Good morning and welcome to the Kennedy-Wilson First Quarter 2016 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Daven Bhavsar, Director of Investor Relations. Please go ahead, sir.

Good morning, everyone, and welcome to Kennedy-Wilson's first-quarter 2016 earnings conference call. This is Daven Bhavsar, and 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 three months. Please see the Investor Relations section of Kennedy-Wilson's website for more information. On this call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA and adjusted net income. You can find a description of these items, along with a reconciliation of the most directly comparable GAAP financial measures, in our first-quarter 2016 earnings release, which is posted on the Investor Relations section of our website. Statements made during this conference call may include forward-looking statements. Actual results may materially differ from the forward-looking information discussed on this call due to a number of risks, uncertainties, and other factors indicated in reports and filings with the Securities and Exchange Commission. I would now like to turn the call over to our Chairman and CEO, Bill McMorrow.

Good morning, everyone, and thank you for joining us today. We're pleased to have reported another solid quarter of operations, resulting in a strong start for 2016. We had a record first quarter, with all-time Q1 highs for many metrics, including revenue, adjusted EBITDA, and adjusted net income. Let's start by first discussing our key financial highlights for the quarter, followed by a review of our strong recurring cash flow and solid operating performance at all of our properties. Next, we'll discuss the strength of our balance sheet before returning to an update on our investment transactions for the quarter. And finally, we'll discuss our current market outlook before opening it up to your questions. So starting off with financial highlights for the quarter, adjusted EBITDA grew by 34% to a Q1 record of $72 million. Similarly, adjusted net income for the quarter was $38 million, up 26% from $30 million in the first quarter of 2015. We continue to focus on growing our recurring income through a combination of NOI increases at our properties, driven by our strong asset management and value-add initiatives, along with building on our base fee income across our investment management platforms. In fact, during the quarter, Kennedy-Wilson's share of property NOI grew by 18% from Q1 of 2015 to $52 million, or $210 million on an annualized basis. Looking at the performance of our same-property portfolio, our multifamily business continues its impressive streak of quarterly growth, where we have now seen 11 consecutive quarters of 8% or higher NOI growth on a same-property basis. For the quarter, our multifamily revenues were up 9%, and our NOI was up 11%. 84% of our 25,000 multifamily units are located in the western US in markets such as greater Seattle, the Bay Area, and southern California, in…

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Mitch Germain of JMP Securities. Please go ahead.

Bill, just curious in terms of the commingled fund in the U.S. and the investment parameters of that fund versus what you would potentially buy within KW balance sheet and how you manage to not have any competition between the two.

Yes. Well, as you might be aware, the fund has a finite life, and the life of that fund is generally seven or eight years. And so clearly, any assets where the game plan has got a longer-term horizon than that just won't fit. And then there are obviously certain geographic limitations in terms of what that fund can do. The main investors, as I said earlier, are primarily pension funds and endowments. And I think, as most of us know on this call, in this zero-interest-rate environment, what all of those type of entities really need is some form of current yield. And so in some cases, the return parameters are tighter, but I would say that over doing this, as I said, for 28 years, we've never really ever had any issues relative to conflicts.

Great. And then just curious about the deal pipeline, specifically within KWE. Obviously, our conversations have suggested that the volumes have slowed a bit pending the Brexit vote next month. So I'm just curious in terms of, I know you announced a couple of deals today, but just the willingness of landlords to sell in this uncertain environment today.

Yes, hi, Mitch. It's Mary Ricks. I would say that our pipeline continues to be really strong. Clearly, you alluded to the two deals that we just closed. I think relative to big commercial deals in London, those have definitely slowed, where people will wait to see what happens next month. But relative to other markets that we're looking at, such as Ireland, you saw that we just did the deal that we announced this morning. We just actually bought a smaller portfolio earlier this quarter, so there's still really a lot to do. You've got NAMA and a variety of banks. You've got a lot of the private equity firms that are now selling individual assets where they haven't really done any asset management, so still a lot of meat on the bone. And relative to the UK as well, for us it's all about stock selection, where there's good value-add opportunities still. So I think the pipeline remains pretty robust, and we're just very focused on the discipline in terms of where we're going to be investing our capital at this stage.

Great. And the last one for me, maybe back to the US. Just curious, Bill, if you guys are seeing any change in the dynamics within the investment sales market. I've been hearing a little thinning out in terms of some of the competitors, but I'm just curious if that's resonated with what you and your team are seeing.

I think, as I've consistently said on all of our calls, we never really feel like we're under pressure to buy anything. So, and as I said on the last quarter call, I said we're seeing a lot of transactions, but we're being very selective on the things that we're doing right now. I will say that I think that there is clearly a disconnect between, I would say, the public market and the private market on the sale side. And part of the reason that I went through some of those examples of sales, like the deal in Scotland, is that there continues to be a very healthy low cap rate sale environment. And as long as these interest rates stay at the levels they're at globally, people are searching for yield through the real estate market. And so we continue to use these periods of time to strategically sell certain assets. But a big part of our focus, as I have said for many quarters here, is the value-add initiatives that we have going on at existing properties, like a Clancy Quay or Baggot Street. And I could go through a list of 15 properties where we have major capital programs going on that, over the next couple of years, are going to add to the income of the Company without additional acquisitions. But the good news for us, all the shareholders and everyone, is that at our size, we continue to see many opportunities. It's just we're going to be very selective on the things that we're doing. And I think the two things that Mary and her team were able to buy in Dublin and Manchester here that got announced this morning are just classic examples of that – two really outstanding deals.

Great. Thanks so much.

And our next question comes from Vincent Chao of Deutsche Bank. Please go ahead.

I just want to ask a question about the multifamily business in the US, which has been posting very strong results. We've heard from other apartment REITs this quarter a little bit more hesitation, maybe, and just some moderation in the quarter, as well as expected over the balance of the year, and I think that has a lot to do with their geographic mix and their focus on suburban versus urban and that kind of thing. But I was just curious. Are there any markets that you're operating in today that are showing any sort of signs of slowing down, be it because job growth is maybe slowing from a high base or supply is starting to have an impact?

Matt, do you want to answer that?

Sure. Yes, if you look across the multifamily portfolio in the western US, we actually had extremely solid growth in all of our major markets. So if you look at northern California, southern California, the state of Washington and mountain states, we saw revenue growth of over 8% on each of those segments. So there are some that are clearly performing even better than others, but across the board we've seen solid rental growth and NOI growth in all of our submarkets. So I think you hit the nail on the head, that most of our portfolio is a bit more suburban as opposed to CBD, and we're still seeing whole-dollar rent increases, like we have for the last 11 quarters.

Okay. And is supply starting to creep up in any of your markets?

Not in the markets that we're in. There's clearly supply coming onstream in the six city center markets, like downtown Los Angeles, where you've got 10,000 units coming onstream here, I believe, over the next three years. But we don't own any buildings there. And also remember that, exclusive of Dublin and the United Kingdom, to a lesser extent, in the U.S. the type of apartment buildings that we buy generally tend to be larger complexes that sit on 35, 40, to 50 acres of land, but where the buildings themselves could be 20-plus years old. And we have a very disciplined method of going in and fixing these buildings up. And so just by doing that sort of thing and taking these from what I'll call B-plus to an A kind of location, but a B-minus product that we're taking to a B-plus, that's the kind of opportunity that we have always found to add value to the apartments. And if you look at where ours are located – like I said, we have almost 10,000 units – I said in the state of Washington, but they're basically in the Seattle area – you've got a tremendous number of Fortune 500 companies there that are growing and adding jobs. And then similarly in the East Bay, as these rents in San Francisco particularly have gotten so high, and with their great transportation system, people are going to less expensive areas. And so in northern California, we own roughly 5,000 units that are all East Bay, location-wise.

Okay, thanks for that. And then maybe a question for Mary on the south Dublin purchase. I think it was a pretty low going-in cap rate, but a lot of occupancy upside. So I guess, one, I think it was described as one of the better suburban office assets in the market. I guess just curious why it's 68% occupied today, and how quickly do you think you can get to stabilization?

Yes, two things with regard to the low NOI. You hit it on the head with regard to the occupancy, but also the passing rents are only EUR19 a foot. So we've really been focused on the suburban office play in Dublin because the difference of ERVs. When you think about Dublin city center, where a great example is our Baggot Street lease that we did at EUR47.50, we've now seen rents break through EUR50 and really getting close to EUR60. So in the suburbs, we're seeing rents get into the mid to high EUR20s, and we think they'll break beyond EUR30. So we just bought an asset with existing rents very, very low. It was a bank-controlled situation, so there was really no focus on leasing, and the building was really just sitting. But it is a great asset – very, very high quality with huge upside. In terms of cap values per foot, we like that trade as well, because in Dublin city center, you're seeing deals trade at over EUR1,000 a foot. And clearly, we bought this at a great value. So we're pretty excited about that opportunity, and we like that whole suburban office play in general.

Okay. And how long do you think it will take to stabilize?

I think we're looking at probably within 12 months. Hopefully, we can do that sooner, but I would say good prospects. I mean, we want to do some CapEx work. The lobby, it's a little small for the asset, so we've got a couple of different really interesting options to open that up and make it a Class A lobby to match the quality of the asset. So we need to do that work and then focus on the leasing. But we obviously don't want to give any space away, and we want to drive the rental rates and therefore drive the value.

Right. And I think, too, Mary, we have such a good view into the Dublin market, if you think about the office building. We own KPMG's corporate headquarters, the State Street Bank corporate headquarters, the Bank of Ireland's corporate headquarters, and then a whole slew of intermediate-sized buildings. And so we have one of the larger commercial portfolios in all of Dublin. And so we've got a very, very, very good view into the market and tenants and all of those sorts of things.

Definitely.

Okay, thanks for that color. And maybe one last question for me on the capital allocation side. I mean, you did buy back a little bit of shares here this quarter. I think it's $5 million worth. I was just curious what the average price on that was, and then where does share buyback stand on your ranking list of capital allocation?

Hey, Vin, it's Matt. So yes, you're right. The $5 million worth of shares that we bought reflects, really, the buyback activity during the month of March. And so if you remember, we announced the results in February, came out of our blackout period and we had 13 trading days before we went back into another blackout. And so we'll update everyone on a quarterly basis as to our progress, but we still see, certainly, value in the shares right now.

Right. And how many shares were bought back?

The average price was just under $21.

Okay, thank you.

And in addition to the shares that the Company bought back, several people on the management team, myself included, in that short window that we had open before we're in another blackout period, we also – myself, I bought 100,000 shares.

And our next question comes from David Ridley-Lane of Bank of America Merrill Lynch. Please go ahead.

Sure, just curious about the European pipeline of deals. And the reason I'll ask is, as a percentage of your, Kennedy-Wilson's, investment account, because the Fund V is a US-focused fund, your mix of investments has actually skewed over the last year towards the US. So wondering how you see the pipeline, particularly in Continental Europe, as you look into 2016. Thank you.

Yes, so Continental Europe – Spain and Italy make up about 11% of our portfolio for KWE. Those are markets that we've been looking at for the last, I would say, 18 to 24 months, particularly in Spain. But we've been very, very careful in terms of what we've wanted to buy there. We think prices on the office side have gotten a little ahead of themselves, just a lot of capital chasing that product type. But we've made some great investments on the retail side – very, very excellent value-add opportunities, especially with our LMG asset that we just recently bought, which is in north Madrid. Great location in a very high-end residential neighborhood, as well as there's a 3.5-million-square-foot business park within walking distance to the retail center. And the retail center had been in bank hands for the last couple of years, so really, no capital spent there. We've got EUR17 million allocated to spend and bring that up to the class A asset that it once was. So I would say we're pretty excited about the prospects of that asset and, really, our entire Continental European portfolio. We also just recently, in December, closed on our first Italian acquisition, which was a portfolio of office buildings throughout Italy, with the majority of the value being in Milan and Rome and Florence. And within that portfolio, we're getting excellent current income at 6.3% as a net income yield, with seven years term certain left to the government. And then there's all kinds of value-add opportunities within that portfolio. And that was an off-market trade that we did. It took us about six months to put it together. And so we're just going to be really careful with anything that we buy. It's got to have the right characteristics. So for us, it's about current income, but also the opportunity to grow that income. And as Bill talked about with regard to our existing portfolio, I mean, within KWE, we have so much organic growth that we've got underway in terms of our asset management work that we will see bear fruit over the next 12 to even 24 months. So while the Continental European portfolio isn't a huge part of our portfolio, we love everything that we bought. And I think for us the pipeline is very big there. We've made a name for ourselves now, so people know us, and just building on our relationships there. So we're going to wait and see and be careful with anything that we buy, and it's got to have the right characteristics.

Got it, okay. And then on the, so the seasoning, I guess, the signed leasings that you've been doing on the commercial side – the period of free rent and so forth – when should we expect that to start to really kick in on the P&L? Thank you.

I would say that you're going to see some pickup in that in the fourth quarter, but I think you're going to see the majority of the increases coming, really, starting in 2017.

Got it. Thank you very much.

And our next question comes from Craig Bibb of CJS Securities. Please go ahead.

This is actually Robert Majek filling in for Craig. The San Francisco multifamily market may have finally peaked within the city, but obviously, Kennedy-Wilson's properties are still doing well in the East Bay. You touched on it a little bit earlier, but what does supply and demand look like in the broader San Francisco market?

Well, obviously, the apartment rental growth is driven in large part by job growth. And even though, as we all read, the technology industry is in somewhat of a slowdown, but it's still growing. And so there's big job creation in the Bay Area in general and Seattle in general. And so that's really what is driving all of these rents. Now, so how long that will continue is anybody's best guess. But for the time being, the kinds of things, like I said earlier, that we buy, like we own a project called Bella Vista, which is just across the Bay from San Francisco. It's 1,000 units on 50 acres. You would be hard pressed to replicate that project today. We own that 100% in Kennedy-Wilson. So finding 50 acres in an infill location like that, even though it's across the Bay, and then getting it entitled for 1,000 units here in the state of California, is a tough thing to do. And so what we've always done, whether it's here…

All right, that's good to know.

In California or Dublin or wherever, we're in high barrier to entry markets, so we're tough to entitle and tough to find land.

Appreciate it. Thank you.

And, ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Bill McMorrow for any closing remarks.

So thanks, everyone. We'll look forward to our next conference call. Thanks. Bye.