for sound risk-adjusted returns.
2021 operating metrics continue to improve for us.
In our U.S. market, we saw continued impressive apartment rent growth, with rents increasing at one of the fastest rates in recent memory across all our regions.
Investor demand for high-quality rental housing remained very strong and has resulted in cap rate compression and further increases to the value of our real estate portfolio.
Our Mountain West apartment portfolio, which is our largest region, with almost 11,000 units, outperformed once again, driven by very attractive migration trends and relative affordability.
We also saw significant improvements in our Pacific Northwest and California portfolio, as pandemic-related moratoriums began to burn off, and we expect meaningful rent growth in all of these areas over the next 15 months.
In Europe, we saw outstanding performance in our U.K. and Dublin properties.
On July 19, the U.K. removed all COVID restrictions.
And in Dublin, essentially all travel reopened on July 26, and we saw a gradual return to office that we expect will accelerate over the next six months and have a positive impact on our portfolio.
Strong leasing demand in our Dublin multifamily portfolio resulted in occupancy growing by over 400 basis points in Q3 to 96.6 occupancy.
The key acquisitions in the quarter were three wholly owned with multifamily assets totaling 879 units that we acquired for a total of $399 million.
Two of these assets are located in suburban Seattle, and the third asset is located in suburban Denver.
We look forward to implementing our value-add programs at these communities, which has consistently shown our ability to drive outsized returns.
Our multifamily portfolio globally grew to a record 33,400 units at quarter end, including almost 5,000 units under development, which we expect to complete at yields well above current market cap rates.
We're on track to increase our global unit count to 35,000 by year-end.
Mary will speak later on the impressive growth of our European logistics portfolio.
Our Q3 transactions grew estimated annual NOI to $413 million, an increase of $19 million in the year, and we increased our fee-bearing capital to $4.8 billion, representing a 23% growth year to date.
I'm also pleased to announce that yesterday, our board of directors authorized a 9% increase to our quarterly dividend, which now annualizes to $0.96 per share.
Looking ahead, I believe the key drivers of our business will be -- are well positioned with our multifamily portfolio, the reopening of our European markets, the growth of our investment management platform, and the completion of our development projects.
Before we discuss these initiatives in more detail, I'd like to pass the call over to our CFO, Justin Enbody, to highlight our Q3 financial results.
In Q3, we had GAAP earnings per share of $0.47 per diluted share, compared to a loss of $0.18 in Q3 of last year.
Adjusted net income in the quarter grew to $112 million, compared to $27 million last year.
And adjusted EBITDA grew to $203 million in the quarter, compared to $76 million in 2020.
For the year, we've had GAAP earnings per share of $1.96 per share, adjusted net income of $424 million, and as Bill mentioned, adjusted EBITDA of $741 million, representing record results for the first nine months of the year.
In our co-investment portfolio, which includes our unconsolidated funds and joint ventures, we continue to see appreciating asset values, driven by strong NOI growth and further cap rate compression.
This strong performance led to $79 million in gains and $46 million of accrued performance fees in the quarter.
For the quarter, including promotes, total adjusted fees were $56 million, up from $8 million in Q3 of last year.
Turning to our balance sheet, in August, we issued $600 million of unsecured bonds maturing in 2030.
The proceeds were used to fully pay off our line of credit, as well as the remaining $296 million of our KWE bonds due in 2022, which was completed in October.
We have significantly improved our maturity schedule, with no unsecured debt maturities until 2025 and nothing outstanding on our $500 million revolving credit facility.
Our debt has a pro forma average interest rate of 3.6% and a weighted average maturity of 6.5 years, which has improved by 2.5 years since the beginning of the year.
During the quarter, we bought back $25 million of stock at an average price of $21.55.
Since the beginning of 2018, we've now returned $750 million, or approximately $5.40 per share, to shareholders in the form of dividends or share repurchases, which includes repurchasing 15.7, million shares or approximately 10%, of our outstanding share count.
We still have $213 million on our $500 million buyback authorization remaining, a portion of which was utilized in October.
Our global multifamily portfolio continues to outperform, due to our market selection and our hands on asset management style.
Our assets are experiencing improving market conditions, lower delinquencies and increasing rents.
Positive migration trends and affordability continue to create outsized demand, in particular for our Mountain West portfolio, which saw same-property revenues grow by 11% and NOI grew by 15%.
We think there remains strong upside in our Mountain West portfolio, where average rents are $1,366 per month, and as people continue to seek a higher quality of life and migrate out of higher rent, higher tax states.
We are also starting to see improving trends from our Pacific Northwest and our California assets.
Offices began to reopen, which has been a positive for renter demand.
Rent concessions in the U.S. were down 63% in Q3 compared to Q3 of 2020, and we saw leasing spreads average a record 27% on new leases across our U.S. portfolio.
We also continue to work with our tenants and take advantage of the rent relief measures that are available.
The combination of these factors resulted in robust same-store revenue growth across our U.S. market rate multifamily portfolio of 8% and NOI growth of 12% versus Q3 of 2020.
This represents our best quarter of NOI growth in the last five years.
Sequentially, from Q2 of this year, revenues grew by an impressive 6% and NOI by 8%.
In-place rents in our U.S. portfolio are now 6% above pre-pandemic levels.
And with an average loss to lease of 15%, we believe our portfolio is set up for strong growth in 2022 and beyond.
Similarly, at our Dublin apartment portfolio, we continue to see strong demand, as people begin returning to the city.
This led to Clancy Quay being stabilized in Q2.
And currently, Capital Dock is 77% leased and on track to be stabilized in Q4.
Overall occupancy is now returning to pre-pandemic levels in Dublin.
In addition to the mega-cap tech companies that have been large employers in Dublin for many years, other high-growth tech companies are looking to expand their presence in Dublin, such as Stripe, TikTok, ServiceNow, and First Data.
We continue to believe in the long-term prospects of the Irish apartment market, driven by a young and growing population.
Additionally, there are a large number of multinational companies with their European headquarters in Dublin, with a workforce that is more likely to rent than buy.
Turning to our office portfolio, as tenants begin to return to the workplace, we are seeing improvements in the operational environment, including a growing number of firm requirements, requests for tours, and deals being executed.
Quality in both design and construction and staff wellness continues to be an important factor as tenants are drawn toward amenity-rich buildings with ESG credentials.
Thematically, we continue to focus on office tenants in high-growth and essential business sectors, including life sciences, media, and technology.
When you include our suburban apartment and growing logistics assets, we believe this thematic approach positions our overall portfolio well for future cycles.
A great recent example is at one of our largest office assets, 111 Buckingham Palace Road in London, where by October, we transacted on approximately 100,000 square feet of lease transactions, including 20,000 square feet under offer, which in total represents 45% of the building.
These transactions will improve the occupancy significantly, from 80% to 100% in Q4, deliver 26% growth above in-place rents and 40% of the income at pre-COVID top rents in excess of GBP70 per square foot, compared to 15% in Q3 of 2020.
Major tech firms represented 80% of the new leases, illustrating that top tenants are active in the market and willing to make decisions for the right space.
71% of our office NOI is from our European portfolio, which saw Q3 same-property revenue grow by 4% and NOI grow by 5%.
These results were driven by strong rent collections, lower bad debt, and the burn-off of free rent in the quarter.
With an even larger focus on employee retention, large corporate tenants are taking advantage of the benefits of modern, low-rise suburban offices, such as affordability, shorter commute times, and outdoor amenities.
We continue to see this play out in our own portfolio, with approximately 90% of the NOI from low and midrise properties.
We completed 585,000 square feet of leasing in the quarter, bringing our year-to-date total to 1.5 million square feet, with a WALT of 7.6 years.
Our leasing pipeline remains strong, with 152,000 square feet of leasing completed thus far in Q4 and another 600,000 square feet in legals that we're actively working on closing out, giving us good momentum heading into next year.
Turning to our investment management platform, we continued to see strong growth in the quarter, with our fee-bearing capital growing to $4.8 billion.
This has now increased over 160% since the beginning of 2018.
Our fast-growing global credit platform continued to lead the charge in Q3.
In July, we announced a new GBP500 million commitment focused on European loans, bringing total global commitments to $3 billion.
In Q3, we completed $440 million of loan investments, including our first loans in Europe on a few large industrial portfolios.
Our debt platform grew by 24% to $1.4 billion in loans outstanding, with $140 million in future unfunded commitments.
We've been able to attract institutional-quality borrowers with high-quality assets to our debt platform, with an average loan size of $70 million and weighted average maturity of four years.
We continue to see a strong macroeconomic environment in the European logistics sector.
Occupational demand has driven vacancy to an all-time low in the U.K. of 3.4%, and yields continued to compress across Europe, due to accelerating rent growth.
Our thesis from the start when we launched this platform was that last-mile logistic properties in close proximity to transit centers would have strong demand, as they allow for companies to get their products to the end customer in an efficient manner.
COVID has accelerated the thesis, as online sales penetration continues to grow, with online sales making up 28% of total retail sales in the U.K.
Our industrial portfolio has grown rapidly, and including assets under offer, our portfolio has a gross value of approximately $1.1 billion today across 59 assets, with KW's share at approximately 20%.
We look forward to further growing both our debt platform and our logistics platform in the fourth quarter and continued expansion of our investment management business, which has, in total, $2.1 billion in future commitments from our various strategic partners.
Another important area of growth for KW will be the completion of our development and lease-up projects, where we continued to make progress throughout the pandemic.
Our developments, totaling $2.7 billion at cost, are being delivered with strong sustainability credentials, with environmental improvements and tenant wellness at the center of our focus.
Once these assets are completed and stabilized, we expect an incremental $105 million of estimated annual NOI to KW, which represents an initial yield on cost of approximately 6%.
We are nearing completion of two office properties in the heart of Dublin, Hannover Quay and Kildaire Street, which total 134,000 square feet that are expected to complete in Q4 and Q1, respectively.
We remain on track to complete the majority of our construction projects in 2023 and 2024, on time and on budget.
Last month, we announced a new project that we are extremely excited about in a public-private partnership with Cal State Channel Islands.
We are going to develop 589 residential units as part of a master-planned community in Camarillo, California.
The project will have 310 wholly owned market-rate units, 170 affordable units built through our vintage housing joint venture, and 109 for-sale townhomes sold by Comstock Homes.
This development sits adjacent to a 386-unit wholly owned community, which we acquired in 2016.
A project of this nature was a natural fit for KW, given our broad multifamily expertise in developing both market-rate and affordable units.
We are aiming to complete construction in 2024 and look forward to breaking ground in Camarillo later this month.
With that, I'd like to pass it back to Bill.
As you can see that we have a combination of ways to further drive earnings and cash flow growth at Kennedy-Wilson.
As I mentioned on the last call, we have a clear path to grow our stabilized NOI at the rate of 10% to 15% a year over the next three years, driven by strong organic NOI growth, new acquisitions, and the completion of our construction.
We also plan to grow our fee-bearing capital and resulting fees by 15% to 20% per year over the next three years.
The combination of these factors should lead to significant growth in both our net asset value per share and our assets under management.
As we look ahead to 2022, I'm very optimistic in our ability to continue expanding our business for a number of reasons.
First, business conditions have rebounded as economies reopen, and we have a very healthy transaction and financing market, perhaps the strongest we've seen in the last decade.
Second, over the last 18 months, we either grew or establish new investment platforms with well capitalized, extremely liquid, global strategic partners who have a keen desire to expand their relationship with Kennedy-Wilson.
We can now creatively allocate capital across the entire capital structure and in a wide range of asset classes.
Finally, our global investment team remains intact, and our global communication has never been better.
I'm very pleased with the progress our team has made not only in Q3, but over the course of 2021.
I'm also reminded of the importance of long-term relationships, both internally and externally to KW.
Although I'm biased, we have an exceptional global team that has been working together for decades and our internal communication, as I mentioned, is the best it's ever been.
This fact, combined with very high-quality properties in the right product category, located in diversified and growing markets, has set up KW for excellent long-term growth.
And with that, Daven, I'd like to open it up to any questions.

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kennedy-wilson holdings inc - qtrly earnings per share $0.47.

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