Shares in Kennedy Wilson Europe Real Estate (KWE) floated on the London Stock Exchange in February 2014 and since then the company has expanded breathlessly, so that by June 2016 its property portfolio had more than doubled to £3.06bn from December 2014. This meteoric rise was financed by £1bn of equity raised on flotation (the second-largest real estate initial public offering), debt financing and share placements.
- Shares trade well below net asset value
- Modest debt to equity
- Adept at picking up undervalued assets
- High occupancy rates
- Aberdeen assets under pressure
- UK recession would hit capital values
Investors have been more than willing to stump up the cash. They like the business model, which relies on acquiring under-utilised properties - more often than not from the receiver or a hard-pressed bank - then refurbishing them and sweating them for maximum rental income.
True, the UK's eventual departure from the EU is likely to hit property values, but Kennedy Wilson has no exposure to the City of London or Canary Wharf, and financial service tenants account for a tiny percentage of net operating income. Besides, since the referendum, it has already secured 12 new lease deals generating rental income of £0.9m and around 42 per cent of the portfolio is located in Ireland, Spain and Italy.
Management has also been savvy enough to build liquidity through disposals. In the first half it balanced acquisitions of £173m in six properties with £166m generated from selling over 30 properties. This helped build liquidity of £609m at the end of June. And the company's bosses reckon there are plenty of investment opportunities, especially as some open-ended real estate funds need to sell quickly to meet demand for redemptions.
| KENNEDY WILSON EUROPE REAL ESTATE (KWE) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,011p | MARKET VALUE: | £1.37bn | |
| TOUCH: | 1,009-1,011p | 12-MONTH HIGH: | 1,253p | LOW: 877p |
| FORWARD DIVIDEND YIELD: | 4.8% | TRADING PROPERTIES: | £147m | |
| FORWARD DISCOUNT TO NAV: | 30% | NET DEBT: | 76% | |
| INVESTMENT PROPERTIES: | £2.76bn | |||
| Year to 31 Dec | Net asset value (p) | Property income (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2014 | 1027 | 44 | 25.9 | 13 |
| 2015 | 1198 | 116 | 47.9 | 40 |
| 2016* | 1316 | 145 | 51.1 | 48 |
| 2017* | 1451 | 156 | 60.1 | 48 |
| % change | +10 | +8 | +18 | nil |
Normal market size: 500 Matched bargain trading Beta: 0.3 *JPMorgan Cazenove forecasts (underlying NAV and EPS) | ||||
Ireland presents a particularly attractive outlook, with its economy expected to grow by 4.8 per cent in 2016. It's also likely that UK-based financial institutions that need to relocate to stay within the EU would find Dublin an ideal choice. Demand for prime office space in Ireland is already pretty strong, with headline rents up 15 per cent year on year at the end of June and a vacancy rate of just 2.4 per cent. Typical of recent deals, Kennedy Wilson secured the Bank of Ireland as the tenant for its Baggot Plaza in Dublin on a 25-year lease. There is also a ready portfolio of assets that could be snapped up cheaply. These are held by the National Asset Management Agency, a bank set up in the wake of the financial crash to hold distressed property assets, which is still an active seller.
During the first half of 2016 Kennedy Wilson also sold £315m of assets at a 5 per cent premium to book value. Those deals both generated a return on cost of 26 per cent, and handed buyers an extra 2.4 percentage points of rental yield compared with what was available when Kennedy acquired the properties. Small wonder, therefore, that across its whole portfolio the company is currently delivering an accounting return of around 7 per cent, well above its 2.9 per cent average cost of debt.
One concern is Aberdeen, where demand for office space has been hit by falling oil prices. Of the three properties, one has a 15-year lease but some leases expire within the next 18 months, and it could be tough finding new tenants. However, exposure to Aberdeen represents just 2.5 per cent of the total portfolio.
Overall, valuations could come under pressure if the UK economy slips into recession as this would dent demand for office and commercial space. However, rental income will be the main growth driver, and in the first six months of 2016 this rose to £93.6m from £64.7m a year earlier. Average expiry on current leases is also reassuring at nine years.
