Kennedy Wilson Europe looks too cheap

Its activity since then has been little short of frantic, and by the end of 2014, it had spent all the money raised at the IPO and in October that year raised a further £351m through a share placing. Another £565m of acquisitions were made in the first quarter of this year, and a subsequent valuation put the total portfolio value at just over £2bn.

To understand how a newcomer can spend £2bn before it's a year old, we have to look a little deeper. KWE is managed by Kennedy Wilson Investment Management, a wholly owned subsidiary of Kennedy Wilson Holdings, a New York-listed real estate and services business with more than $17bn (£10.8bn) of assets under management. That gives it access to a lot of expertise, and KWH has already shown its investment touch by picking up cheap assets soon after the financial crash sent prices reeling.

It's not surprising then that KWE has been similarly adept at picking up undervalued assets this side of the pond. The business plan is simple. Buy under-managed assets, which are usually non-core to their owners (usually a bank or receiver), refurbish them and secure a higher rental income when the lease expires. It also adheres to the maxim that a property is worth selling if you think it's too expensive to buy.

Typical of the sort of acquisitions it has been making is the non-performing loan secured against the freehold interest in a 184,000 square feet mixed use development in Ilford, east of London, it recently bought for £68.5m. That's a hefty discount to the unpaid principal balance of around £149m. And with vacancies to fill, there is scope for improving the rental income, on top of which, the complex is ideally situated to benefit from Ilford's own Crossrail station that opens in around four years.

KWE is also active in Ireland, where the opportunity to pick up cheap assets is considerable, and Irish property, principally situated in and around Dublin, now accounts for about a third of the total portfolio. The source of much of the property is the National Asset Management Agency, which was set up as a bad bank for distressed assets, and still has around £10bn of property on its books. Last month, KWE secured a deal with Bank of Ireland in which the bank will rent a refurbished and extended site in Dublin covering more than 129,000 sq ft at €47.5 (£34.1) per sq ft on a 25-year lease. The value of this deal can be seen from the fact that KWE expects a yield of 8.6 per cent on an expected cost basis of €550 per sq ft, compared with recent prime yields of 4.75 per cent and capital values of €975 per sq ft.

Group finances are in pretty good shape. As well as the two equity raising exercises, it has borrowed money cheaply, with a weighted average interest rate of 2.6 per cent; pretty good when stacked up against a gross yield on the portfolio of 6.5 per cent. Debt has risen since the end of 2014, but the loan-to-value ratio was a modest 29.2 per cent at the end of March. However, with such a low cost of borrowing, president and chief executive Mary Ricks has indicated that she would be prepared to see the LTV ratio rise to a maximum of 50 per cent. Including cash holdings that implies an additional investment capacity of £700m, according to broker Davy Research.

At the pace that the group is expanding, it's not an exact science forecasting future earnings, but rental income is expected to rise from £66.4m in 2014 to around £140m in 2016. The decline in forecast pre-tax profits includes an estimate of a reduced uplift in the value of the property portfolio, as asset inflation starts to level off.