What happened
Shares of Kennedy-Wilson Holdings (KW 0.47%) were rising today, up 11.8% as of 12:54 p.m. ET.
The real estate investment company rose on news that it would be added to the S&P MidCap 400 index, in a big reshuffling of stocks within several S&P indexes. When a stock that wasn't part of a large index gets a lift to that index, either through its own outperformance or due to underperformance of larger stocks that are dropping out, the stock price usually gets a boost. This is because investors perceive demand for the stock will rise as some institutional investors are restricted to buy stocks within an index, or even just indexes themselves over individual names.
So while the uplift is nice, is there a more fundamental reason for optimism in KW?
So what
KW is diversified in terms of form, type of real estate, and geography. The company wholly owns real estate properties and also invests in real estate on behalf of third-party investors such as insurance companies, pension funds, and other asset managers.
Of the owned portfolio, 54% is in multifamily housing, 30% is in office real estate, 7% is in retail, and the remaining 9% is across hotel, industrial, and real estate loans to other entities. In terms of geography, 62% is in the Western U.S., 18% is in Ireland, 17% is in the U.K. and the remaining 3% is in Spain. Of the multifamily and office properties, about three-quarters are in suburban geographies, with one-quarter in urban settings.
Now what
The company estimates its current portfolio will bring in $491 million of net operating income (NOI), with another $24 million in asset management fees on its portfolio. Through 2025, the company estimates its in-development properties will grow NOI by another $96 million.
Kennedy Wilson has a market cap of around $3 billion after today's move, and a $10 billion enterprise value when factoring in its debt. Keep in mind, high debt is not abnormal for real estate companies and is often secured by individual properties. So, KW only trades at around a 5% cap rate today, or roughly 6% on 2025 numbers on an enterprise basis, but a 16% yield on its equity, thanks to its leverage. It also pays a dividend of 5.2%.
While that may seem very cheap, remember that leverage is an issue in this period of rapidly rising rates. While the bulk of KW's debt is either fixed or hedged at an average of 4.2%, refinancing may be an issue. However, only 4% of notes are maturing in 2023, with a weighted average term to maturity of 5.6 years. So while there is risk if rates stay this high for a long time, KW's leverage position seems relatively safe for now, unless vacancies skyrocket at its office properties.
While multifamily should do quite well, office rents are in a more dubious position given hybrid work trends. Still, it appears as though KW isn't feeling much of the effects, thanks to some prime locations and tenants. KW seems fairly priced in this investor's eyes.
