Welcome to the Second Quarter 2015 Kennedy-Wilson Earnings Conference Call. My name is Christine, 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. You may begin.

Thank you, good morning. Joining us today 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 Web site 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.

Thank you, Christina, and good morning, everyone and thank you for joining the call this morning. We've got a lot of information we're going to go through here this morning. But, this quarter was one of the best in our history in terms of what we are able to accomplish on the acquisition, disposition, financing operations and asset management side of our business. First, I would like to discuss some of the key financial highlights for the quarter and for the first half of 2015 followed by a discussion of the record $3 billion of transactional activities so far this year and how these transactions will impact the company in the future. We will then walk you through our property operations and how our value-add initiatives and asset management have led to improving metrics across the board. Next, we will explain some of the big value creation projects that are happening at the company, which are not currently reflected in our financial statements or investment account. Finally, we will conclude by discussing our current financial position and outlook before opening up to your questions. Starting off with the financial highlights this quarter, which was the second best in our history only exceeded by the financial results of the second quarter of 2014. Our adjusted EBITDA for the quarter was $112.8 million compared with $122.2 million for the same period in 2014. Our adjusted EBITDA includes acquisition related gains of $45.9 million and $52.5 million for the second quarter of 2015 and 2014 respectively. Also included in our EBITDA for the quarter were gains related to the sale of our Japanese apartment portfolio in 2015 and gains related to the sale of our Irish commercial portfolio in 2014. Excluding gains, our adjusted EBITDA for Q2 more than doubled from the same…

Thank you. [Operator Instructions] And our first question is from Vincent Chao of Deutsche Bank. Please go ahead.

Hey, good morning everyone.

Hi, Vincent.

Hi. I just want to touch based on the disposition activity here. I think about $1 billion done already so far this year. And I thought last quarter you talked about – trying to do about a $1 billion for the full year, it sound like there is additional plan ahead. I was just curious just in order of magnitude how much more in dispositions should we expect here in the back half?

I'm going to give you a bit of a range here. But, I would guess Vincent in the second half of the year that you are going to see somewhere between $300 million and $500 million of additional dispositions.

Okay. And that sound like it's largely going to come from the office portfolio there in Southern California?

It's going to come from the office portfolio we have a few multifamily properties where we have partners in that we will be disposing off of in the second half of the year. And there is some few planned dispositions in our KWE portfolio in the second half of the year.

Okay. I guess, as we just think about the commercial portfolio in Southern California, so it sounds like a lot of the vacancy is now addressed, I guess for those that are not slated for sale, I think now that they are stabilized, I mean it's the longer term plan here to sell those eventually as well. Just given where maybe cap rates have gone and just a fact that you have sort of stabilized some of those assets?

Yes. I mean as I said on earlier calls that we have a few core office properties that I think you will see us keep long-term. But, I said generally there is a very big difference between the office leasing market in Europe and the office leasing market here in the United States in general. The lease terms in Europe tend to be much longer for example the lease that Mary just did on our Baggot Street Building in Dublin as a lease term of 25 years. Generally speaking here in the United States the lease terms tend to be between 5 to 7 to 10 years, which means that on a regular basis you are reimproving what capital these office buildings. And so that makes the office business in our opinion here in the United States more challenging than it is in Europe. So from time-to-time and especially in this cap rate environment we are taking advantage of any opportunities to sell where we think the buildings have stabilized. But as I said earlier there is a core group of maybe five or six office buildings here in the Southern California that you will see us keep long-term.

Okay. Thanks for that. And just maybe thinking about some of the global uncertainty that you mentioned, just curious how that's impacted sort of the financing environment in Europe, obviously, you got the unsecured debt offering done probably at a pretty good time. I was just curious, how those markets look today and also if there has been any impact on sort of the investment opportunities you are seeing – have you seen some of the disruption there create more opportunities than you have been seeing off late?

Mary, you want to comment on that?

Sure. So you mentioned in terms of the debt market and –

Yes. Some of the volatilities you are seeing there, yes.

Yes. I mean so, I think you alluded to – we were really pleased with sort of pricing the bond when we did and closing it when we did. I think the market was open in Europe here for just a couple of days and we got it done there. So we got pretty lucky there. In terms of our acquisitions and just the volatility in Europe, I mean, clearly, the volatility as we think in holding the euro debt, the euro secured debt market down quite a lot. So that's helpful on the secured side. And in terms of acquisitions, there is still a lot of disrupt here. I mean NAMA still has $12 billion on their balance sheet, SAREB has $44 billion. In Italy there have been in the first half $1.5 billion sales have traded which is double the amount traded for the entire year last year. Spain, it's picking up a lot of transactions there. So we are seeing a ton of opportunities and we are just pricing in whatever risk it is and I think you know that we have the ability to invest across asset classes jurisdictions and the capital stack. So that sort of allows us to maintain the pricing discipline and good deals on the way in.

Okay. Thanks.

Vincent just one -- add to Mary's I mean, if you look at the interest rate differentials between the United States, today roughly the tenure in the United States is a 225, 230 something like that. But the tenure in Ireland is 100 basis points less than that. And so – and that's pretty much true across Europe and what I call the more stable economies, Spain, United Kingdom. And so as I said earlier in my presentation there is still about 100 to 150 basis point spread with rates being that much lower in European markets than here in the United States. And also, I think obviously the big change in the European market, when we first went to Europe in 2011. And we are really kind of the first to get there on the U.S. institutional side there was no debt market at all. All the early acquisitions that we did in Europe basically were all equity. But obviously today there is an extremely liquid property financing and debt market in Europe. But, as Mary said there are still plenty of opportunities to invest in the markets that we like in Europe.

Okay. Thank you. And maybe just one last one for me, I mean, so you got some dispositions that are coming down in the back half, obviously, you got fair amount of liquidity already on the balance sheet debt, I think it's pretty close to your target of about 50%. And just curious how you think equity at the KW level plays into future liquidity decisions or is it going to be mostly focused on dispositions given that stock really – it's been somewhat range bound I guess despite you guys continuing to put up some pretty good numbers we think and continuing to make accretive investments here. Just curious how you are thinking about the equity component?

I mean we are very focused on generating cash internally and doing our investing activity off of the internally generated cash. And so we don't have any plans at the present time to issue any equity. And we have – as you all know we will have a big ownership interest in the company. We think that the KW stock is a very solid value proposition today. And so we are very, very focused on generating cash internally as supposed to raising capital externally.

Okay. Thanks a lot guys.

Thank you. Our next question is from Mitch Germain of GMP Securities [sic] [JMP Securities]. Please go ahead.

Hey, just another question on the asset sales. Are they going to be granular or you thinking about possibly doing some portfolio?

They are mostly into the July asset sales Mitch. We have about doing this from my memory map, we have probably, let's say 10 individual asset sales that we have planned right now that are currently underway that or in that to re-reference that $300 million to $500 million or inside of those numbers that I mentioned to you earlier. But there are no portfolios that we're selling.

Great. And then I appreciate the extra disclosures this quarter particularly on the development and I'm just kind of curious, Bill on your thoughts with regards to how you look to manage development making sure that you are not over exposed particularly doing something on it speculatively. So maybe just kind of your thoughts surrounding that [indiscernible]?

Well, I think there is two things really to think about there. First of all, is your team and so we have both here and the United States and in Europe, we have extremely experienced team of people that are involved in – both in entitlement and construction. If you added up amount of years that the people we have in those businesses – I mean 100s of years that have been doing this. So this is not any kind of maiden voyage. But, the point I really want to make and reemphasize is that, just like in the case of that Sacramento property or in the case of Clancy, we bought properties that already had an above market yield from the existing income that was being generated from the buildings that were already on the property, it just happened that we ended up with excess land either on the site or next to the site that we were able to buy and allocate almost zero cost basis to. So I mean a really good example that I didn't mention Mary is really the State Street site in Dublin which is arguably one of the finest locations in all of Dublin. But, when we bought that property it came with roughly 175,000 square foot building that's leased for 15 years to State Street. Next to it in that acquisition came roughly 3 plus acres. And then there is an additional couple of acres next to the site that we are able to combine into a joint venture with an Irish institutions, so now we have 5 acres that we are entitling right now for roughly 700,000 square feet of multifamily residential apartment units and office. Once we get that entitled for that 700,000 square feet on land that as virtually no cost basis. We make a decision every time that land is extremely valuable today. But, then we make a decision, does it make more sense to derisk, put it in a joint venture sell it, all of those options that you have available to yourself. And so each circumstance is evaluated individually. So the big value creator is getting the entitlements done, right away, you have added significant value that isn't on your balance sheet as soon as you get things entitled. But, believe me we are very, very mindful of – what I call development risk. We would never go into a situation where we just bought a piece of land build development on it. Just it wouldn't be the case. So we have to have some story attached to it.

Great. I appreciate your thoughts. Good quarter.

Thank you.

Thank you. Our next question comes is from Craig Bibb of CJS Securities. Please go ahead.

Hi, guys. I'm sorry. I hopped on late. If you have already covered this I apologize. Could you – it looks like broadly speaking, is there an opportunity to recycle capital from Japan to Europe or there other sectors that you kind of see other capital recycling broad opportunities?

Well, I think the two places that we have recycled capital two are Europe and to our multifamily business. And so if you look back over the last, I would say five or six years, we have more than doubled our investment in the multifamily business and of course, as you all know, our business in Europe didn't exist in 2011. We made our first investment in Europe in the second quarter of 2011. And so the focus of where the capital got recycled was really into our multifamily business in Europe. And remember too, with bringing that capital back from Japan, we almost immediately bought the Vintage portfolio and not that they were part of strategy but it also gave us more apartment units in the Seattle market, which has more fortune 500 companies headquartered there than in Los Angeles. And it took away any currency risk that we might have yen to the dollar that wasn't the reason that we did it. But, it have the effect of letting us reinvest in a very growing market with growing NOI and growing revenue away from a market where there was some currency risk, but over the last few years we had some modest rental growth in rates and NOI. But not like it as in the Western United States and in Europe.

Okay. And can you – what is kind of the outlook for NOI growth where we had eight quarters in a row of double-digit NOI growth in multifamily. What's the outlook – are we close to maxing out or give us a kind of broad stroke and the outlook there?

Well, I will let Matt answer part of that. But, I don't know the word close to maxing out because you have to really think about the kind of properties that we buy. And so we buy generally very well located assets but once it have value add component to them. And so Summer House was a good example where you saw – you have seen a tremendous growth in the NOI of the property over the years. We own a property here in Los Angeles called Chad Wood, which own 50:50 with a large New York-based family. And the NOI growth in that property has been almost similar to Summer House, but we have spent in the last – it's extremely good location. But, we spent almost $8 million in capital on that property in the last couple of years. And so if not any great revelation, but what we've learned in our multifamily business is that if you kind of menutize these properties with fitness centers and business centers and all of those sort of things and you can refurbish these units in some cases where it's 20 years old. That people will pay a premium to be in your properties. And so as opposed to like a brand new building basically we are fixing up 20 and 25 year-old properties here in the U.S.

Well, Craig, this is Matt. Just to add to what Bill is saying, if you look at our revenue and NOI growth on the multifamily portfolio particularly in the Western U.S. over the past several years. We have outperformed the overall market and we are doing that by – as Bill said buying things that we can add value to. So even – we are seeing a market stay very good, but our goal is to always outperform the market by buying things right and adding value.

Okay. And last one, what's the outlook for occupancy in your commercial sector?

Well, I would say the core assets that I mentioned to you that are here in Southern California that we plan to keep long-term. Those by the end of the year, they will all be in the 95% occupancy range and most of the others will be there in the high 80s or low 90s. And we have a few that are slated for sale here on the second half of the year. But the core ones that we plan to keep and there is only five, they are sizable, but there is five of them. Those buildings are always going to run in the 95% occupancy range.

Great. Okay. Well, thank you.

Thank you. Our next question is from David Ridley-Lane of Bank of America Merrill Lynch. Please go ahead.

Sure. So in the second quarter you gained control of another three assets, can you give the rough amount of rental revenue that will be in the run rate now on the P&L?

I see.

Won't give the revenue but the NOI is about $25 million from those assets and we did have a minor ownership in those so – we are probably adding about $20 million from those specific assets on a NOI basis.

All right.

Got it. Okay. And then on the value-add development initiatives $85 million this quarter definitely appreciate the disclosure around future plans and the release, should we be expecting the spending to continue to ramp, or as this kind of a decent run rate for the next couple of quarters that you are kind of expecting.

Dave, this is Matt. I think it depends, as Bill was mentioning on as we get some of these projects entitled, we are going to make decisions on whether to proceed or whether to enter into a JV or to sell. So I think it's going to be very specific asset by asset and depending on how we finance it. But, I think we had a number there $2 billion of total cost to complete. I mean – there is no chance of coming out of our pocket all of that. So it's going to really be depending on each project individually.

Well, I would guess though over the next 12 months that on – again, I'm giving you a range, I mean, the capital which have come out of KW would be in the $50 million to $75 million range.

Got it. That's very helpful. And I know this will be a tough one to answer, but sort of the 8% same property revenue growth, is that mostly the value-added in activities helping to drive rental rate above market, is it kind of 50:50 market rents raising versus value add. I know that's a difficult question to ask, but I thought I would try.

Sure. We studied that very carefully. It's about 2/3rds market and about 1/3rd value-add over the past couple of years on the – in the Western U.S. So there has obviously been some good rental growth in the market. But, we have added on top of that with the value-add.

Great.

I think -- to Mary's, you were talking on your conference call today, I think the property bought in Hillford is a good example of kind of how you used all of your disciplines that clearly create rental growth not only out of the market growth but also what you are going to do value add wise. So I think that's another good example to talk about.

Sure. Yes. That's Bill is referring to what we call Pioneer Point and we bought a loan from a German bank. We paid 68.5 million pounds. The unpaid principle balance on the loan was 149 million pounds. And this German bank had basically roughly control of these two high raise, new built towers in London zone in an area called Hillford. And the developer was into those towers for about 130 million. So we bought at a serious discount. The bank had let one of the towers, but then the other tower they kept vacant purposely and then there is also a podium commercial space that's been left raw. And so I was just actually on site last week with a couple of our teammates and we were looking the podium because we are going to basically take the U.S. model which we have done many times before to our assets in Dublin and a little bit as well in our resi project just outside of Manchester. And we are going to put into many package in just like Matt and Bill has been talking about on the call. And then we are going to go ahead and renovate the one tower in terms of the furnishing et cetera, finish it and then lease it. So basically it's going to go from our asset via loan strategy to our value add and then that asset will become a very core institutional full let PRS as they call it here in Europe asset which is a highly sort after product type.

Yes. One thing I should have mentioned to that I think will be helpful to all investors. I know we presented this to our Board yesterday. Monthly and quarterly now on any of these – I will call major value add projects we are actually using the drone to photograph all these things. We are going to be putting on our Web site here probably by the end of next week pictorial drone shot for example of what we are doing at Clancy Quay in Dublin and you will be able to visually look at these high raise buildings, the 423 units that we already have which in just – by way of reference to that roughly in euros the total cost of the bank and the developers had in that site was €280 million. We bought that Mary for around €85 million. So in the drone side, you will see at the end of next week you will be able to see the high raise buildings which were all finished, but we completely menutized those – that property with fitness centers, business centers, unheard before in Ireland. So we are running almost full occupancy now in those high rise towers and then you will see behind those high rise towers they can land where these barracks, so called barracks buildings. So periodically now we are going to be upgrading this site – the Web site with these drone photographs that you will be able to see where we are doing the work.

Pictures always worth thousand words. That sounds very cool. Thank you very much.

Thank you. Our next question is from Vince Edelson of Morgan Stanley. Please go ahead.

Good morning. I will start with a more general question. Beyond your own expertise in monetizing and maximizing the value of your holding increasing occupancy and raising rents and so forth. What are your thoughts on the fundamental momentum of your markets right now, would you say you are getting a strong tailwind from an improving economy in any of your regions. Or do you feel like you are really doing the heavy lifting globally because economic strength will use a lot to be desired?

Well, look it's obviously a combination of both. Even though we are not executing this way we have a belief that you are going to see interest – even low interest rates may increase. And even though we are fixing the great proposition of our debt, we think we are in for a long – much longer period of very moderate interest rates. So having said all of that, I think that in the markets that we are in, and we always like to be in these very high-barrier to entry markets, Seattle, Southern California, The East Bay, Dublin, the United Kingdom where it's very difficult not only to find additional land but to find to get things entitled. So it's a real skill set to be able to get things entitled. And so you are going to see I think natural growth in those markets that we are in. We never have – never will and I'm not like critiquing what was going on in the mid-west for example when all the fracing, you could get into the apartment business there and the rents were going like crazy and now look what's happened because oil prices have declined. The properties are basically gone down a lot in value. So we try to stay in these very high-barrier to entry markets. But, again, having said all of that, we have a full team of people across every product type whether that's apartments, office, retail that are extremely have great expertise in value add initiatives. And then I think two, as you all know, we – Mary and I have been together here for almost 25 years at KW. We work very, very hard to keep the same team of people together for a very long periods of time. So that when we go about executing these value add strategies there is no real mystery to what as to be done. So we are careful about spending money. We are in high-barrier to entry markets, but we believe that the market that we are in are going to continue to have growth opportunities.

Okay. Thanks for that. And then you got into this some but could you talk a little more about the embedded growth potential for the commercial portfolio. You mentioned the portion of vacancy that's already spoken for and I might have missed it. But, is that just referring to what's already leased and you just have some free rent burn off to get through or is there leasing pipeline ahead that gives you confidence that the leased rate is going to climb and whatever the combination are you seeing that is early as year end this embedded opportunity is going to be pretty much fully realized?

I don't know by year end. But, I think there will be a long way down the road to creating that income stream. But, I think you will see those kind of improvements really show up in 2016 and –

Some of the – the 800,000 feet that Bill was mentioning in Southern California were roughly half of that spoken for. Some of those are major leases that we have entered into. And it could take six to nine months for our tenants to take occupancy. So there is definitely lag between the leasing and the revenue. Obviously, you have a lot value by getting the lease done.

Right. I think just to kind of frame it in some context, if you think about KWE in February of 2014, we started with cash. That's all was in that business. Today, Mary and her team have created a recurring NOI stream of almost $240 million. Having said all of that, there is – in both the U.S. and here there is many opportunities now to kind of regear existing leases. Matt told you about the roughly $20 million of net NOI income that we have added just in the last 30 days here in the U.S. with these three acquisitions and consolidations. The so called [FCO] [ph] portfolio in KWE that was acquired in July, in dollar terms that has an NOI of almost $25 million a year, what I said very, very high quality credit tenants. And so what is somewhat mast in these first six months numbers is that we have added really just in the last 60 days both the KWE and the three things that I mentioned here in the United States, we have added a tremendous amount of recurring income.

Okay. That's very helpful. I leave it there. Thanks guys.

Thank you. Our next question is from David Gold of Sidoti. Please go head.

Hey, just a quick one Bill. You spend some good time speaking about second half thoughts on dispositions, I was curious if you can give similar type color on second half thoughts on the acquisition side particularly geographically speaking and update if you can also on Spain and any other geographies you might be looking to establish if at all near term? Thanks.

Yes. That means think about it in terms of really kind of last 5.5 years. We have now – we are closing in on $17 billion of total acquisitions during that period of time that cost. And expect for the corporate acquisitions in some of the big private equity firms have done, I would guess we are – have them one of the bigger acquirers globally during that period of time. As I said we have really a record first six months in terms of both the acquisitions and the dispositions and last year our total acquisitions totaled slightly over $3 billion. As we sit here with the July acquisitions we are almost a $2.5 billion through the first seven months. And so I would be surprised if we didn't exceed last year's total. So it's a balance right now of continuing to find great opportunities and also selling things in this very attractive cap rate environment. So but, I think for the year, we will certainly be ahead of where we are at last year.

Got you. And then just following up on where are in Spain and any other geographies you are starting to look at for establishing foothold?

Mary, you want to talk about the Spain and Italy?

Sure. Yes. That sounds good. I was just in actually in Madrid in Spain last week. Spain, we are feeling that it's really in recovery. It's just posted a strongest quarterly growth in the last eight years. And we are seeing that that Madrid and Barcelona recovering at a pretty fast rate. And we are pursuing investment opportunities in these two cities as well as obviously strategic micro location and specifically we have done three deals thus far in Spain. We bought a property that was sort of a complex situation, it was a retail asset in Madrid really in like the sort of Times Square or [Puerta del Sol] [ph] Circuit, if you will of Madrid sort of the best retail area there. That is right across the square from the largest Apple flagship store. And when I was there last week it was just – I was going to say 34 degrees because I now talk in Celsius but it was totally 90 plus degrees and it was just steaming with people. So it's a great asset for us. We are going to reposition that and turn into sort of a retail flagship store. And then we also bought a couple of assets also in a similar location -- great location in Madrid that we are going to be converting to resi. And we have seen residential prices and our first asset we bought now they are called ST5 where sales prices have increased already by 8% in the eight months that we owned it. So we sort of like the resi space, we like the retail space consumer confidence is back in Spain, we are seeing that translate to higher retail sales. So Spain feels good and we definitely have a nice pipeline line Spain. And then in Italy we are looking at something that's pretty interesting in the most part in – really in all the northern cities in Italy, direct real estate. And really I think in Italy we are seeing the highest transaction volume that we have seen in many, many years in Italy, so a lot of capital there. There is good liquidity in Italy. And also real estate cap rates yields there is the further spread between yields and government bonds that's really been seen in decades in Italy. So if you look at sort of the seven year Italian bond, it's like 1.4%, 1.5% for a piece of real estate with the similar tenure of lease with sort of good solid income, you are going to be kind of 500 to 550 basis points ahead of that. So we like that – we like that spread and we like for specific real estate assets, we are looking at some stuff in Italy right now.

Perfect. That's helpful. Thank you both.

You are welcome.

Thank you. And our last question is from Eric Miller of Circle Road Advisors. Please go head.

Yes. Congratulations guys on the continuing outstanding execution. I know you delved into the multifamily market, but just one last question, Bill, you guys have been involved in that for a long time. I assume you collect a lot of demographic info on your renters and stuff. Do you get from that anything that make you think not only is there a cyclical comment to the strong multifamily business, but, there maybe really just some secular things going on in that market?

Yes. Eric, it's a very, very good point. I think it's – I can tell you this is true in the United Kingdom. It's true in Ireland and its definitely true here in the Western United States that there has been a major shift away from home ownership to rental. And you have seen this great [indiscernible] what they call a millennial, the 25 to 35 year old and particularly here in the Western U.S., the cost of housing is very expensive. You have people earning good incomes but with the new credit standards generally and the down payments of people are required to come with. It makes it difficult to buy. And so you have seen a decline in home ownership and a very much an increase in the rental – use of the rental apartment market as a fair housing. And so I believe that over the next 10 years you are just going to see that increase. And so you got those increases happening in terms of the number of people that want a rent in markets where there is very high barriers to entry where it's almost impossible to get stuff entitled or in some cases to find land. So it has the obvious effect of putting pressure on rental rates which is why I believe long-term for that reason, the apartment rental business is going to be a fantastic business and all the markets that we are in. And the second part of it is, that the capital commitment once you have done your initial upgrades, the capital commitments that you have to commit to unit refurbishments in any common area where or miniscule compared to what you have to commit to say office building refurbishments. And so the apartment rental business is a very – particularly here in the U.S. in the markets that we are in is a very, very attractive long-term business. It's going to continue to show growth over the next 10 to 15 years.

Okay, great. Thanks.

Thank you. I will now turn the call back over to Bill McMorrow.

Okay. Again, thanks everybody for joining the call. We appreciate your support and the questions and as I said not only that we have a great first half of the year, but having been here for 26 years, I can tell you that I really feel like with the base, the capital, the liquidity and everything that we have been able to assemble here that the future does look very bright for both our companies. So thanks very much.

Thank you. And thank you ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.