Good day and welcome to the Kennedy-Wilson Second Quarter 2019 Earnings Call and Webcast. Today's presentation is being recorded. [Operator Instructions] I would now like to turn the conference over to Daven Bhavsar, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning. This is Daven Bhavsar and joining us today are Bill McMorrow, Chairman and CEO of Kennedy-Wilson; Mary Ricks, President of Kennedy-Wilson; 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 1 week and by webcast for three months. Please see the Investor Relations Web site for more information. On this call, we will refer to certain non-GAAP financial measures including adjusted EBITDA and adjusted net income. You can find a description of these items along with a reconciliation of the most directly comparable GAAP financial measure and our second quarter 2019 earnings release, which is posted on the Investor Relations section of our Web site. Statements made during this call may include 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 would now like to turn the call over to our Chairman and CEO, Bill McMorrow.

Thanks, Daven. Good morning everyone and thanks for joining us today. We're pleased to report a solid quarter of results highlighted by continued strength in our same property results, the successful disposition of non-core assets with proceeds being reinvested into CapEx at existing properties, or higher growth property opportunities and the continued growth of our separate account business through our new joint venture at Capital Dock. This morning, I'll review our financial and property operating results for the quarter and then update you on the progress we made on our key strategic initiatives before opening it up for questions. So, starting with our results. For the quarter, GAAP EPS was $0.36 per share compared with $0.77 per share in Q2 of 2018. Adjusted EBITDA was $187 million in the quarter compared to $271 million in Q2 of 2018. Adjusted net income totaled $105 million compared to $171 million in Q2 of 2018. Our results are always impacted by the level of gains in any given quarter and we had $68 million in fewer gains in Q2 2019 compared to Q2 of last year. However, both on a GAAP EPS and adjusted EBITDA basis this past quarter, it was one of the strongest quarters of financial results we've had in the last decade. Our global same property portfolio continues to perform very well with same property revenue up 4% and NOI up 6%. We continue to see strong growth in our Western U.S. multifamily portfolio where our strategy involves buying assets in growing markets where we can unlock value through the completion of our value-add initiatives and through institutional asset management. As we've seen in for many quarters, this strategy is resulting in leading same-store results against many other publicly-traded real estate companies. And once again, in Q2, we saw this…

Thanks, Bill. We're making excellent progress across our European asset management initiatives, including stabilizing assets and deploying CapEx across our development projects. The European portfolio generates $212 million or almost 52% of the global estimated annual NOI, with the strong stabilized commercial occupancy at 96% at the end of Q2, up 40 basis points on the previous quarter. Strong leasing at Capital Dock in Dublin, Merlin Park in Manchester and to global online fashion retailer ASOS at Leavesden Park in Watford following the completion of their works contributed to the improved occupancy and the additional $5 million of estimated annual NOI. As Bill mentioned, the Shelbourne refurbishment completed last quarter and the displaced income is now beginning to come back on stream. The hotel continues to perform well against its peer set. Capital Dock was a significant contributor to our NOI uplift in the quarter. We signed three retail leases covering over 18,000 square feet, with top food and beverage occupiers. This included a new craft beer operator occupying the flagship restaurant with bar and terrace called the Quarterdeck. We also signed a gourmet grocer and artisanal food offering, all joining JPMorgan and indeed at Capital Dock later this year. We believe these tenants will help continue the strong demand we're seeing for 190 premium multifamily units, which is the premier, amenity-rich, multifamily offering in the Dublin rental market today. During the quarter, we increased our stake in Capital Dock from 42.5% to 50%, with AXA IM Real Assets and existing JV partner in Ireland acquiring the remaining 50% from the other two investors in the project. KW remains asset manager for the entire campus. Also, we recently started construction at Hanover Quay, which is adjacent to Capital Dock and Kildare Street, which is adjacent to the Shelbourne. On a…

Thanks, Mary. The third area of focus is our asset sale program, where our strategy includes disposing assets that are not core or assets that do not fit our long-term investment strategies and recycling the proceeds into other higher quality growth opportunities. Since the beginning of 2018, we've sold approximately 75 assets, which have generated an IRR of 21% back to KW. During the quarter, we sold $339 million of assets, which our share was, $70 million. Our dispositions resulted in a 19% IRR to KBW. In Q2, our U.S. commingled fund, Fund V, sold the portfolio of three office buildings in the greater Seattle area for $252 million, generating a gross IRR of 30%. We also sold $72 million of non-core retail assets in both the U.S. and the U.K. For the year, we have sold $662 million of assets, of which our share was, $216 million. These sales have generated an IRR of 19% to KW. So, far in 2019, excluding sales from our commingled funds, 85% of our asset sales have been either retail, hotel, or residential assets. In Q2, we allocated a $117 million in investment capital as follows; 53% to new investments, which were completed through either our commingled funds or where we increased our ownership in an existing asset; 41% to CapEx; and 6% to our stock repurchase plan. For the year, we have allocated a $195 million with 53% to CapEx, 39% to new investments and 8% to share repurchases. Looking ahead, we expect an increase in transaction levels for the second half of the year and currently have over $800 million of investment transactions in our pipeline, including $612 million of acquisitions and $204 million of dispositions. In total, we expect to generate in excess of $400 million of cash to KW…

[Operator Instructions] And we will now take our first question from Mitch Germain with JMP Securities.

Thank you. We're hearing about some pressure in the development side growing costs, labor, steel, anything that's provided you any caution or impacting your yields?

Mitch, thanks. Yes, not in the markets that we're in. When you think about Ireland, we really focused most of our building activity. Well, let me back up a second. First of all, we have two separate construction management teams inside KW; one, in Ireland run by Peter McKenna, and one in the United States run by Mike Eadie. And we have great depth in both of those teams. And I think over many years now, our team has developed and demonstrated the ability to deliver very large scale projects on time and on budget as witnessed by the Capital Dock project, which is the largest single phase project ever been done in Ireland. And so, we haven't had any surprises on the construction cost side or timing. I mean, what we are hearing, of course, in certain markets, there has tended not to be a shortage of skilled labor because there's construction going on literally all over the world. But, it hasn't really impacted our budgeting process or cost to complete.

Got you. When we talked about asset sales, I think you said about 400 million to KW in the back part of the year. How should we characterize that with regards to what sector it might be included?

It's going to be across most asset sectors. I mean, in our footnote to the earnings release, we said that we have sold -- we're now under binding contracts on two of the multifamily assets that we're selling. There is a third one that we're selling, it's under contract now. But, those three assets are going to generate $76 million, just those three are going to generate $76 million of cash for us, which by the way, we're [10.31] [ph] in the proceeds of those asset sales and to a very high quality business Park in the Marin County market. And the differential in cap rates that were trading the apartment assets into what I consider to be a very A quality assets, but the differential in cap rates is almost 200 basis points. In other words, we're selling the multifamily assets for 5% cap rate and we're buying the office park at a stabilized yield of 7%.

Great. Last question on the fund raising front. I guess, Mary, you mentioned a couple of insurance companies that you're working with. I'm curious with the different products from the separate account and the commingled fund, are you seeing any new relationships that are evolving, or are you seeing existing relationships that are expanding?

Yes. A little bit of both. I mean, we are having really good success on the commingled fund side, both in Europe and the U.S. And then, on separate account side, we're working on something with another insurance company that could be big. And then, as you know, you continue to see AXA grow with us in Ireland. So, it's a little bit of both, new relationships, as well as our existing.

Thank you.

I will now take our next question from Tony Paolone with JPMorgan.

Thank you. My first question is just on the transaction environment and your potential deal flow picking up here it seems. How much of it's been either a change in the market and what you're seeing versus any change in how you're underwriting or the return hurdles on the capital you bring into those deals?

Well, I think I've said on previous calls, Tony. I think we have really good acquisition teams, both here and in Europe. But you have to sieve through really more transactions today obviously than you did in 2010 and '11, and when you look back over this last 10 years now. We've acquired at cost over $22 billion of assets, but you've got to look at more opportunities today on existing assets than you ever have, because the capital markets is no surprise to anybody, they are very efficient and there is a whole lot of capital around. And once you find something that you think makes sense to do, you have to be able to move with speed, which we do. And I think the other great thing about our company is that all of the due diligence, we don't outsource really hardly anything to other people. And so, whether it's our construction management team or due diligence teams, all of that is housed inside the company. And so it allows us to be very nimble when we find something that we like to buy. I think, two, the reputation of the company over, I've been here for over 30 years, the reputation of the company is really good in the whole transactional market. And so, people like having us as a counterparty on their transaction. So, it's always competitive. I don't care what point in the cycle you're in and today is no different. But, we're still finding opportunities and I think as Mary said earlier too, we are having very, very good success on the third-party capital raising front, particularly in the insurance industry. And so, we've got the capital and it's just really a matter of finding things that make sense to do and I would say. Then, the last thing I would say, to answer your question is that as we've said at length here today, the development work that we're doing, which is going to be completed over the next two or three years, is really a very, very key part of our strategy because we're able to build today at very high returns. The Capital Dock project stabilized at an 8% cap rate. And so, when you think about that, that's a cap rate that I'm not trying to prognosticate the market, but that's a cap rate that's certainly 300 basis points to 400 basis points for an asset quality of that size above the transaction market. So, it's all part of this whole combination of things that we're doing.

Got it. Thank you for that. And then, in the Mountain States, the numbers have been strong and it's been primarily multifamily. Are there opportunities in other property types in the region, or do you see it is primarily being a place that is where multifamily works best?

We are looking at things. I think for us in the Mountain State markets, it's generally multifamily will be the dominant product type and when we do in separate accounts, we have some office assets in Denver, which is a very, very good office market. And then, outside of the Mountain States, of course, in the Pacific Northwest, we have a very decent size office portfolio there. And then, one of the big properties that Matt was responsible for acquiring here in the subsequent to quarter-end is a property in Bellevue and that's a $227 million office project. And by the way, that's the largest office acquisition we've ever done in the United States. So, it just depends on where the opportunities are, but to go back to specifically answer your question, I think in the Mountain States the focus is really going to be on the multifamily assets.

Okay. And then, just last question with regards to your same store NOI growth. Is there a way to gauge how much that the market is giving you versus the value-add component of what you're doing?

Matt, do you want to answer them?

Sure. I mean, if you compare what we're doing to some of the peers, obviously, we're significantly outperforming a number of the public multifamily companies. And so, I think clearly there is some secret sauce here in terms of the value-add we're doing. So, I'd say probably half of the growth is driven by the value-add, we're doing and half is related to the market.

In that pipeline of value-add activity to do in the portfolio is still pretty deep?

It is particularly on the multifamily side. We still have several thousand units we're looking to turn here in the next few years, especially on some of the properties we bought over the past 12 months to 18 months. We're just getting going on the value-add initiatives at those properties. So, there is still a big pipeline of value-add across the portfolio.

Okay. Thank you.

[Operator Instructions] We will now take a question from Sheila McGrath with Evercore.

Hi. Yes. Good morning. On the Shelbourne, now that the hotel is fully operational in June and July, I'm wondering, if you could give us an update how things are trending and are you seeing any benefit yet with the asset added to the Autograph Collection, in terms of rate?

So, Mary, I'll let you go with that one.

Sure. Hi, Sheila. Yes, so you mentioned -- really mainly the decrease in NOI was due to the refurbishment displacement in the lobby, as well as the ballroom, which just completed mid-July. And then, we also had the hotel close for two full days in April to work on some M&A systems. So, now that that is all completed and the hotel looks amazing, Bill and I were just there a couple of weeks ago. We are seeing the group and the high-end leisure business come back. The high-end leisure bookings, they're about 10% up on this time last year. And then, group inquiries as well are up over about a 1,000 room nights. So, both segments we're seeing come back nicely. And I would say that the hotel is operating well against its peer set. Yes, I mean, we're seeing it come back and we think we're going to have a good second half.

Okay. That's great. And then, I guess sticking with the Ireland. Bill mentioned yield on Capital Dock at 8%. So, if you look across most of your development, it is like 7% plus. Just wondering if you could give us some insight if there has been any recent comparable sale transactions in the Dublin market, so we can see how that spread is currently comparing to prevailing cap rates?

Yes. It's kind of Dublin Class A office yields are holding at about 4%. So, when you think about what we built Cap Dock to kind of where yields are today. There are a lot of trades that will show that, that was a significant spread. On the PRS side, we're seeing yields trend below 4%. They are averaging right around 3.85%. So, everything that we're building to in Ireland, whether it's multifamily or commercial, we've got a significant somewhere between 200 basis point and 400 basis point spread to where things are trading.

Okay, great And then, if you could talk about the multifamily portfolio in the Western United States, you sold for over $200 million, just the interest level in the portfolio and maybe some insight on the cap rate?

Occasionally, one of them was in the Sacramento market and then two of them were in the Greater Seattle area, they weren't in downtown Seattle, but they were suburban Seattle. And there were multiple bidders on all three of the assets. And I would say that the appetite for multifamily assets in the Western United States is as high as I've ever seen it. So, there is no shortage of people looking to add to their multifamily portfolio. And then, so much of it, Sheila, it's not only driven by the 10-year now down below 2% today. But, it is also driven by the significant job growth that's going on in the western part of the United States and the great university systems that are producing all of these younger people. So, it was a very competitive process on all three of these assets. And we're really pleased with the final outcome of what happened. And as I said earlier too, we're also pleased with the fact that this gave us an opportunity on a tax-deferred basis to upgrade the income and upgrade the quality of the assets. I always say the hardest thing I get around with Mary and everybody to a lot of our properties, the hardest thing to describe over these phone calls is the incredible level of upgrading we've been able to do over the last three or four years in the quality of the assets that we own. And so the sale of those three properties and I'm not belittling the contributions they made, but we're trading that into what I consider to be a much higher quality long-term asset.

Okay. That's great. And then, last question. G&A year-over-year was down in the quarter. Is there any detail that you could give us on that that looked good?

Well, we have had a conscious effort over this last 6 months to not only stabilize our payroll numbers, which were down on a -- when you look back over this last year 12 months to 12 months. We've reduced our base payroll by almost $12 million with the Meyers sale and some other things that we've done. And on the G&A front, we've reduced that by about $4.5 million to year-to-date and part of that came from the sale of the Meyers Group but part of it just come from our efforts to reduce costs. And so, what you're seeing at the company and generally speaking like on the personnel front today, if we're hiring somebody, it's a replacement position. We're not really adding significantly to our payroll. And so, with all of the things that we're doing globally, we obviously have a lot of bandwidth within our existing 336 people to grow the business without growing either of those cost categories.

Okay. Thank you.

With no more questions, I'd like to turn the call back to Bill McMorrow for final remarks.

Thank you everybody for joining the call today. And as I always say, whether it's myself or Matt, Justin or Daven or Mary and I, we are always available to answer any questions. And have a great day. Thanks very much.

The conference has now concluded. Thank you for attending today's presentation.