Kennedy Wilson first came onto the property scene in 1977 as a US real estate auction platform and, for many years, the Beverly Hills-based firm made steady progress without necessary attracting much attention. However, all that changed last year when it burst onto the scene in Europe.
Indeed, the world of private equity real estate sat up and took notice when Kennedy Wilson took over Bank of Ireland’s €1.6 billion ($2.3 billion) property investment management business. The firm followed that transaction with the purchase of a $1.8 billion UK loan portfolio from the Bank of Ireland, which turned out to be the largest private equity real estate deal of 2011.
In its home market of the US, Kennedy Wilson has been active as well. In the past two months, the firm bought a 544-unit multifamily community in Hayward, California for $86.5 million and a 409-unit apartment community in Sacramento for $64 million. Nevertheless, it is continuing to expand its footprint globally, as it recently bought a 210-unit apartment building in Dublin for €40 million.
Moreover, it was revealed in March that Kennedy Wilson had formed a joint venture with Canadian financial services company Fairfax Financial to boost its operations in Europe. The joint venture initially will focus on the UK and Ireland, with Fairfax providing a €250 million capital commitment and Kennedy Wilson contributing a 10 percent co-investment.
Given Kennedy Wilson’s new-found status as a global player, it seemed the time was right for PERE to sit down with the firm’s senior management. What we discovered is a business built mainly on separate accounts and joint ventures with blue-chip institutions and families such as the LeFrak family, whose LeFrak Organisation is one of New York’s highest-regarded real estate investors.
William McMorrow, chairman and chief executive officer, and executive vice president Matt Windisch met with PERE to outline the ethos of the firm and how it is going about growing its footprint. In addition, Mary Ricks, president and chief executive of Kennedy Wilson Europe, spoke with PERE on the phone from her office in London to discuss the European platform.
From domestic to international
After 11 years operating primarily as a real estate auction company, everything began to change for Kennedy Wilson when McMorrow purchased the firm in 1988. “I bought the company 24 years ago, and since then we have run the firm as a service business alongside an investment business,” says McMorrow.
In 1994, a milestone arrived when the firm opened an office in Japan. In 2002, Kennedy Wilson Japan went public on the Tokyo Stock Exchange. In November 2009, Kennedy Wilson went public on the New York Stock Exchange.
Roughly 17 years after establishing an Asian presence, Kennedy Wilson entered Europe. In June of last year, the firm took over the property investment management business of Bank of Ireland, Bank of Ireland Real Estate Investment Management (BoI REIM), for an undisclosed sum. Its signature deal, however, came towards the end of 2011, when Kennedy Wilson agreed to acquire a $1.8 billion loan portfolio secured by Class A office, multifamily and retail properties in London from the troubled Irish bank.
By taking over BoI REIM and its senior team, Kennedy Wilson grew its $7.4 billion in assets under management in the US and Japan to almost $10 billion in the US, Japan and Europe. Acquisitions such as the loan portfolio from Bank of Ireland and a loan portfolio against greater Los Angeles-area office buildings have helped balloon the firm’s AUM to approximately $12 billion.
The Emerald Isle
McMorrow tells PERE that Kennedy Wilson saw the purchase of BoI REIM as a way to get its proverbial foot in the door. However, in order to establish a credible presence in Europe, the firm first needed some boots-on-the-ground experience within the market. Therefore, it made sense to acquire an already-established platform instead of just showing up anew and setting up shop on its own.
“We learned from our experiences in Japan – where we went in 1994, when that market was having the same degree of difficulty that Europe is now – that you need to have your own team of people on the ground in order to execute the kind of service and investment strategy that we like to do,” McMorrow says.
In the middle of 2010, Kennedy Wilson studied the European banking system and came to the conclusion that, with the amount of leverage that the European banks had in their system, the banks were going to need to de-lever. One of the ways they were going to de-lever was to sell assets.
Kennedy Wilson focused specifically on Ireland because the nation had set up the National Asset Management Agency (NAMA), which was similar to the Resolution Trust Corporation established in the US in the 1990s and with which the firm has had experience. “When [the banks in Ireland] transferred roughly €100 billion of assets into NAMA at a discount of roughly 50 percent, that gave us the idea that the banking system was starting to take write-downs and therefore could liquidate assets,” explains McMorrow.
This discovery led Kennedy Wilson on a fact-finding trip to Dublin in late 2010, which led to a series of meetings with many financial institutions, including the Bank of Ireland. After a few discussions between Kennedy Wilson and the Irish bank, it seemed that the two organisations would make a good fit.
“We looked at what was going on in Europe and Ireland and determined that that’s where we potentially wanted to invest, but we needed good people,” says Ricks, who moved to London to head up the European business, which has been rechristened as Kennedy Wilson Europe. “So, it made sense to buy a platform with good people rather than hiring one person at a time.”
McMorrow adds: “Within a short period of time, we made a deal to buy that company and that gave us an income stream and 15 people with market knowledge in Europe that we didn’t have before at Kennedy Wilson.”
A story attached
Both Ricks and McMorrow confirm that the acquisition of BoI REIM was a means of establishing a presence in Europe for Kennedy Wilson. “In our business, you’ve got to be the first mover in a market that’s inefficient,” says McMorrow. “That was the whole idea with Europe.”
Now that it’s there, Kennedy Wilson is accelerating its growth with plans to focus on a combination of distressed real estate loans, as well as real estate assets, in the UK, Ireland and continental Europe. “There’s a lot of de-leveraging going on within the European banking system,” says Ricks. “We flock to markets where there’s financial distress within the banking system.”
Considering Kennedy Wilson’s specialty under McMorrow’s watch has always been to go where others fear to tread, it makes sense that the firm had its eye on Europe. Indeed, the firm built up its multifamily business in 2008 when the rest of the financial world was falling apart and the remaining players were avoiding multifamily like the plague.
“Although we had a big apartment business, we started buying even more because nobody wanted to do anything in 2008,” says McMorrow. “Everybody said it’s the end of the world, and that caused cap rates for very high-quality apartment buildings in the US to widen out to 8.5 percent to 9 percent. As a result, we started buying more than a year ahead of everybody and laid the groundwork during that period of time.”
“We’re looking to buy anything that has a story attached,” says Windisch. He notes that Kennedy Wilson is looking for “a way to buy something for well below replacement cost. There’s got to be dislocation.”
“We are looking at anything that is real estate-related on the investment side,” adds Ricks. “We’re looking at direct equity investments, as well as several loan portfolios. In terms of property types, we target undeveloped land to multifamily to hotel.”
McMorrow echoes Windisch’s sentiment that, in order for Kennedy Wilson to be interested, there needs to be a story attached. “It can’t just be the Saks Fifth Avenue building is going on the market, and there’s going to be 30 people trying to buy it. There’s got to be some element of a story attached to it,” he says, pointing out that distress can be part of that story.
Big in Japan
The acquisition of BoI REIM may have been Kennedy Wilson’s first European deal, but the precedent for international growth was established in 1994 when the firm set up shop in Japan.
“In Japan, we started with a guy and a secretary and ultimately ended up being a public company,” says McMorrow. “We were the first US real estate company to ever go public in Japan in 2002, but we grew that whole team of people out of the local market. There weren’t any US people in that business.”
Currently, Kennedy Wilson owns 50 multifamily properties in Japan that are running at 97 percent occupancy. According to Windisch, through Kennedy Wilson’s regional venture with Fairfax Financial, the two firms “have refinanced the entire Japanese portfolio. It is a very steady business and produces great cash flow for the company and for our partner.”
As a result, Kennedy Wilson’s presence in Japan, which is providing stable, income-producing returns, is enabling the firm to engage in more risky investments in Europe. “If you look at what we’re doing in Japan versus what we’re doing in Europe, Japan really allows us to have stable recurring cash flow,” adds Windisch.
“Because we are in these various markets – the US, the UK and Japan – we have this natural currency hedge,” says McMorrow. “For example, in Japan, because the yen has strengthened so much, we’ve got a very big currency gain on our investment there. In Europe, most of our money is invested in the UK, where they’ve got their own central bank and the sterling actually has strengthened a lot in the last couple of weeks. So, even though Europe has its issues, we’ve ended up in what is perceived as a safe haven.”
By 2005, roughly three years after Kennedy Wilson Japan went public, Kennedy Wilson sold its entire stake in the firm, making it a separate company. Still, Kennedy Wilson is interested in doing deals in the region.
In terms of expanding in Asia, however, Windisch doesn’t foresee Kennedy Wilson expanding beyond Japan. “It’s possible we’ll do more in Japan,” he says. “At this point, we’re not looking anywhere else.”
Meanwhile, in the US, Kennedy Wilson’s primary market is the West Coast. Specifically, the firm focuses on three cities: Seattle, San Francisco and Los Angeles.
In addition to those three markets, about five percent of Kennedy Wilson’s US investment activity is in Hawaii, although McMorrow points out that that part of the equation really comes from Japan. “In the ‘90s, a lot of Japanese companies owned real estate in Hawaii, and that’s how we started getting involved there,” he says.
Over the past two years, Kennedy Wilson’s track record has been 50 percent debt and 50 percent hard assets. “We’ve bought roughly $3 billion of assets on the West Coast and in Hawaii, and it’s been 50 percent debt and 50 percent either apartment buildings or office buildings,” adds Windisch. “If you look at our portfolio today, it’s apartment buildings, office buildings and loans secured by real estate.”
According to both McMorrow and Windisch, Kennedy Wilson plans to keep its US strategy the same – predominantly multifamily and office assets in Seattle, San Francisco, Los Angeles and, to a lesser extent, Hawaii – unless special circumstances bring the firm to the Midwest or East Coast.
“Unless there’s a banking relationship that takes us someplace else, it’s really going to be the West,” explains McMorrow. “That might include some different cities as we go forward. For example, Salt Lake City is growing significantly right now, so we’re currently looking at the apartment market there.”
McMorrow notes that there are no current plans to invest in any East Coast properties. However, if anything on the East Coast happens to catch Kennedy Wilson’s eye in the future, odds are the firm would “partner with the LeFrak family in New York” under such circumstances.
In addition to the purchase of the Bank of Ireland loan portfolio, both McMorrow and Windisch agree that the sale of San Jose’s 360 Residences earlier this year is another signature deal for the firm. Just 13 months after acquiring the property, Kennedy Wilson sold it to Capri Capital Partners for $118 million.
“360 Residences is a 213-unit residential project in downtown San Jose, and it really touched almost every group within our firm,” explains Windisch. “We bought the debt on that property at a discount back in November of 2010 from a national bank in the US.”
The plan, according to Windisch, was to take over ownership of the property, so Kennedy Wilson went through the process of foreclosing on the owner of the high-end condominium building. Upon gaining control of the property, the firm converted the asset to an apartment building and raised occupancy from zero percent to 97 percent. “It took about 10 months to get fully leased up,” he adds, noting that Kennedy Wilson sold the property one week prior to this interview.
“It was really a value-added deal because we saw that the property’s use as a condo just wasn’t the right timing for the market. It was really a better apartment deal, and we were able to execute it from start to finish in a year-and-a-half.”
Although Kennedy Wilson has raised commingled funds, McMorrow points out that 95 percent of the firm’s capital comes from separate accounts and joint ventures. He cites as an example the firm’s recently formed joint venture with Fairfax Financial, which will boost Kennedy Wilson’s operations in Europe.
In addition, McMorrow points out that the LeFrak Organization is a “meaningful shareholder” in Kennedy Wilson. Not only has Kennedy Wilson partnered with the LeFrak family in the past, but LeFrak also owns Kennedy Wilson’s headquarters building.
Beyond those partnerships and ventures, however, Kennedy Wilson also has had some success with commingled funds. “We’ve had very good luck at adding some really high-quality names to our fund management business,” says McMorrow, citing such investors as Wake Forest University, the Tennessee Valley Authority, Key Bank and the Illinois Student Assistance Commission.
Although the executives at Kennedy Wilson declined to comment on its current fundraising activity, PERE previously reported that the firm closed on $125 million in commitments in 2010 for its value-added US real estate vehicle, Kennedy Wilson Property Fund III. As of last year, it was still raising funds for Kennedy Wilson Real Estate Fund IV, which is targeting a final close on approximately $300 million in mid- to late 2012.
McMorrow reiterates: “Although [funds are] a very important part of our business, most of our capital really comes from these separate account platforms.”
Looking towards the rest of 2012 and into 2013, Kennedy Wilson is hoping to both continue growing its European platform and to make global acquisitions in the multifamily and office sectors.
“We plan to continue to grow the business,” says Ricks of Kennedy Wilson’s European platform. “We’ll definitely make some additional hires beyond the six new people we just added in London, and we just went through a five-week due diligence process on another Irish loan portfolio.”
McMorrow says he believes that, in the future, Kennedy Wilson will be more active in Europe because that’s where the deals that interest the firm the most will take place. “There are fewer opportunities for our kind of value-added investing here in the US because there is so much capital chasing fewer assets, so it’s driving up prices to places with which we’re not really comfortable.”
McMorrow adds: “We’re value investors, so we’re always looking for places where there’s dislocation in the market.”
The logistics of coordinating a European business when headquarters is on the West Coast
One of the major challenges in keeping the lines of communication open between the chief executives of Kennedy Wilson and Kennedy Wilson Europe is the eight-hour time difference between the two offices. Indeed, while one business day (in London) is ending, the other (in Los Angeles) is just starting.
Therefore, one might assume that William McMorrow and Mary Ricks only talk sporadically or communicate solely via email. But, according to Ricks, the two of them speak daily, sometimes multiple times each day, which leads to very long days for both chief executives.
“It’s a long day for both of us,” Ricks says. “Bill wakes up very early in the morning, and my day ends long after dinner. Still, I talk to him every day. “
In the span of less than one month, Kennedy Wilson has made two multifamily purchases – in California and Dublin – for a combined total of $201 million
Beverly Hills-based Kennedy Wilson has been very busy indeed in the multifamily space of late. In the span of about one month, the real estate investment firm has made three multifamily acquisitions – two in California and one in Dublin – for a total of approximately $200.7 million.
In June, Kennedy Wilson announced that it had acquired Waterford, a 544-unit multifamily community in Hayward, California, for $86.5 million. Waterford is comprised of 29 two- and three-storey residential buildings with leasing and fitness centres, two swimming pools and spas and a children’s playground. Kennedy Wilson, which plans to upgrade the buildings with new paint and landscaping, funded the purchase with $68.1 million in financing from Freddie Mac at a fixed rate of 3.69 percent for 10 years.
Earlier in the month, Kennedy Wilson purchased the Alliance Building, a 210-unit apartment building in Dublin. The firm and its partner, Fairfax Financial, purchased the property for €40 million ($50.2 million) from Grant Thornton, which acted as appointed receiver on behalf of Ulster Bank.
“We are seeing significant opportunities in the residential space, particularly in Ireland, and this transaction is a reflection of our on-going commitment to building our business there as well as other parts of Europe,” said Mary Ricks, president and chief executive of Kennedy Wilson Europe, in a statement.
The Alliance Building is part of the larger Gasworks estate, which comprises approximately 29,000 square metres of offices, 1,500 square metres of retail and 645 dwelling units. The property is adjacent to Google’s European headquarters.
In May, Kennedy Wilson bought Capitol Towers, a 409-unit apartment community in Sacramento. The firm and its partners purchased the property for $64 million, with Kennedy Wilson investing 50 percent of the equity in the deal. The deal was funded with $50 million in financing from Freddie Mac at a fixed rate of 3.5 percent for seven years.
These three purchases have brought Kennedy Wilson’s multifamily portfolio to 14,114 units, including deals currently under contract.
Headquarters: Beverly Hills, California
No. of offices worldwide: 23
No. of employees: More than 300
Assets under management: $12 billion (as of 31 March)