Kennedy Wilson Europe Real Estate (KWE) plans to concentrate its non-performing loan investment activity on the “lender friendly” UK and Irish markets, with Spain and Italy predicted to be less of a focus for the firm.
Publishing its 2015 results this morning (26 February), Kennedy Wilson’s listed European real estate investment vehicle said that it will focus its European NPL strategy on locations where it is best able to execute its loan-to-own strategy.
Since its launch in 2014, KWE’s NPL acquisitions have been in the UK and Ireland. However, Spain and Italy are target markets for the fund, which invests in both direct real estate and loans. Early last year, KWE noted that Spanish banks were beginning to deleverage their assets.
“There remain opportunities to acquire loans in our target markets and we expect to continue to be more active in the UK and Ireland,” KWE said in today’s results. “We are unlikely to undertake loan transactions in Spain and Italy to the same extent as in the UK and Ireland, which are more lender-friendly markets as our ultimate goal remains taking title to the underlying real estate.”
As a result, the firm said that its European strategy will be limited to where it has a “direct line of sight” to the underlying real estate. Oversees lenders to the UK market still hold significant levels of NPLs, according to Deloitte, which KWE said it anticipates will be marketed gradually as lenders recognise the level of mark-to-market write-downs required.
“In addition, we are tracking several commercial mortgage-backed securities (CMBS) transactions in the UK which have come to the end of their fixed life,” the company added.
KWE noted a slowdown in the level of loans available to buy in Ireland due to the banks and National Asset Management Agency (NAMA) often enforcing on loans rather than disposing of them.
During 2015, KWE, which invests in both direct real estate assets and debt, cut its exposure to loans. The firm’s post-year end exposure to loans has fallen to 3 percent from 6.4 percent at year-end, which it attributed to a combination of executing its asset-via-loan (AVL) strategy over the year and the disposal of the underlying collateral of the Project Avon loan portfolio, which it bought from Lloyds in May 2014 for £93.5 million.
KWE sold the underlying collateral of the Avon loan portfolio for gross proceeds of £100.3 million in January 2016.
“We continue to believe that activity in the loan market through both primary and secondary trades will provide attractive opportunities to capitalise on our AVL strategy,” KWE added.
In total, the firm’s £2.79 billion portfolio included three loans secured by 20 assets with a value of £179.2 million as at 31 December 2015, down from £211 million at the end of 2014.
During 2015, the firm completed £1.13 billion of acquisitions across 217 properties and two loan portfolios, secured against nine collateral assets. In February, KWE bought a Park Inn NPL loans comprising eight assets for £61.9 million. In May, it bought the loan securing Pioneer Point in Ilford, London for £68.5 million.
KWE also completed the conversion of four loans to direct real estate worth £139.9 million; Gardner House, Dublin 2 and two properties from the Elliot loan portfolio, the Times Building, Dublin 2, and Lakeland Retail Park in Cavan. KWE also took title of Pioneer Point on 5 February 2016.
President and CEO Mary Ricks announced that KWE will continue to dispose of assets: “Our £300 million non-core disposal programme announced in August 2015 is delivering a return on cost of 23.1 percent on £261.9 million of sales to date. Capital recycling remains a high priority and we are targeting a further £200 million of disposals by June 2017 as we crystallise on asset management completions and continue to prune the portfolio.”
In terms of financing activity, KWE issued its first unsecured seven-year bond listed on the London Stock Exchange on 24 June 2015. The face value of the bond is £300 million, with net proceeds of £295.2 million. After using a cross-currency swap to translate 50% of the proceeds to euro, the effective fixed coupon is 3.35 percent.
On 6 November 2015, KWE established a £2,000 million Euro Medium Term Note (EMTN) Programme and four days later announced the first drawdown under the programme, with the issuance of €400 million senior unsecured notes with an annual fixed coupon of 3.25 percent and a ten-year term to maturity.
KWE’s weighted average term to maturity improved by 12 months to 5.9 years, while its cost of debt increased from 2.4 percent to 2.9 percent during the year. Gearing at the end of 2015 stood at 39.7 percent compared with 7.5 percent at 31 December 2014. Group LTV is not expected to exceed 50% and the company said that it continues to target a ratio between 45 percent and 50 percent.