Yet Another Value Podcast - Ari Lazar sees value in $KW

Episode Date: December 2, 2021

Ari Lazar, senior analyst at RGA investment advisors, discusses his bull case for KW. Ari believes KW trades at a material discount to NAV, and that discount should shrink as the company's growth starts to ramp up in the near future.My tweet thread on KW: https://twitter.com/AndrewRangeley/status/1465714725254307840?s=20RGA's Q3 letter w/ KW discussion: https://www.rgaia.com/commentary/q4-2021-investment-commentary-looking-inward-and-looking-westward/Chapters0:00 Intro1:25 KW Overview2:45 How KW fits into RGA's investment framework6:35 KW history8:30 Discussing the KWE / KW deal from ~201711:30 What's KW been doing since the KWE deal?18:35 Diving into KW's SOTP and their multifamily properties20:45 Slight technical difficulty21:25 Continued discussion of KW's SOTP / multifamily assets23:05 KW"s office assets29:45 How do you get comfortable when cap rates are this low?32:30 KW's development asset value40:20 Valuing KW's asset management business50:10 Don't all real estate companies trade at a discount to NAV?55:25 Is there financial engineering potential / could KW split into a REIT?1:02:00 Does KW belong on the Mount Rushmore of value traps?

All right, hello, and welcome to yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm excited to have Ari Lazar. Ari is a senior analyst at RGA investment advisors. Ari, how's it going? It's going pretty good. Thanks for having me. Hey, thanks for coming on. Let me start this podcast the way I do every podcast. First, just a disclaimer to remind everyone that nothing on this podcast is investing advice. Everyone should do their own due diligence. I know Ari is going to have a position in the stock we're going to talk about today. And then the second way, start this podcast is with a pitch for you, my guest. You know, you work with friend of the podcast, one of my friends, Elliot Turner. And anyone who's good enough for working with Elliot is,

you know, good enough for me. That's about as good as a recommendation as it gets. But we've also talked several times. You know, I find you to be a sharp investor. We're fellow bagholders of the Angie's list bagholder club. So we really got to watch out for each other. But I'm just excited to have you on. And that out the way, let's turn to the soccer in and talk about the company. It's Keller Williams, the ticker is KW, and I'll just flip it over to you. What's so interesting about Keller Williams? So it's actually called Kennedy Wilson. Sorry. Oh, my God. I think I saw KW and in my head, I think of stocks in their ticker, not the company, which I know is probably bad, but I think I was, but Kennedy Wilson, I've looked at these guys forever. I tweeted out the

notes to prove I looked at it. My bad. Go ahead. Oh, no problem at all. Yeah, I make those kind mistakes all the time. But yes, so Kendi Wilson, they are a real estate investment firm. They are not structured as a reed, which we should definitely talk about down the road. But what they do is they invest in multifamily properties. They invest in offices and to a small degree retail and commercial infrastructure, which is mostly e-commerce infrastructure. And then they also have one hotel currently, although they are in the process of developing another one. And I think they actually might have just acquired another one. But multifamily is their main focus.

They are based in the U.S. However, they have a lot of European investments. So geographically speaking, they're headquartered in California. They've got investments in California. The Pacific Northwest, I think like Seattle, Portland, Oregon area. They have the mountain states, which is a huge focus of their portfolio right now. So think Colorado, Boise, Idaho, Utah, and then on the European side, most of their investments are in the UK and in Ireland, London and Dublin-based for a majority of those.

Cool. So lots of different stuff to talk about. I just want to start. So, you know, again, Elliot's been on the podcast. and I have talked before, KW is a little bit different than what you guys, than what I feel like you guys normally look at. Oh, of course, my light shuts off as we're doing this. But KW is a little bit different than what I feel like you guys normally look at. You know, most of the stuff we've talked about Angie's LIS, which is a burgeoning marketplace, you know, IAC, Elliot will

talk to your off about Roku, you know, these types of things, which are more internet scale businesses, whereas this, it's an interesting some of the part story, but, you know, it's real estate. They've got a burgeoning NASA manager, but what particularly attracted you to KW? And then I'm going to use that transition into a couple of other things about some of the parts. Yeah, absolutely. So at RGA, definitely talking about Angie gets a lot more attention on Twitter. And I feel like there's more, maybe those are the most interesting to some degree stocks. But we are generalists and we focus across the entire spectrum. There's a lot less to talk about maybe our less internet-related or tech-related positions, but we

have those, and KW is a great example. At RGA, our three focuses are quality, growth, some form of growth tail, and reasonable valuation. Ken New Wilson checks all three of those boxes, and so we're fascinated with it. We think that there's, the thing that makes us most excited, not only is that we think it's an incredibly high quality real estate business with high quality assets really well managed and it's really run by McMorrow and the whole team in such a value investor way they I don't know how they find these yields but you're always seeing them like if you look at the last five or six press releases they've had and it's like we just bought an asset for a 7.5 cap rate we just sold it.

as a that's very similar for a three cap rate and it's like they get it they're their value investors themselves so we relate to that and then um they're k w we like to think of it um they were in a growth gutter or no longer but they since between 2017 and Q2 of 2021 they were in a growth gutter um and we should definitely talk about this more but we're very fascinating with our framework is we saw the we saw that turning that they were returning to growth and that got that understanding that put that very much in our radar it got us excited and is part of the reason we I wrote it up on in our last letter and that we're so excited about it and that why I'm here talking about it today perfect and I'll include the the RGA's Q3 letter in the show notes the

back half of the letter is all KW all the time so people can definitely dive into that I I guess the best place to start. So there's going to be a lot of questions. I put all my questions out on Twitter. There were lots of questions and responses there. But I think the best way, because again, this is a company that mainly owns their real estate and they have a burgeoning asset management business. And value in an asset management business is a lot different than value in a real estate business. But I think the best way to start would be let's go through the different some of the parts here, start doing an overall value framework, which I think will get people to why you're excited about it. And then we can go to some of the pushback. So, you know, people can look at

my Twitter thing, the company is really helpful in that for years, because I've got notes on these guys from 2017-2018. They've always published a basic, here's each of the sum. Here's each of our parts. You can make your own assumption, but here's how much income each of our parts do. But let's just go through it. You know, let's do with some of the parts on KW. Yeah. So I think right before we get into this, it's really important to give maybe a little history of the company. I think that that would fit really well right here. So it started in the wake of the 1987 market crash, I think in 1988, McMorrow kind of started that he purchased an auction company. An auction company was important because they have relationships with banks. And he wanted the best deals he could

get from banks on defaulted real estate. The name of the auction company was Kennedy Wilson, but that's not part of the business anymore. So he had been focused mostly on initially in U.S. real estate. Somebody on Twitter asked, there was a, they did dabble in Japan. They're not involved there anymore. I don't think they've been involved there since 2015. Yeah, I was surprised when someone asked, because I was like, I've loosely followed this for a couple years,

and I don't remember a lot of Japan talk on this. no i i had to look that up because i i heard that at one point but yeah that wasn't something i don't read anything about but then okay so then in europe and this is a really fascinating part of their story um they started investing in europe i think in around 2014 that might be a year or two off there but um they took a minority investment um and that grew to a public entity it was kwee kind of new with some Europe. And then in 2017, right in the heart of Brexit, true value timing guys, they came in and they bought the remaining 75% of the KW that they did not own of the European assets, took that

under KW. Can I pause there for one second? Yeah, sure. I, again, I've loosely followed this for your, and I remember when KW took over KW. and I also remember a lot of KWE shareholders saying this is ridiculous, you're taking us literally out at the bottom, which, you know, as a KW shareholder you love, but it does remind me a little bit, I don't know if you ever looked at Brookfield Asset Management, but you know, one of the issues with Brookfield Asset Management is they are great at creating value. But if you invest in anything at Brookfield, aside from Brookfield Asset Management, you know, like they've got a bunch of malls publicly traded, right? And then the five, then the, then the, then COVID hits and the malls are traded. trading for pennies on the dollar. And sure enough, a month later, Brookfield steps in and buys all of the malls from minority shareholders and basically a compulsory bid, takes them all out at the bottom. I think they're going to create a lot of value there. And I think one of the pushbacks with

KW would be, you know, these guys. And we can also talk about Fairfax involvement here because Fairfax has been kind of involved just on. But when you look at that KW deal, I say, oh, well, if I'm on the KW side, I'm really happy at this. But if I'm a KW minority shareholder, I'm looking at the deal and saying, why couldn't that happen to me a couple years from me? out where, I don't know, KW goes private right before there's a big trender, like, are they really going to be looking up for minority shareholders? Does that make sense? Well, I believe that they will because if you look at the stakeholders, yes, at one point, I don't think, I don't know what was going through their heads as that structure emerged having a portion of minority interest

in KWP. They were minority shareholders when they bought it. So they bought it. I mean, they didn't it shared a name, they were not the, I think it's maybe a little different than some of the Brookfield stuff. But in terms of what the stakeholders look like today, you have shareholders Kenny Wilson, I believe close to 10% is held by the CEO himself. That's right. It's a huge portion of his wealth. Then Fairfax, one of their asset managed partners, owns 9% of the company, so they're very tied in that sense. You can tell they're a big fan in the business. So you have the shareholders, you have the investors that are investing in the asset management platforms, and there really aren't any other vehicles out there that would be

at risk of something like that. So I wouldn't really be worried about that. And I don't think that they, I don't think they were really thinking, let's go screw our European investors. I think they were thinking, we have a chance to buy this asset. We already own a minority of it. Let's, let's buy it for what we can get it for today. And that's what they do. And I would not want to be on the other side of any of their deals, to be honest. So yeah, I would, I'm a shareholder because I want to be on their side of all the deals. Perfect, perfect. So I think that's, the KWE deal is happened in 2017. So what did you take us from 2017 to today? Yeah. So they had been aggressively growing their NOI, their balance sheet, everything had been aggressively growing from when they

went public in the wake of 08 until 2017. And then out of that, you're, that is when two things happen. Number one, they had to digest that. That was a huge acquisition for them. They were digesting that. They had to divest some things they didn't love. They had to change things around. They had to make it fit them. And number two, KW is always thinking about mid to long-term decision on where they want their capital, where they want their properties to be. They were heavily invested in California.

They still are. But that way more so bad. And 2017, two things happened. They simultaneously decided they wanted to cut their California exposure and that they wanted to increase their mountain state exposure. And there are many reasons for that. I mean, some of the reasons being like you have really high taxes in California, very high valuations at that time, there still are. you're looking at three cap rates across the board. Yep.

And just general, like, there's not, they didn't see much upside and they wanted to turn those assets over. So they've been selling those assets since about 2017. They've been buying for much, much more attractive cap rates. I mean, they were like the first big player to get into Boise, Idaho. They like to compete where REITs are not playing. They like to be the only ones there. And I think you're just starting to see reeds come into the mountain states, which are still pretty fragmented.

And I mean, there's a chart in the right up, but like for the such fastest growing states are mountain states in terms of population. You have, especially with COVID trends, work from home, people want more outdoor space. People want cheaper real estate. You have those populations growing like wild. And I mean, the real estate can barely keep up. There's so many projected shortfalls in real estate, which is all. really attractive. You have similar things happening in Dublin from Brexit, and they've been definitely sort of, they're still very invested in the UK, but they've been focusing more on

Dublin. And Dublin is interesting because out of Brexit, you have a lot of, London is no longer to be part of the EU. And if a company wants to have an office in the English-speaking city in the EU that was London that's going to be double Dublin's a very popular tax haven i believe google is might be headquartered there i'm not sure about that but i think so i think a lot of companies are kr is i mean you've got a lot of a lot of companies are headquartered there so dublin is growing very quickly lots of projected shortfalls in housing is in dublin and they um They find that dynamic very attractive, both for office and multifamily. And so before we get finally into some parts very soon, what's been happening is since 2017,

entered what we call the growth gutter. They've been net sellers of real estate because they're selling their California property. Yeah, they're investing in the mountain states. They're continuing to invest in the Seattle area. They're, but mostly focused on the mountain states, focused on Dublin. it. And they've been, you go from a company that's like growing their NOI very consistently, very quickly, like mid double digits, some years high double digits, close to triple digits. And then bam, I know I right after that acquisition starts going down and that there's net sales every

year. And then kind of right when that trend was like about to reverse, you get it by COVID. The largest asset that KW owns is the shellboy. It's a hotel. It is where the Irish Constitution was signed. It is extremely iconic, extremely high end. There's all sorts of ghost stories. I can't think of a better hotel on the plan. I mean, I'm sure there's things equally as good, but not many.

And the earnings profile on that asset got obliterated during COVID. It still hasn't recovered. It's started to recover, but nowhere near to pre-COVID levels. it will recover. When COVID's not an issue, there's no doubt in my mind that it will be back to at least where it was, if not more. And so that wasn't good for growing N.OI. Despite that, NOI hung in there in 2020, it was slight debt from 2019.

And we're already back to, now we're back to the point where they're growing NOI again. Q2 on the earnings call, there was a large amount of urgency for management. I are communicated to me that they intend to be met, acquires going forward. You're seeing a lot of press releases on acquisitions. They made a really interesting acquisition in California, right adjacent to a property they own, a housing on a campus. I don't remember the name of the university, but it's, they can, they have synergies with amenities. They have, they're going to develop more land.

They're going to take over a lot of the university's housing, which I'm very excited about because they have the adjacent asset, so that they already have a team there should be a great deal for them. And then I guess something that they're always thinking about on top of all this. I mean, this is net buyers, net sellers. On top of all this, minus COVID, which was obviously a rough year. Within their disclosures, you can break out what their same property. growth is. Historically, they've averaged mid-single digits. And their strategy for this is to be doing, I guess, constant improvements. They want to have, they're the dog-friendly amenities. They're the dog-friendly multi-family apartments. They're the ones with the pool, the gym. They want to be

the ones that you pay a little bit more for, but get a lot more out of them. They want to constantly be making it better and raising the price that you're more than willing to pay. And so they're able to do that. They've been doing that, and I think they'll continue to do that at home. So these are the growth talent. And then we should definitely talk about their affordable housing, which is probably one of my favorite sub-segments. We should talk about that when we talk about the re-structure. But anyways, let's get into the summer parts now.

Let's do it. Let's do it. So people can see my tweet. It's the second or third tweet and the things I put out. They literally give you, hey, here's our net operating income broken down by, you know, because if you've got net operating income from a hotel versus. versus an apartment building, you're going to value those very differently. They literally give you.

Here's our net operating income from hotels, multifamily, office, all that. Here's our cost basis for all of our development programs. Here's how much we're getting into NASA management. So they give you the parts. So let's walk through the parts and come up with kind of how you think about the value for KW. Perfect. So the first segment let's start with is their mature income earning real estate. So the way to I think about valuing that is with.

the cap rate. Multifamily is the largest segment. I think that a four cap rate is conservative yet fair. I think we were working with a slightly higher cap rate there in the RGA right up. But I'm pretty comfortable. I mean, they're in California, which probably has cap rates in the threes based on my conversations with professionals there. I hear some, I've heard even lower, but I don't believe it in the mountain states.

where they have both California and Mountain States are like, I think about a, no, sorry, Mount States, California is about a quarter of their multifamily. Mount States are about a third. Then the Seattle, Portland area, I've talking to real estate professionals, I definitely have heard below four cross the board there. That's about a third. And then Dublin is the rest. And Dublin, I've heard below four as well, minimum, because there are definitely like population growth is not being offset by um by housing growth so i think four is really fair and some context one of my buddies who's a real estate investor all he focuses on are um it's like investing in real estate a lot of multifamily and he he was telling me they were his team

was looking at a deal in the heart of covid at a at an un at a vacant door. room for a college of Wilson sure was going to survive the pandemic at a 4-25 or a 4-5 cap rate. And that's like what the market is. And I think for it is extremely conservative for their real estate after the multi-lan. Ari, I think we're losing you.

I'm just going to pause it real quick. All right, we had a little bit of technical difficulties, but we're back. Ari was just going through. His friend was bidding for, I believe, was a college mixed use facility at like a 4.2 or 4.5 cap rate kind of during the heart of COVID. But please continue. Yeah, I think it was like an unoccupied dorm for a college that was closed for COVID, wasn't sure if it was going to reopen. And that dorm was sold or was going to

sell for like a 425 or 45 cap rate. And so if that's where the market is, then that makes me pretty comfortable with the 4 cap rate and the multifamily. And on top of that, a lot of people on Twitter asked about inflation and, in fact, what happens if cap rates compress and, or I'm sorry, if cap rates will worsen. And I think that using the valuation assumptions I'm using, I think I'm building it a lot of wiggle for that. Yep. So for those just quickly, so right now, let's say he was saying buy something at a five cap rate. That's a five percent yield. It's equivalent to paying 20 times earnings for something, you know, people worry inflation goes up, a five cap rate becomes a 10 cap rate. So in effect, your multiple went from 12 to 10.

Your value got cut in half. That's what people worry about because cap rates and yields are very closely connected to each other. So that's perfect. So yeah, multifamily, 4% cap rate. I think that makes all the sense in the world. What else is in the sum of the parts? One quick point on the inflation as well. I think that it's something that makes us comfortable with it being, yeah, I mean, interest rates move, cap rates move a little. That's fine. We built then they're underwriting valuation assumptions. But if there's like a true inflation motion, I would love to be owning real properties on real estate because those assets will be just fine. I mean, they're going to their real assets will grow. The valuation will grow with

inflation because people need to buy it housing. So yeah, anyways, next point on the sum of the parts is office. It's their second largest segment. And within the office segment, I'm working with a much higher cap rate. I think it's like a thing I'm using about a five and a half cap rate, which I think is generally considered based on my conversations in the industry standard, maybe a little conservative. Yep. However, I think they have very high quality assets. Here, let me just, I got a spreadsheet on the side here that has the real pro move on a podcast. Pull up the Excel spreadsheet. Yeah. Well, here we go. So they, about 40%, I'm sorry, about 30% of their office assets are in the U.S. So that's about half of

that's in California and half that's in Seattle. Their Seattle assets are, they're renting to like really, really high. Costco, Amazon, like they're renting to amazing companies that need headquartered offices. They're headquartered there. That's a really good office assets. Those are really good office assets. Excuse me. Their California assets, they own their own headquarters. They know the area very well because their headquarters are there. They live there. They have some really interesting assets that have to do with research labs. Obviously, not something that can be worked from home. You need to go in and get your hands dirty in the scientific experiments.

And then so the U.S. office assets, I'm confident, are very high quality. So then in Ireland, they have about a quarter. So that is a very hot growing office market with Brexit. out with a lot of companies needing to put headquarters there, not to mention the tax havens and whatnot. So Dublin is a booming city right now. Great place to be in offices there. Then you have the UK is about, well, others like less than 10%. So that's not even worth discussing. And then the UK is about 40%. Within the UK, their office assets are largely in the London area. There's some spread out, but largely in the London area. And this is the other

side of the coin of that Brexit scenario. However, London is still a first class city. There's still plenty, the economy there is still plenty strong, plenty of jobs, plenty of people going to offices. And they, across the board, have over mid, they're like in the mid 90% in their office. In their office occupancy that did a tiny bit, I think, with COVID, but it's not too different than pre-COVID, didn't dip too much. And they have offices that people really, that people that are rented out and that are occupied. Now, what's really interesting about some dynamics in the British, or at least the British or the UK office markets is that your typical leases there are extremely friendly towards the owner of the real estate where you have all these options to

increase the rent if market rates have gone off. But if rates have gone down, the rate doesn't change. So that's really friendly. Second of all, the typical leases there are, I think like over 10 years, maybe like 14, 15 years, 12 years, something like that. The typical leases are like that. And so what really affects your cap rate in the London office market really is is how many years are left on the lease. If you have a lease with a few years left, you're going to look at a mid, the high single-digit cap rate because you've got to find a new tenant

to sign a really unfriendly lease and whatnot. Now, on the flip side of that, if you're a patient investor, you know the area, you've got boots on the ground, a phrase that KW uses quite a bit. They have that. And they know how to find tenants there. They know how to, they have people that they've been renting to and they know the market very well.

Now, what they do is they arbitrage this like any Great Valley investor. So in Q2, there was a press release of them buying an office asset in the UK area for like a 7-7 cap rate and then selling a different one for a 3-5 cap rate. I'm, I would be surprised if the term of years remaining. on the lease for that 7-7 cap rate, where just a couple of years and that 3-5 cap rate was something that just got renewed. So they're the ones who they'll go do that work. They'll get their hands dirty and they'll, yeah, that's why I'm confident in a 5-5 cap rate. I think that their average duration in those assets are definitely somewhere in the middle

there. And I think 5-5 cap rate makes sense. So that was a long answer to that one. No, no, no. That was perfect. Interesting stuff. Perfect. Look, I don't disagree with you. And actually, one of the things, because I've been following this for a while, you can go to their 10K. And it's not for their actual producing assets, but it's for their development assets. And they give you, hey, here's the range of cap rates that we're using to think about our development assets. And the numbers you just gave me are square in the middle of what they use. So we just did multi in office. That's 340, 350 of annualized net operating income. I've got their NOI at 410 or so for the developed stuff. So I don't think we need to go through the rest of it. We've covered by far the majority here.

But so what you're seeing is multi at 4% office at 5.5%. And we can cover that produces, I don't know, $9 billion or so value in total for the developed segment. Am I kind of doing that math right? Yeah. Well, actually, let me correct myself here. I think I'm working with a five cap rate for the office. Okay.

So, yes, but I actually, what's a half percent among friends? No, that's actually a big deal with this stuff. But yeah, no, I'm working on the five cap right there. But I don't think five, five is crazy. I don't think four five is crazy. I think it's the range that works. Let me ask you another question here. And this is something I always worry about when I look at these.

And actually, it'll come into another question I have on net ask value later. But you know, you just said, oh, I said five and a half percent cap rate. I'm actually using five percent cap rate. And, you know, one of the things I worry about is when you look at real estate, when you get to these small of cap rates, right, four versus 4.25 versus 3.75, like a small change in cap rate makes such a difference in the valuation, right? Because going from 5 to 4 is, that's literally 20% boost to your property. And it's not that big a change. So I worry, I start getting into my head about, hey, am I just garbage in barbage outing this, right? Where, oh, I had a. at 5-5, but I thought that was conservative. So why not 5-25? And I do that. And all of a sudden, my value is 10% higher. And, you know, what was a hold or kind of fairly valued becomes really undervalue. Do you worry about that here? Yeah. So I think that that's when it comes to margin of safety being the keyword. So like, you, you have, you have your assumptions. You get to

value. And if that value is, the value I'm coming out with is, 48% above current market price, then I'm not terribly worried about a half turn or a turn on those things. And I think that what it really comes down to is, yeah, if you're going to pitch something arguing that it's a vibe because it's 1% undervalue, but then you make that quarter turn, half turn, and that makes the difference, then you're really just probably not playing the right game. And I think there's so much more to this story here than just what does the valuation come out to?

And I have a valuation background. I worked as evaluation analysts for about three years before switching over to the by side. And I think that it's so easy to get lost in the weeds here. And it's really important to have an opinion on these things. and I think it's more important to have a reasonable range and when things get interesting or when I think you have this is my reasonable range of outcomes but it's worth this much and it's priced like I'm sorry like this is my range of outcomes and it's worth like it's priced here

but it's like worth here so it's priced here but it's worth here that's when things get interesting Yeah. And if they're doing things to add value on top of that, that's when I think you can get even, it becomes even less. I mean, it makes it like, it gives you a more margin of safety. And I think it's something like why growth is important because it can bail you out of problems like that. Yeah. And I will say just like, I'll save that for the NAV discussion actually. Okay. So we just did their operating net income producing assets. You know, we said, 4% cap rate on multi, 5% on office, the other stuff is small. You can play around with it, but probably comes out to about of the 410 million in NOI that I think they're run rating right now probably comes out to 9 billion or so of value. Let's switch to the development assets. They've got, I think it's about $1.5 billion of book value in development assets. You know, in my head, just to make this conversation pretty quickly, I've always just valued those at book when I look at them. I think you could make an argument they're worth more than

book. I'm sure there's an argument they're worth less than book. But how are you looking at that $1.5 billion of 2021? The company came out with some new disclosures here that really helped clarify that picture. What they did was they told investors exactly how much NOI they were expecting stabilized um the stabilized outcome to be and at which year they they would hit their um p and so they actually fed it to you on a platter exactly when it's going to hit how much it's going to hit and so it actually made it for me it finally made it so i could value it in that sense out away from cost basis so what i did was i looked at um so i mean we just talked about about what sort of cap rate I'm using for their assets.

And I'm using a global, like, yeah, I come out to about $9 billion in value for their global portfolio. And then when you look at the, what I think these assets will be, because I think the assets that they're developing are just as high quality as the ones that they have. So I'm using that same cap rate. However, on the average time until that those, those. those earnings are going to hit their stabilized profile is actually like almost exactly two years. So I discounted. I took that value of slap on that cap rate. And then it's two years

from now. I use a 10% discount rate. That's way too high for real estate. Though I guess it's development real estate. Yeah. You know, I'm trying to, what if there's a delay? It's probably two. But, yeah, I think that's conservative. And I think that there's plenty of upside there to be had. And I think that, yeah, I'm really trying to work with assumptions that make it really hard to lose here. Again, not to be a 10-K junkie, but I think if you go to page, I'm looking at right now, page 89 of their 10-K, they actually give you how they discount their development assets. And it is lower than 10%.

So conservative here. Yeah, they actually, their mindset for when they do developments is they're trying to work back from a between, I think it's like seven and six, six to something like the six to seven percent yield range is what they target with their developments. So yeah. And then so, you know, I said about a billion and a half of a book value here. When you do your math, what valuation do you get for, what valuation do you get for that? Um, yes, I'm at one, about one point seven billion. Okay, so that would add another $200 million or so in value. There's 150 million shares outstanding or so, I believe. So that would create, uh, up, nope, I'm on the old sheet. There's, yeah, still 150 million shares, if I'm right. So that would create about, uh, that would create about a dollar or so of extra value over the book value I was talking about. Let's turn, unless you've got anything else in the development, I want to turn to the most interesting segment to me. Yeah, I think it's great. I mean, I think before we go there, I think it's, we don't have to get into the nitty gears how they're being valued, but I think it's worth just briefly discussing their other assets. Sure. So they have retail, which a lot of those retail assets are things that are like kind of attached to, you've got a hotel and a retail shop in the hotel. You've got a, you've got like an office building and some retail on the first floor.

And that's important. I'll jump out of you. That's important because, you know, when a lot of people think retail, they think, oh, the old strip center off the eye, off the interstate. state that maybe doesn't get a lot of traffic, which, you know, those have a very questionable future. I think the future for retail, you know, the Starbucks at the bottom of the office building or something, maybe if it's not a Starbucks, maybe if it's a retailer, it's got a little bit more questionable future. But I think there's absolutely value there just because there's so much foot traffic going by. So sorry to jump in, but please continue. No problem. That was a great point.

And I think that's really interesting because they're very versatile. They're not, oh, we can't touch it because there's a dollar of retail income. They're versatile. They make it work. And they've actually, throughout that time period from 2017 to Q2, they were actually not only selling assets in California, but they were selling down their hotel and retail assets, which was a really lucky move going into COVID. But they were actually had a strategic imperative to get into more multifamily office is important to, but really focus on multifamily. So there's that. They have a really interesting. This is probably one of my favorite.

segments, but they have a, their commercial segment is all industrial assets that, I'm sorry, the commercial encompasses retail. They have industrial assets under that, that are, their industrial assets, 100% occupied. They are e-commerce infrastructure. They recently, like, bought an airport in Brighton, in Brighton, UK. And they're going to take a lot of the land there build like shipping warehouses for like logistics and I think that it's a brilliant play um and the final segment which we which I already discussed at the hotel and I think that is worth talking about valuation because it's really hard to value so largest assets so it's important and it's um the way that I think about valuation there is it's really hard to use

I know I on it and and what I really triangulated how to think about the value there is I looked at price per key transactions or like price per room of a hotel yeah I saw inferior hotels or heard accounts of hotels that are just not as upscale not as desired not as iconic not as historical I mean literally the Irish constitution was signed in a room there and like the highest number I saw for all for inferior assets was a million in a room. So I just used that to get to the value there. And I think that's a appropriate way to think about that. And that transaction happened in a post-COVID world. So that's, that is a reasonable one. Just to back you up, because it sounds silly to say, oh, the Irish Constitution was sold here. There's this, but people do

pay up for trophy assets like that, right? Like I don't have a ton of them off the top of my head, but you think back to something like the Waldorf Astoria on in New York. You know, a couple years ago, it went for record-breaking sums because that was the hotel that every president stayed at when they came, right? They don't stay here anymore, stay there anymore because the Chinese bought it and there's national security concerns. But like that type of stuff buying the trophy asset that resonates across the world, there's real value there because tourists are always going to want to go there. And people respond to that real value where they put lower cap rates on it and people compete a little bit more aggressively to buy it. So I think that's definitely there.

Okay. So I think we've covered the development assets, you know, 1.5 of book. You think they're probably worth a 200 million overbook. We've covered the NOI, probably $9 billion of value there. Let's talk about the thing that I think, you know, at the asset management stream, right? So the asset management stream to simplify, this is, hey, we run funds, third parties give us money. We take management incentives on it, right? The classic private equity model, the classic hedge fund model, the classic real estate model. They've got, oh, off the top of my head, I think it's $4 billion in assets in third-party assets and management. You can correct me if I'm wrong, but it's four and a half, but yeah, four and a half. As of the Q3 presentation, the run rate $33 million in asset management fees, $67 million in incentive fees for a total of $100 million run rate and fees. You know, you look at the valuations that some asset managers trade at. They've all go look at the stock price of KKR, Blackstone, any of these. They've all done screamingly well because people look at these fees as high. margin, I'm very sticky. Fees are obviously not earnings. So I've said a lot. I've rambled a lot.

I'll toss it over to you. How do you look at that valuation? Sure. So I think that before I get into getting into the value, I think it's worth discussing the business and how important it is. So they, KW, they are experts at finding cheap real estate, high quality real estate, and they're great value investors. And that has become recognized by large institutions, insurance providers. Actually, from a recent press release, Goldman Sachs has just invested alongside them in something. So that was nice. Goldman Sachs, asset management, I think. So that was, that was great to see the traction there. But so Fairfax owns 9% of KW stock. They are clearly huge fans of this. They outsource their real estate or a portion or all of, I'm not sure,

their real estate investment to KW. And they are actually, what happens is this allows KW to have more capital to play with, invest in larger deals, keep a portion on the balance sheet, but then also have charged fees on the additional parts. So it's a beautiful business. And I think that it in some ways it's more interesting than when you have a company that just manages assets because KW's bread and butter is to operate this business. And it kind of reminds me of digital bridge or what used to be calling Capital doing the sort of two-step approach with digital asset management and digital assets. And you have the core competencies.

And I think it's a really interesting another player doing this as well that I find fasting. me. And you have like, they have the ability to know what they want to buy, know what they want to keep a lot of, know what they want to keep less of, balance their portfolios geographically how they want. They have the ability to, if they need to raise capital quickly, sell it into their funds. If they, it gives them flexibility. They have the ability to do specific asset types for partners. They're partnered specifically with the Singapore sovereign wealth fund to do the e-commerce industrial investing. So that's something they're doing alongside an amazing partner. And it's amazing to be, it lowers their cost to capital because they're able to do these

deals, not have to front the cash. And it's like they can play in bigger ponds. It also allows them to get their name out there more, get reputations with developers, be able to commit developers, commit more business to developers and have better relationships. And that's been really key to them to keeping their development on schedule. So it all kind of, it makes their core business a better business, and their core business makes their asset management a better business. And what I find really fascinating as well is, I might be butchering the AXA or OXA. They have their own segment for this, but despite that, they invests with Kennedy Wilson,

and which I think speaks volumes to how high quality Kennedy Wilson is at this. And yeah, so now into the valuation of it, they have a lot more committed capital than they have even, than they've been able to deploy. A huge source of this has actually been their debt platform. They started investing in debt pretty recently within like the last year or two. If I remember correctly, Fairfield gave them, sorry, Fairfax gave them two billion dollars and like pretty much the height of COVID, right? It was like May 2020.

They gave them $2 billion to go out and lend, which speaks to the relationship because, you know, $2 billion was pretty precious then. They've been, between the fees they got, the yield on these, on this debt, which is about 6% and I mean the fees on which like they're putting up 5 to 10% of the capital so they're charging fees on much more they're getting mid teen IRA on these on this debt platform but the most beautiful part and why they're in a whole other league on these debt investments they're not doing diligence on the borrower they're doing diligence on the value of the property they're underwriting they're not looking at the borrow which almost every other lender on the planet is like and the

reason they can do this is because they'll make even more money if the debt defaults, because then they get to acquire the property way cheaper than if they bought it in the market. The old loan to own. I've heard this story before. But, okay, so $100 million in fees. Let's try to figure out how to value that. Sure.

So you've got, the fees are very lumpy. Sometimes you get a big incentive from performance. Sometimes you don't. But in general, based on my conversations with the company, they, they, they, kind of described to me that they think the best way to think about it is assets under management, their revenue and low should average out to about 1% their fee there. So then on that, they expect their EBITO margins to be 50%. And I believe that's very consistent with, relatively consistent with historic figures and they're still growing very rapidly. They've been

growing and are on pace to growing. If you just look at their capital commitments by like, about 20% per year. I think that's a pretty reasonable growth rate to expect from them for the next few years. And so they're for, they'll be at $5 billion by the end of this year. And I think, yeah, and it grows 20% a year for a couple of years. So I think that the way that I think about valuation is 1% of AUN as revenue, 50% of that in EBITDA. And then I don't know if the comps had moved since I pulled this. in September, but I looked at what are the forward comps of similar businesses that are

pure plays that are asset managers that are growing at like anywhere from in the ballpark like at 20-ish percent or less. And that came out to mid-teens multiple. And I think that using that multiple for KW, and I'm working with forward numbers here for to just to be as transparent as possible. I'm using 13X forward EBITA. And I think that's pretty conservative. I think it's an unbelievably stable business, like extremely sticky.

It's, and I mean, it ties so well into their core business. And like what I was, that portion of the business makes their core business better. And their core business and competencies make them better at the asset management. I mean, maybe you can argue there's a premium that should be there, but I didn't underwrite

that, I guess. You know, I can't remember what was this investor day or the last investor day, but Apollo's investor day, either this one or the last one, does a lot of work on, it's got some slides that really lay out, hey, here's how we think about managing, about valuing both our asset management fee stream, the management fee stream and the incentive fee stream. So, you know, actually, I think your multiples are a little bit lower than they would, but it's also, you know, they're the hairdresser telling you need a haircut, right? So, yeah. But I think they would probably push you that you're a little conservative. And, you know, 13 times EBIT offers something,

at least on the asset management side, that should be very steady. You know, it shouldn't be cyclical. It's probably a little light. But let's put it all together. So $9 billion of dollars in value-ish for the developed net operating for producing assets, 1.5 to $1.7 billion for the kind of lease up development assets. And I think if I'm doing my math right, you were saying about 700 billion value for the combined asset management and incentive fee business. It's a bit lower than that, actually. Because I think they had a lot of performance fees. Yeah. I'm working with just the 1% of A.U.N. Okay. So you're not even value. But if I put that all together, I mean, I think I get a value per share, you know, take out the, they've got six billion of

net debt that's attributable to them. Take that all. I think I'm getting a value per share over $30 per share. Am I thinking about that correctly? It's exactly where I am. And so right now, as we talk the stocks in the low 20s, if I remember, so we're talking, as you said, about a 50%ish discount. Let me, so here's the pushback I want to provide. So I tweeted this up. You know, I have heard real estate company trading at a discount to NAB forever, right? Howard Hughes. Everybody always likes to go argue, go look at the Howard Hughes comps. The ones I really think about, which are not perfect comps here, are Vernado and S.L. Green, which are both all New York office base. So again, not perfect comps, but both of

them, you know, S.L. Green attacks their share account. They buy back so many shares. Vernado actually has said, if I remember correctly, Steve Roth, icon of real estate, he says, hey, we don't believe in buying back our shares because we actually think, even if our shares are at a 50% discount, the returns we can get from going and developing the next big skyscraper in New York actually create more value than buying back our shares at a discount to NAB, which he walks through the math and I had always kind of disagreed with him, but increasingly I think he might be right. But, you know, both them, I tweeted out the chart that showed Bernardo's stock price versus their estimate of NAB, right? So both of them always say we

traded a discount to NAB. Why is KW different than these guys, right? You say they traded a discount to NAB. Why shouldn't they? Everyone else does. What's special about these guys? Yes. So I think that what makes them, they're clearly trading at a discount. And I think that that discount should probably, I expect it to to shrink, if not disappear in the foreseeable future for a couple of reasons. The first is that if you look at, if you look at NOI growth and And a lot of how multiples work in all forms of applying multiples for investment reasons is you have to look at the growth and the growth and multiple are tied at the head. And so from basically when they went public until 2017, KW, the stock performed excellently.

I definitely think the multiple got a little out of hand in 2013 and 14. But it corresponded with a couple of years where they were growing at almost 100% year-over-year growth. A lot of that was from net acquisitions, but they were growing very quickly. And I think that as long as KW can show consistent growth and keep growing, they'll get their multiple back and they'll close that discount. And I think that a big focus on the letter in our commentary is about, why I think they're exiting the growth gutter. So on one hand, you're coming out of COVID where they have a lot of assets that were impaired from that. Plus, you've got tail-ins to the mountain states, accelerating population shift towards a mountain state.

So that's a tail-in. They consistently grow their same property, like the same property rent mid-single digit. So there's a tail-in there. The company has told me they're aiming for net acquisitions and I definitely seem to think they're on that path from a few press releases I've seen over the last couple months. And I mean, they are developing like credit. So they have about $400 million in NOI. Over the next three to four years, they're going to add $100 million in development on top of $400 million. That's 25% growth from developing a loan before, I mean, like you've got upside from COVID.

You've got management thinks they're going to McMorrow, the CEO came out pretty confident that they're going to grow 10 to 15% for the next couple of years and grow NOI that much. And I do think that once they return to growth and show consistent growth, not to mention their asset fee-bearing capital segments growing at 20%. And that's really high margin. You're going to really start seeing that accumulate on the bottom line more and more. Not that. So I think that there's a lot of reasons why you could see multiples, I guess, converge more with Nav going forward. And on top of that, I think unlike a lot of other real estate companies I look at, I've looked at a few. I haven't looked at a ton. I'm not a specialist. But KW stood out to me when I was

researching it because unlike at least three or four other ones, they have such transparent disclosures. I understand exactly what they own. I feel like I can value it. And I feel like other companies trade at a nav that's blurry because you don't know exactly what they own. It's what I said at the beginning, right? They might just give you an NOI and you've got to guess how much of it is hotel versus resource versus office versus multifamily. In this case, they give you every component of the NOI. So I'm a lot more comfortable with the NAV here than other real estate companies. Let me ask you one of my favorite things, financial engineering, right? You mentioned at the beginning, KW is not a REAP, which is a little surprising to me, right? Of the, we estimated their value at,

I don't know, before debt, it was like $11 billion of enterprise value. And of that $9 billion or so was net operating producing properties, right? Like properties that are cash flowing right now, those are exactly what are meant to be inside of REITs, right? Big multifamily that produces consistent cash flow. It strikes me as inefficient that it's not a REIT right now. So how do you think about the company and being a REIT going forward? Because if I remember correctly, I could be wrong. But I think in 2018, there was even a push for them to consider becoming a REIT. I can't remember for sure. But how do you think about REIT, financial engineering? Because another financial engineering they could do. They've got a burgeoning asset managed business.

They've got a lot of, they've got a lot of income producing things. They could split them, right? They could spin off the asset manager and the properties and do some financial engineering that way, which I've seen companies do pretty successfully before. But read financial engineering everything. What do you think about KW in those terms? Yeah, I don't think they're interested in the financial engineering. There's so many, like I explained before, the aspects of the fee bearing versus the property owning that make the other one a better business is so valuable. Why would they want to ruin that? And yeah, it becomes easier for a Wall Street analyst to figure it out.

But McMorro's a very long-term thinker. At RGA, we invests five plus year outlook. So I'm not concerned with that. Maybe this is not the right stock for investors who are expecting something like that. But yeah, I don't really think there would be any, it would. wouldn't make sense to me for them to do that spin-off, nor do I think they have any interest in it. And there, oh, sorry, go ahead. Oh, no, I hear you, but I do think the tax efficiency of splitting the net operating producing assets into a REIT structure and then spinning out

the asset manager. I do think there are efficiency arguments there. So KW is actually one of the most tax-efficient businesses I've ever studied. They roll over their 10 with 1031s, they are able to offset a lot. I don't know how much, but over half historically, well over half historically of the dividend payouts have been offset as 1031 rollovers. Return of capital. Yeah. Return of capital. So they are, they're not paying that much in taxes. They're really tax efficient. Some other things they do to be tax efficient. So I mentioned earlier affordable housing. I think it's like 10, 15% of either the, I don't remember if that's 10, 15% of the multifamily or of the total NOI. I think it's total NOI, but I have to double check.

They, what they do is they go out and they get a permit to develop multifamily housing. They develop the housing. They then get reimbursed the entire development expense and tax credits. So they are building that and growing that as fast as possible, as fast as they can get credits. It's helpful for the world. The world needs more affordable housing. They make good returns off of it. Their return profile, and that is extremely, extremely positive. And how do you even calculate the IRA on something with functionally zero upfront cost because it's all reimbursed in the tax credit? So they're really tax efficient in that sense. And then when it comes to not being a rate, I think it's really important in an edge for them because they're not

beholden to having to pay a certain portion of net income out. They can focus on growth priorities. They can do share by bet. In 2018, I think the company bought about 10% of the flow back because that was what they had the capital and that was the top priority. They're always discussing and figuring out and acting on what is the best use of our capital. Right now, the next couple of years, it's the development pipeline to grow on OI by 25% from that alone. After that, they're going to have a lot of capital to work with. And it's really messy when you look through their gap financial statements as it is with all real estate companies. A lot of when they buy or sell real estate, it gets into cash flow from operations. It's all messy. But like,

they have a lot of things that are, they're using cash for, a lot of cash for for the next couple of years that three, four years from now, that's going to be fair game for an aggressive buyback for dividend or what I almost prefer, they find more opportunities to keep that double-digit growth going on a high level. And they pay a 4% dividend. That dividend has grown at a double-digit hogger for as far as I could go back in the data. And I'm, you could, I also have another way to value this company, just a simple DDM. And I get to a similar value of north of 30 a share. And I'm, And I think that you can really count on them to grow dividends at 10% for a very long time. They've done it and they will continue to do it.

And that's a priority for that. Now, they balance that with growing. And their philosophy, it's really similar to how I like to and how RGA likes to look at, think about the philosophy we like in companies where you, where you balance. value, finding great value and growth, but you're, they're balancing everything really well, I think. And so I'm very happy that they're not a reed. And I think that something they talk a lot about is they like to play where the reits, the big reits are not playing. They like to look for the opportunities where no one else's looking, which is why they're the largest holders in

Boise, Idaho of multifamily assets. And I think that that's, that's, that's, that's, that's, huge and then that's a big deal and they're going to have so many so much flexibility with that they're going to i think they're going to add a lot of value from owning that today and something they've said that it makes it really hard to grow these mountain states uh to grow in the mountain states you've got two options you can purchase your way in for really really aggressive cap rates or you can have boots on the ground and you can already know the developers and that's that's where they are right now in a really hot, quick-growing market that I think has many years ago. Sorry, I went on a tangent. No, no, no, that's great, though. I feel like you're bordering on besmirching Boise, Idaho.

And the yet another value podcast fans from Boise, Idaho are not going to stand by for that. We're approaching over an hour, I believe. So I want to wrap this up. But I want to do one more question and then maybe get your final thoughts. You know, the question, I'm sure you saw it on Twitter. It comes in two forms. And it matched my priors, right? where KW had the slide in their proxy statement that said, hey, we've outperformed our peers. We've outperformed the indexes over the past. I think it was 10 years and three years or something, which didn't really match my priors. You know, I remember looking at this in 2017 or 2018 on the heels of the KWE thing.

And it's kind of been me since then. And, you know, a lot of people, I think a direct quote was this is on the Mount Rushmore value. This belongs to the Mount Rushmore values traps. Like there's good assets, there's good management, but the market's just never. going to care. And that also kind of rolls into the management team gets paid really well, and they kind of get paid really well, whether the stock does blet or the stock does pretty well or something. So maybe they don't super care. You know, it's the old private equity. They care about if their funds are doing well or not because that's where all their carry is. They might not

care as much about their stock because their carry is more direct than their stock. But I'll just toss all of that that I just talked about over to you. Yeah. So, Mark Morrow, the CEO, he's one of if not the largest holders of the stock. He owns close to 10% of the company. I think he's highly aligned incentives to, in the long run, make the stock work and the dividend payment that he gets a lot in that. So he's got the balance of both of those. I think that the first thing that came to my mind when I started looking at this and opened the chart was, this looks like a value trend. I think that, This company just went through between 2017 and Q2, 2021, went through a very, let's numerically messy transformation, a very necessary, long-term-oriented transformation. And this management is very long-term-oriented. They were selling off a lot of assets. They were moving geographies. They started a lot of development projects. They were very focused on planting a lot of seeds and you can look at this and like if you take a step back with that in mind and I again

I want to reference if you get a chance to look at our commentary I have a chart um in there that I really like that's about it'll be in the show notes for my listeners go ahead perfect yeah and that chart it shows the correlation between I know I growth and net acquisitions and starting in 2017 when they made the biggest acquisition I think they've ever made, at least as far as I could tell, it was a KWE buying 75% of that, that a lot to digest there. And on top of that, you start divesting California, you start divesting retail, you're selling your hotels. And then you're buying some Mountain State. You're starting a lot of developments. And yeah, that was really messy for the stock performance. But if you zoom out, the stock has done really, really well. If you go back

to when they IPO. It's done really well. And I don't have the numbers all the top of my head. I'm not surprised. I saw the thing you posted. I also, I don't know who they indexed. I don't, I maybe scratched my head at the three year as well. It has not been a fantastic three year performer. And that's, I think that this is the moment that they get out of the growth. This is when the growth comes back. And this is when the story cleans up. And I think that, I think that, I think that if you zoom out enough and if you're patient and you're a long-term investor, I'm confident that management will do what they've been doing since they IPO with this and they clearly added a lot of value leading up to that. And I think that the value trap

might have been there for a few years. I think the value trap's over. And yeah, I really do think that the market will start to care once they've grown in a line for a couple of years. And And they've, on top of all this, they've started cleaning up, they used to offer a lot more services, like a lot more subdivisions. And they've been cutting those aggressively. They're just trying to simplify the business. And I think that that's a huge reaction to that and something that I like it. Yeah. My old model had a lot more had a lot of different segments they have. And to your point on, you know, sometimes the best opportunity is the stock is flat for five years because they're going through a messy change or something. But. Five years ago, it was fairly valued, and intrinsic value has increased by 10% per year for five years. So fast forward today, the stock's flat, but now it's 50% undervalued. And as you say, you're kind of catching that curve right before it spikes up. We've talked a lot about Kennedy Wilson. I want to give you last thoughts. Is there anything you think we should have hit a little harder, anything we didn't cover that you think is important to the story or anything?

Um, yeah, I think that, um, I think we hit most of the interesting points. Um, were there any I read through the Twitter questions. There are a lot of good ones there. Is there anything we missed from those Twitter threads? You know, I think we really covered, I think we really covered everything. Most of them were pay, incentives, interest rate risk, inflation risk. And I, I think we did a nice job of at least touching on everything. Uh, you know, the, the two out there ones that I had kind of thought in my mind was a lot of their assets are in Dublin. And with tax reform coming, do companies stop headquartering in Dublin? But that might be a little too galaxy brain for this podcast. And then rent control risk is a big topic for some of my friends who invest in New York

real estate. I don't think they've got a lot of rent control risk because I don't think the mountain states are where they're going to be putting out rent control. But that's an interesting out there one I was kind of thought where I was trying to think of some off the cuff shelf to throw at you. But I don't know. Anything else you want to talk about? no i i mean not seeing any evidence of rent control in the mountain states these days that's for sure but um yeah i i think that's it and i want to just encourage anyone who's listening to if they want to discuss k w if there's a question they have i haven't answered to reach out to me on twitter um i'm at pommel horse nine i was a gymnast in high school so i shut over you really

yeah that's awesome can you do the can you do the tea the iron the crossword yeah yeah i I could have, now I don't know, I haven't touched a reset since the pandemic, but I definitely could back in the day, so that's pretty cool. That's pretty cool. Well, hey, Ari, this has been great. Thank you so much for coming on. I think in the next few months, we're going to have to have you back on to talk about Angie and just, we're just back on it all the way through, man. I still love that company. I know the stock price is telling me I'm wrong every day, but I always happy to talk Angie. Always happy to talk Angie. Well, hey, I appreciate you coming on. Everything we talked about is going to be in the show notes.

We want to reach out to Ari, read the Q3 letter and everything. And Ari, thank you so much for coming on. Thank you. Take care.