Welcome to the Q1 2015 Kennedy-Wilson Earnings Conference Call. My name is John and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Christina Cha, Vice President of Corporate Communication at Kennedy-Wilson. Christina, you may begin.

Thank you, good morning everyone. Joining us on today’s call are Bill McMorrow, Chairman and CEO of Kennedy-Wilson; Mary Ricks, President and CEO of Kennedy-Wilson Europe, Matt Windisch, Executive Vice President of Kennedy-Wilson; and Justin Enbody, Chief Financial Officer of Kennedy-Wilson. Today's call is being webcast live and will be archived for replay. The replay will be available by phone for one-week and by webcast for one-year. Please see the Investor Relations section of Kennedy-Wilson's website for more information. Statements made during this conference call may be forward-looking statements. Actual results may materially differ from forward-looking information discussed on this call due to a number of risks, uncertainties and other factors indicated in reports and filings with the Securities and Exchange Commission. I will now turn the call over to Bill McMorrow.

Thanks, Christina. Good morning everybody and thank you for joining the call. We're going to start with some of the key financial highlights for the quarter, then discuss our property operating performance and value-added initiatives and then touch on our are acquisition disposition and financing activity and conclude by discussing our current financial position and outlook. Starting with our financial highlights our adjusted EBITDA for the quarter was $53.7 million compared to $69.2 million for the same period in 2014. Our adjusted EBITDA includes acquisition-related gains of $600,000 actually for the first quarter and $43.9 million for the first quarter of 2015 and 2014 respectively. Excluding the acquisition-related gains in both periods our EBITDA was $53.1 million in 2015 and $25.3 million in 2014. Our adjusted net income for the period was $30.5 million or $0.33 per basic share compared with $34.3 million, or $0.39 per basic share for the same period in 2014, which includes acquisition-related gains of $0.01 per basic share and $0.50 per basic share for the respective quarters of 2015 and 2014. Our adjusted net income is reduced by KW’s share depreciation and amortization which was $15.9 million and $5.3 million in 2014. As all of you know these are non-cash charges. Our investment management and service segment produced adjusted fees of $27.1 million which is up 49% from last year. During the same period our service fee that grew by a 125% to $12.8 million. Regarding our investment transaction summary we had total acquisitions including with N KW Europe of $923 million in Q1 at an average cap rate of 7% and approximately $225 million of dispositions at an average cap rate of 4%. The trend of buying at 7% caps and selling at 4% caps will continue into the second quarter as we are…

Thank you. We’ll now begin the question-and-answer session [Operator Instructions]. And our first question is from Jason Ursaner from CJS Securities.

Good morning. Congratulations on a strong start to the year.

Thank you.

I just want to focus on the equity recycle that you did in the quarter because I think for most investors this is what they kind of view as the secret sauce of the company and it's one of those things that maybe on the surface at the real estate market was more efficient it wouldn't be - wouldn't be possible. So just at a high level when you look at the 920 of acquisitions at a 7-cap and the 225 sold at a 4-cap, how do you see Kennedy-Wilson continuing to generate and turnaround those types of opportunities, yes, and is it more geographic based or it's really just the proprietary nature of what you guys do on sourcing?

Well, I’d say first of all as I alluded to a little bit, Jason, we have been doing this for 26 years. I mean this isn’t the first time we have been through this kind of activity in cycle although obviously the dollar amounts are larger at this point in time. So as I said, you know, really what we're doing globally we're trying to maintain very high levels of liquidity in the company to take advantage of this global search for yield that people have right now to prune our portfolio either on assets that we don't think are of a quality that we want to keep them long-term or where there's a window of opportunity to dispose of a large portfolio like we did in Japan. But at the same time what we're doing is – as I hope I explained we're growing our existing recurring NOI at our existing assets that we plan to keep long-term through these value enhancement strategies that I explained on the Rock, Merritt on 3rd and on Sandpiper and so it’s a balance, but at the root of it all it has to do starting with maintaining a very high level of liquidity, pruning our portfolio for things that we don't want to keep long-term or where we want to recycle equity into assets that have higher returns and so the Vintage portfolio is a very, very good example of how we were able to take an opportunity that we sourced off market, buy it at a cap rate that was above market for a variety of reasons, but use the equity essentially out of the sale of Japan to reinvest in that portfolio. So kind of if you looked out now over a three to five year period of time, we're going to continue to see the NOI on a recurring basis of these properties increasing.

Okay. And with VHH in Japan you should be close to a $1.5 billion of acquisitions and maybe close to 750 or so of divestiture through the first half. You know, I realize it was a pretty quick start to the year, but just wondering how you're starting to think about the balance of the year in terms of activity maybe not in terms of a specific number, but usually there is an acceleration into the second half as companies look to get some deals done so just what you expect to see that again this year and I guess it sounds like you plan to participate on both sides of that.

Yes, I mean as I said if you think about it in the last five years we have bought now almost $16 billion of assets at purchase price and remember when I talk about purchase price, those are deeply discounted prices just like the example I went through on the Rock. And so if you look at on average what's happened in the last five years, we have averaged close to $3 billion of acquisitions on an annualized basis. We don’t look at any of that as being a bogey for each year. It just depends on what the market opportunities are the present themselves. We are off to a very fast start, it’s hard to really annualized what we’ve done in the first half of the year, but what I am really trying to communicate is that we're – we have nothing out – virtually nothing out on our lines of credit, we have a tremendous level of cash in both of our companies. We also have a fund management business although it smaller we have almost $300 million of cash sitting in that business right now. And so we are in a position right now we are pruning the portfolio and looking for opportunities but being very, very careful about where we're spending our money right now. Clearly here in the United States, you have a market where you know prices of increased significantly and we bought we still see opportunities as witnessed by the vintage deal the bargain purchases, though, [Italy] today exist in Europe and we were fortunate to get out flag plan of there in 2010 when nobody else want to go there. So we are going to continue to take advantage of these opportunities that we see in Europe.

Okay that also great. Thank you for taking my question.

Our next question is from David Gold from Sidoti.

Hi, good morning.

Hi, David.

So a couple of questions. First by way of follow-up just, so Bill, you noted number two where you have seen the bargain purchases in the European side of things. Can you give a little additional color as to how you are thinking about the different markets, you know plan did you flag in Spain as well in the last year or so, but between Ireland, UK and Continental Europe probably where do you see the best opportunities and where should we be expecting you to be more focused.

Yes. Thanks. I'm going to answer part of that question Mary and then I am going to let Mary Ricks on the line with us and as you all know she is the Chief Executive Officer of our business Europe, but if you look at the company over the last 26 years we have always gone into markets that were out of favor and hopefully before other people got there and so Japan we went there in 1992, as I said, we got to Europe in 2010. We really ramped up the growth in our multifamily business, you know, kind of at the height of the great recession when we saw opportunities to buy things here in the Western United States. And so Mary and I have been together as business partners now for all of that 25 years. We still continue to see opportunities, but Mary I would like you to kind of focus now on what you are seeing Europe.

Sure, it was interesting because I just actually spent the last two days in Dublin and there are still a lot of opportunities in Ireland and I think one of the things that make us unique is that we have a very large platform there all the way from acquisitions asset management, construction management, accounting so we are fully integrated there in Ireland and we I think we are very local player that knows everything was going on the operating side so all the fundamentals what’s going on the occupancy and in office market in Dublin and particularly we’re very active. So there is quite a few opportunities there that were at beginning stages of underwriting and looking at I think that will continue over the next 12 months to 24 months. So very active and looking hard it opportunities here in the UK and we also have a large team you know 35 people here on the ground in London and so and like Bill talked about how we are sourcing opportunities really off market I think that’s just about that sort of prominence and importance we put on relationships and working on those relationships with the most of the financial institutions. So we continue to do that and we see opportunities here in the UK, we also see opportunities and we're in the kind of final stages of underwriting some potential acquisitions in Spain and sort of beginning stages of looking at things in Italy. So it's sort of throughout those four jurisdictions where we’ve been talking about being focused over the past 12 months. We’ve got a pipeline really in all of them.

Perfect. That’s helpful. And then Mary, also to small extent there were some dispositions in KWE during the quarter and actually I guess some commentary in your release as to further property among disposals over the rest of 2015 and 2016 and I'm curious there given obviously the relatively short duration if you can give some additional color as to – and obviously the returns look like they have been terrific, but has that been by design or more opportunistic?

I mean everything that we’re buying a lot of what we have bought have been in portfolios. So for example the Aviva transaction 180 assets so where those going to be disposals out of that portfolio. We have underwritten literally every single asset on a lease-by-lease analysis. So we’ve got business plans for every single asset and as you pointed out in your question, we've own these asset for not roughly just over 7 months on average. So a lot of it is about getting our arms around everything and doing all the asset management kind of the low-hanging fruit and then understanding the time and specific submarkets to sell assets that somebody is willing to pay us kind of tomorrow's prices today and/or are we defensively selling and those will be situations that we have underwritten and so, yes, I mean I think I'm happy with what we have sold and we've got a pipeline of dispositions that we're planning for the second half.

Perfect. Thank you both.

Thank you, David.

Our next question is from Vincent Chao, Private Investor. Please go ahead.

Hey, good morning everyone. Just a quick question just sticking with the disposition theme here. Of the billion that you expect to sell I know we talked about the proceeds from Japan, but just curious what you think the net proceeds to KWH will be from those billion?

Yes, I mean our plan on these dispositions in terms of cash to KWH and this is just the range, okay? But we plan to generate cash of in excess of a couple hundred million dollars at KWH between now and the end of the year which includes cash generated from the properties that we sell and cash generated from the dispositions.

Okay, thanks. And then just as we think about the U.S. markets where prices have elevated in many markets just curious which of your own submarkets you may feel it's a better time to be a seller than a buyer?

Well, I think just to re-amplify on the cash and we talked about KWH. I mean Mary is going through the same strategy at KWE and she is going to – and that company generate significant cash between now and the end of the year, but in terms of the U.S. as I think all of you know our business is confined in terms of the investment activity to the Western U.S. and our main markets in the Western U.S. are Seattle, The Bay area and here in Southern California. What I have said on prior calls is that the things that we're primarily selling here in the U.S. are either office buildings here in the western United States that have reached full occupancy and full value or in some cases multi-family assets where we're not the 100% owner. We have some multi-family assets if you go back historically where we had partners in them and those partners want realizations and so sometimes we're selling those, but there's no [indiscernible] reason. We like all three of those markets. We have never been when I say The Bay area, our focus has been really not Downtown, San Francisco, it's been the submarkets outside of San Francisco particularly the East Bay. We really like the Seattle multifamily market and after the Vintage closing, we'll own almost 10,000 units in the Seattle market which is you all know is experiencing very, very good job growth. And there is no real secret to the multifamily business that – the very strong NOI growth and everything that we're experiencing in many respects relates to those markets that are having great job growth. The Bay area and Seattle. But I would say, you know, one consistent theme on the disposition side is that to the extent we have office buildings that have reached what we think is full value we’re selling those right now here in the US.

Okay, I guess I was more alluding to The East Bay you’ve been there and that’s been great move for you guys and seems like we are hearing more and more from others that about the strength of the market and people start to move so just curious at the margin you know and might be time to sell some assets there, but I guess the other question…

Then we are and then we’re under contract to sell one reasonably good size asset and what I would call The East Bay. But many of the assets that we own in The East Bay we own at the 100% level and so those, several of those like for example we own a very large apartment complex in Alameda called Summer House and its almost 700 units that over the years, we spent over $20 million refurbishing that. I am trying to do this from memory math. But when we first bought that portfolio the NOI of that property – we guys started that put assets – NOI of that property was right around $6 million when we first got it stabilized here about four, five years ago. The NOI of that property today is close to $10 million a year. And so those kinds of assets that we own in The East Bay are long-term keepers that we just continued asset managing growth the NOI.

Okay, thanks for that. Maybe just going back to your comments about the volatility of the markets and some of the swings we have seen in the rates globally, just curious if that has had any impact on transactional volumes in any of your markets just is there, is some of the movements we have seen recently in the tenure rates are they causing people – has it all and in Europe are you seeing the recent upswing in say the – for instance but just curious if that's having impact on cap rate discussions and things like that.

It really isn't. I mean the rates haven't move perceptibly. The volatility really only plays into and how we look at our own business. And the fact that we want to is at several times maintain a high – why we are doing all of these acquisitions is $16 billion over five years. I continue to remain convinced that we need to maintain a high degree of liquidity with this little short-term debt as we can possibly have. But it hasn’t there is, you still have when we first went to Ireland in 2010, the tenure bond in Ireland was 14.5%. And today the tenure bond in Ireland is some 1%. And so there can’t – there won’t be enough of an increase in these increase rates that’s really going to slow people down from time to time some type of yield everywhere, which is obviously what’s causing this compression in cap rates, this global desire to find some kind of yield above these very, very low not only deposit rates in the banks, but these 10-year government bonds all over the world.

And then just to add on to one thing, this is Matt. If you look at how we’re managing our balance sheet against some of these risks, if you look at the financing of the company both at the corporate level and property level we’ve got 85% of our debt either fixed or hedged against interest rate volatility and at the same time on the currency side of the business we do have about $600 million of currency exposure through our investment account and that's about 80% hedged against currency swings and so we are managing the balance sheet for this type of volatility.

Yes, I think Matt is making a really good point that even in spite of these very, very low floating rate opportunities to borrow on a short-term basis we have made the strategic decision that we're going to fix as he pointed out 85% of our interest rate exposures either fixed or has a rate cap attached to it and except in a few isolated cases we’ve been willing to forego the extra 50 or 100 basis points that you can get on these short-term loans to have longer-term debt at fixed rates and at the same time maintain a very, very high degree of liquidity in both KWE and Kennedy-Wilson.

Okay, thanks for the color.

Our next question is from David Ridley-Lane from Bank of America.

Sure. So investment level debt is now at 4.2% blended interest rate down from 5.1% a year ago, but the re-financing you did in the first quarter were being lower 2.9%, so just wondering how much further do you think you can move that overall blended interest rate down in 2015?

It's hard to project that one Dave, but I mean we don’t have a lot of debt maturities at the property level in 2015 and 2016.

Our share of the total debt coming due in the next two years is under $200 million. Nothing on the corporate side for many, many years.

Right, we’ve refinanced all the corporate debt. We are doing in Europe we have a couple of assets that we are refinancing right now that 100 basis points savings in interest rate and adding term to them, but basically here at KWH other than what we have already done we don't have a lot of debt maturities coming up over the next couple of years.

Got it. And then on a blended basis your ownership in U.S. apartments is up to 46% now and as you mentioned you have been selling the ones where you're the minority holders so are there opportunities within the portfolio to sort of crossover the 50%, gain control, consolidate the properties, sort of similar to what we saw last year here in 2015?

David, this is Matt. I think there is a potential for that and we – to the extent where there's opportunities to increase ownership in our existing portfolio on assets we know we may take advantage of that.

I think David, it obviously takes time to build up these percentage ownerships and as I’ve said many times, we started with $57,000, 26 years ago and so when we first starred in business and really up into the last three or four years we always had a lot of partners where we own smaller ownership interest in the deals that had promote structures and over the last three or four years we've continued to really change that strategy. We still have some partners with much – many, many fewer partners than we used to have and so obviously over time the ownership interest in every asset class has increased dramatically over the last couple of – or three years. In Kennedy-Wilson, Europe for example except for one extremely small asset out of $3 billion portfolio we don’t have any part of this.

Got it. A few quick numbers questions, were asset under management at quarter end. And then the gains from the sale of Japanese portfolio, I believe those will run through JV income line on the P&L, am I right in that.

Yes, so for the AUM it will be little over $18 billion for the quarter. And in terms of the Japanese sale it actually a consolidated asset. So it will run through a gain on sale on the income statement not the JV line.

Got it. And so you have on the revenue line you had that $105 million or so.

I don’t think it will be revenue, it will be a gain on sale below the line.

Okay, gain on sale.

Below the line.

Below the line. Got it. All right, thank you very much.

Our next question is from Vance Edelson from Morgan Stanley.

Good morning, thanks for taking the questions. You mentioned the raise in prices in the US and the bargain prices in Europe. So could you give us your insight on the recent trajectory of cap rates year-to-date for example where you see in the most cap rate compression around the world and are there any regions where cap rates are really moving in the other direction and meaningfully rising?

Yes, I mean I don’t think there is any specific regions, I mean cap rates have compressed everywhere in the world, witnessed by these 10-year bond rates, is that like the example I just went through in Ireland. And the enormous amount of liquidity that exists around the world today that is searching for some kind of yield and so there is been cap rate compression in Japan there is been cap rate compression in the United States. And since 2010, there is obviously been cap rate compression in Europe. When we first and that’s why when I said earlier we all was trying to get into these markets early when they are out of favor, but if you look at the markets that we’re in the common characteristic as is the some of the largest bank in the world exist in those markets. And some of the largest companies because that’s really the source of our purchasing opportunities when these markets are out of favor. But it’s just, it’s a market today, where obviously cap rate compression is happening globally and you have to stay disciplined in terms of the markets that you want to invest. And you can’t be going outside of markets that you don’t have your own infrastructure in. And I think that’s really been as Mary point out. We have almost to 80 people in Europe and it’s a fully integrated business, asset management, entitlement accounting, due diligence and acquisitions. And so unlike, but peers tend to have only an investment side. We have fully integrated on the ground operations in every market that we invest in. But that’s why when you look at our company we don’t go outside of markets that we don’t have that kind of infrastructure in. And so in a longwinded way I always say that the cap rate compression has been global. And while we still continue to find opportunities through our own network to buy off market transactions. We are just we want to be very, very careful, in this environment. And that’s why I said earlier when Jason asked me about the acquisitions for the year. We don’t any – in terms of what we want to acquire for any given year. The opportunity has to make sense to us or we’re not going to buy, it’s just got simple.

Okay, that’s very helpful. And then just given the recent sale in Japan could you just share with us what’s your long-term commitment is to Japan, you’ve been there for a while. So should we assume and remains an important region for you and this is just a temporary level in your presence there. Because it sounds like in the near term at least you view Europe as the more fertile hunting ground for acquisitions.

Yes, as I said earlier you know I mean went in Japan since 1992 and so we build up tremendous relationships in Japan, but not only have an influence on our Japanese business but because the Japanese company are selective here on the west coast. There is a spill over effect took places like California and Seattle when Hawaii particularly. And so when we really going in Japan we were the first U.S. real estate company to ever go public there in 2002 and that takes a lot of work and I think one of the things in our thought process is we don’t want to give up those relationships so to speak that we build up now over this 20 plus year period of time. Plus we very much respect admire the purchaser of these assets and so we think it’s a great opportunity not only to develop and continuing relationship with them. But continue all of our relationships in Japan and as I said earlier one of the great parts above the transaction was that not only reinvesting us the modest amount of money but we are going asset managing everything on three year contract and so that evolving us so keep our same theme of people headed by [indiscernible] the company for many years that same team of people will stay in place and keep and I on the market for us. And so was I said earlier in Mary as said keep thing you are same theme in place on a global basis. Even at a time where were selling a large interest in Japan is a very, very important part of our long-term strategy.

Okay fair enough and then lastly for me kind of related to an earlier question on interest rates, but more along the lines of FX could you provide some color on the role if foreign exchange swings are playing in your decision making beyond the obvious need to head does it changed the relative of peal of operating in certain regions or does it have any other on your thinking?

Yes, this is Matt I would say that generally we are real estate investors and we try to take the foreign currency out of the equation and that’s why we hedge the majority of our exposure. So it doesn’t really play a big role and where we make our investment decisions because we are hedging out there currency risk anyway.

Okay got it. Thanks guys. End of Q&A

And as our final question, I will turn the call back over to Bill McMorrow for closing comments.

Thanks everybody I know we went through a lot of information today. I hope it was helpful as always we are here to answer to any questions post this call and we very much appreciate all your support. Thanks very much.