27 March 2015
KENNEDY WILSON EUROPE REAL ESTATE PLC
("KWE", the "Company" or the "Group")
ANNUAL REPORT AND ACCOUNTS 2014 AND
NOTICE OF ANNUAL GENERAL MEETING
Further to the release of its results announcement on 26 February 2015, Kennedy Wilson Europe Real Estate Plc, an LSE listed property company (LSE: KWE) announces that it has today published its Annual Report and Accounts 2014 (the "Annual Report 2014").
The Company also announces that it has today posted to shareholders the Annual Report 2014 and the Notice of an Annual General Meeting, together with a form of proxy. The Annual General Meeting will be held at 10.00 a.m. on Wednesday, 29 April 2015 at The May Fair Hotel, Private Suite 3, Stratton Street, London W1J 8LT.
In accordance with Listing Rule 9.6.1, copies of the following documents have been submitted to the UK Listing Authority and will shortly be available for inspection from the National Storage Mechanism, which can be accessed at www.morningstar.co.uk/UK/NSM:
- Annual Report 2014;
- Notice of Annual General Meeting 2015; and
- Form of Proxy.
The Annual Report 2014, the Notice of the Annual General Meeting 2015 and the Form of Proxy are also available for viewing and to download on the Company's website at www.kennedywilson.eu.
A condensed set of financial statements and information on important events that have occurred during the financial year and their impact on the financial statements were included in the Company's results announcement on 26 February 2015. That information together with the information set out below which is extracted from the Annual Report and Accounts 2014 constitute the material required by Disclosure and Transparency Rule 6.3.5 which is required to be communicated to the media in full unedited text through a Regulatory Information Service. This announcement is not a substitute for reading the full Annual Report and Accounts 2014. Page and note references in the text below refer to page and note numbers in the Annual Report and Accounts 2014. View the results announcement released on 26 February 2015.
Unless defined herein, terms not defined in this announcement shall have the meaning given to them in the Annual Report 2014.
PRINCIPAL RISKS AND UNCERTAINTIES
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Principal Risk |
Potential Exposure |
Mitigation |
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Macro-Economic Risks |
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General economic conditions |
Our target markets of operation are currently the UK, Ireland, Spain and Italy. Although there are clear signs of economic recovery in these jurisdictions, the recovery is still at an early stage of the cycle. Volatility and speed of change of asset valuations, prospect of increasing interest rates and overall health of the target market economies remain a concern and there can be no assurance that sustained growth will continue. Unforeseen future political events, such as the exit of Britain, Greece or another European country from the Eurozone, would further affect the economic, political and investment climate across Europe, particularly in one or more of our target markets. |
· The Investment Manager has a broad investment mandate, which gives it flexibility to invest across the real estate markets in Europe, targeting a wide range of both debt and equity investment opportunities, with limited restrictions on investments across asset class, capital structure or nature of instrument, and thereby spreading our investment risk · We are not able to influence the outcome of significant political events but the Board reviews the economic environment regularly to assess whether any changes to the economic outlook present risks or opportunities, which should be reflected in the execution of our strategy by the Investment Manager
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Availability and cost of finance |
Reduced availability of property financing may adversely impact our ability to refinance facilities, meet financial commitments and result in weaker investor demand for real estate.
Increasing finance costs (associated with an increase in interest rates) would reduce our underlying income.
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· The Investment Manager is responsible for monitoring the borrowing needs of the Group on a regular basis and guides our financing actions in executing our strategy · The Investment Manager is responsible for ensuring that the existing leverage in the Group is hedged to manage and monitor our interest rate exposure and associated costs · The Investment Manager is responsible for monitoring our LTV on an ongoing basis and managing gearing levels over the cycle · We and the Investment Manager are committed to maintaining strong relationships with our financing partners and advisors in the various jurisdictions in which we operate |
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Strategic Risks |
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Failure to implement and poor execution of the investment strategy |
Poor execution of our investment strategy may arise as a result of factors including, amongst others: · timing of investment and divestment decisions · incorrect allocation of capital · exposure to any development risk or large-scale capital expenditures · failure to implement the approved business plan · sector, asset, tenant, region concentration could result in a significant underperformance of our portfolio and reduce profitability |
· Role of the Management Engagement Committee is to ensure implementation of the investment strategy by the Investment Manager and undertake regular reviews of the performance of the Investment Manager · Progress against the investment strategy and continuing alignment with our risk appetite is monitored by the Board · All investment decisions are subject to robust risk evaluation by the Investment Manager |
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Risks inherent in development and construction projects |
Property development projects inherently carry with them:
· planning risk: inability to secure planning consent due to political, legislative, regulatory and other risks inherent in the planning environment · construction risk: timing delays, reliance on third parties including contractors and additional cost overruns (due to market pricing, unforeseen site issues or longer build periods)
There is also a potential risk that a positive letting cycle might not be met as occupiers may be reluctant to take space in our new developments upon completion.
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· At any point in time, the aggregate development and redevelopment costs incurred in respect of assets under development and/or redevelopment at that time will not exceed 15 per cent of the Company's most recently published NAV. This is monitored regularly by the Investment Manager · Monitor market cycle and likely customer demand before committing to new developments and secure pre-lets where appropriate · For each project, we make a judgement about apportionment of construction risk. Where we retain this risk, we fix costs early in the process, subject to other market factors, with key contractors subject to financial covenant review · Strong, experienced internal construction management team · Extensive consultation, design and technical work undertaken prior to commencement of any project · Engagement with relevant authorities at a local and national level to ensure development proposals are in accordance with current and emerging policy · Clearly defined formal tender process that evaluates qualitative and quantitative factors in bid assessment · Appointment and supervision of a preferred supply chain of high-quality trusted suppliers and professionals such as architects, engineers and quantity surveyors |
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Reputational Risk |
The "Kennedy Wilson" brand and its reputation is of paramount importance to the continued successful development of our business.
Regulatory breaches, public relations incidents, alleged or actual acts of fraud or bribery by one or more members of the investment management team, any public criticism or other negative publicity that led to investigation, litigation or sanction, could have an adverse impact on us by association.
Any damage to the reputation of the personnel of the Investment Manager could result in potential counterparties and other third parties such as occupiers, landlords, joint venture partners, lenders or developers being unwilling to deal with us.
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· Robust internal procedures and checks in place to mitigate against policy breaches · Regular training provided to members of the management team to ensure up-to-date knowledge of, and monitor compliance with, the anti-bribery policy and procedures · Risk assessments conducted as part of due diligence processes on acquisitions · Use of high-quality external advisors · Reputation managed by a core team of skilled public relations professionals |
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Operational Risks |
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Financial control |
We have a complicated investment structure with multiple regulated funds and holding and operating subsidiaries across the UK, Jersey, Ireland, Luxembourg and the Isle of Man.
The number and complexity of bank accounts held in the multiple jurisdictions require a well-controlled accounting environment to ensure material exposure to financial loss does not occur.
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· Documented delegation of authority matrix in place which provides for a three-tier payment origination and approvals system · Cash control and monthly cash sweep mechanisms in place across the Group · Control by and oversight from the Investment Manager and its team over property level accounts as well as subsidiary bank accounts
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Occupier demand, tenant defaults and income sustainability |
Underlying income, rental growth and capital performance could be adversely affected by weakening occupier demand resulting from variations in the health of the economies of our target markets and corresponding weakening of consumer confidence and investment.
Lack of occupier demand may result in the unoccupied/vacant space in our portfolio taking longer than expected to lease out, thereby impacting the Company's income and capital performance.
While the Company's income is secured and documented in leases with tenants, all have contractual expiry dates, and some have break dates in advance of their expiry date.
Changing consumer and business practices (including the growth of internet retailing, flexible working practices and demand for energy efficient buildings), new technologies, new legislation and alternative locations may result in earlier than anticipated obsolescence of our buildings if evolving occupier and regulatory requirements are not met.
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· The Investment Manager monitors our market letting exposure including vacancies, upcoming expiries and breaks, tenants in receivership or administration as well as our weighted average lease length · The Investment Manager performs appropriate occupier covenant checks and reviews these on an ongoing basis in order to be proactive in managing exposure to weaker occupiers · The Investment Manager is proactive in addressing key lease breaks and expiries to minimise periods of vacancy. The Investment Manager works with tenants so that their space requirements are tailored to their business needs and their ability to pay for the space they rent. In addition, the asset managers' knowledge and experience of occupier plans, trading and leasing activity is also instrumental in execution of our strategy · We have a diversified occupier base and through the Investment Manager monitor concentration of exposure to individual occupiers or sectors · The Investment Manager undertakes comprehensive profit and cash flow forecasting, incorporating scenario analysis to model the impact of proposed transactions · We also engage experienced letting agents with track record and expertise relevant to asset-class
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Asset Insurance |
Our property investments could suffer a major loss due to a catastrophic business event such as an environmental disaster, fire, flood, explosion, an act of terrorism or material structural defect. |
· Comprehensive insurance cover in place with effect from time of acquisition · Regular asset reviews and risk assessments conducted to validate asset insurance |
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Dependence on the Investment Manager |
We are reliant on the Investment Manager for its real estate investment, asset management and development expertise which drives the financial and operational performance of the Company. The Investment Manager's failure to attract, retain and develop any of the key personnel of the Investment Manager, the IC and Kennedy Wilson in Europe, and the departure of any of such key personnel without timely and adequate replacement or any damage to the reputation of any such key personnel or member, may hinder our ability to successfully pursue our investment strategy.
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· Performance of the Investment Manager and its delegates is reviewed at the Board level and there is an effective working relationship between the Board and the Investment Manager · The Investment Manager and its management and advisory team have significant capital invested in the Company, thereby closely aligning their interests with those of the other shareholders · Further, the Investment Manager is financially incentivised through the payment of a quarterly management fee and a performance fee under the terms of the investment management agreement · Targeted recruitment processes undertaken by Kennedy Wilson with highly competitive performance driven remuneration packages to attract and retain senior members of the management and advisory team
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Regulatory and compliance risks |
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Regulatory Risk |
The Group is subject to laws and regulations in a number of jurisdictions including the UK, Jersey and Ireland. Consequently, we are required to comply with various laws and regulations in such jurisdictions such as the AIFMD, UK listing and disclosure and transparency rules, anti-money laundering, anti-bribery and market abuse legislations, amongst others.
The enhanced regulated environment in which the Group operates may reduce operational flexibility and increase operational costs.
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· Senior personnel with legal and regulatory expertise hired by Kennedy Wilson to ensure compliance, by the Company, with enhanced regulatory requirements · External legal advisers engaged to assist with specialist matters · Continued engagement with high-quality external advisers and regulators to monitor the risks and develop protocols for ensured compliance · Up-to-date training provided internally to the management and advisory team, and Board · Systems and procedures implemented across the Group and tested regularly to check robustness and effectiveness
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Political risk
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We are incorporated and domiciled in the island of Jersey in the Channel Islands. Our chosen jurisdiction provides for optimal tax efficiencies for the Group's business. Any actions taken by the UK Government to change tax legislation or changes to the current HMRC practices could lead to us being regarded as an "offshore fund" for UK tax purposes, or may even result in us losing our non-UK tax resident status.
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· Robust procedures in place to ensure that the Company is centrally managed and controlled outside the UK. No board meetings of the Company or the Investment Manager take place in the UK and majority of the directors on both boards are Jersey residents
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Irish legislative changes affecting income and growth |
A significant portion of our residential properties are located in Ireland where the letting market has been the subject of recent political discussions. If the proposal of imposition of rent controls restricting rent increases is implemented, and there are further political and regulatory changes that affect the property sector, this could impact our ability to increase our profitability in the medium to long term.
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· Continued engagement with high-quality external advisers and all relevant stakeholders to monitor the risk and its impact · The Board continues to monitor developments in this area
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Related party transactions
A. Parent and ultimate controlling party
The Company's parent and ultimate controlling party is Kennedy-Wilson Holdings, Inc. (KWI). This is by virtue of an indirect wholly owned subsidiary of KWI, KW Investment Management Ltd (the Investment Manager) acting as investment manager to the Company in accordance with the terms of the Investment Management Agreement between the Investment Manager and the Company, and the Investment Manager being entitled to receive certain management and performance fees.
In addition, KWI (through its subsidiaries) holds 20,189,952 shares in the Company at 31 December 2014.
On 28 February 2014, on admission to trading on the London Stock Exchange, the Company issued 7,000,000 shares to KW Europe Investors Ltd and Welford Limited (an unrelated entity) in equal portions in consideration for the acquisition of the holding company of the Tiger Portfolio of properties. The fair value of the shares on issue was £70.0 million.
The Investment Manager, pursuant to the terms of an Investment Management Agreement with the Company, is entitled to receive a management fee from the Company at an annual rate of 1.0% of the EPRA NAV of the Company, payable quarterly in arrears. The investment management fee is payable 50% in cash and the remaining 50% through the issuance of ordinary shares in the Company to the value of that 50% fee portion. In addition to the investment management fee, the Investment Manager has also paid certain other expenses on behalf of the Company. The total amount of the investment management fee in respect of the period to 31 December 2014 was £8.4 million, comprising:
· On 31 March 2014, the Company issued 9,005 shares to the Investment Manager in part settlement of investment management fee for the quarter ended 31 March 2014. In accordance with the Investment Management Agreement, the fair value price was the average closing share price for the twenty days immediately prior to the issue date of these shares being £10.51 per share. The total consideration equated £ 0.1 million. In addition, a cash payment in the amount of £0.1 million was paid to the Investment Manager in settlement of the investment management fee. The total investment management fee for the quarter ended 31 March 2014 was £0.2 million
· On 6 August 2014, the Company issued 116,208 shares to the Investment Manager in part settlement of investment management fee for the quarter ended 30 June 2014. In accordance with the Investment Management Agreement, the fair value price was the average closing share price for the twenty days immediately prior to the issue date of these shares being £10.68 per share. The total consideration equated to £1.2 million. In addition, a cash payment in the amount of £1.2 million was paid to the Investment Manager in settlement of the investment management fee. The total investment management fee for the quarter ended 30 June 2014 was £2.4 million
· On 6 November 2014, the Company issued 119,568 shares to the Investment Manager in part settlement of investment management fee for the quarter ended 30 September 2014. In accordance with the Investment Management Agreement, the fair value price was the average closing share price for the twenty days immediately prior to the issue date of these shares being £10.45 per share. The total consideration equated to £1.2 million. In addition, a cash payment in the amount of £1.2 million was paid to the Investment Manager in settlement of the investment management fee. The total investment management fee for the quarter ended 30 September 2014 was £2.4 million
· For the quarter ended 31 December 2014, the investment management fee payable to the Investment Manager totals £3.4 million, of which 50% (or £1.7 million) was paid in cash and the remaining 50% (or £1.7 million) has been settled through the issuance of ordinary shares in the Company. The total number of shares to be issued in connection with settlement of the share based portion of the investment management fee is 163,478, calculated using the fair value price of the shares of £10.57, being the average closing price for the twenty days immediately prior to the issue date of these shares
The Company will pay an annual performance fee calculated with reference to total shareholder return. The fee is the lesser of 20% of a) the excess over an annualised annual return hurdle of 10% (being for the first period, the Gross Opening NAV divided by the number of ordinary shares in issue immediately following admission) or b) the excess of year end EPRA NAV per ordinary share over the relevant High Water Mark (being the greater of the closing EPRA NAV per ordinary share and the Gross Opening NAV plus further cash and non-cash issues of ordinary shares calculated per ordinary share). Gross Opening NAV is the gross cash proceeds of the issue of shares at the time of the Company's flotation and an amount equal to £70.0 million. No Performance fee is payable in respect of the period ended 31 December 2014.
The Company, KW Europe Investors Ltd and KW Carried Interest Partner LP (acting as nominee for certain employees of the KW group) entered into a subscription agreement dated 25 February 2014 (the KW Subscription Agreement). Pursuant to the KW Subscription Agreement, the KW group, through KW Europe Investors Ltd and the KW Carried Interest Partner LP, committed to subscribe for in aggregate 9,000,000 ordinary shares at a price of £10.00 per share (in addition to the 3,500,000 shares issued to KW Europe Investors Ltd in consideration for the acquisition of the holding company of the Tiger Portfolio of properties).
In connection with the secondary offering (placing and open offer) completed by the Company in October 2014, KW Europe Investors Ltd, KW Investment Management Ltd and KW Carried Interest Partner LP (acting as nominee for certain employees of the KW group, including William McMorrow and Mary Ricks) subscribed for in aggregate 4,749,749 ordinary shares at a price of £10.06 per share.
The Company, KW Europe Investors Ltd, certain banks identified in the Company's IPO prospectus and KW Carried Interest Partner LP entered into a lock-up agreement dated 25 February 2014 (the KW Lock-up Agreement). Pursuant to the terms of the KW Lock-up Agreement, each of KW Europe Investors Ltd and KW Carried Interest Partner undertook, subject to certain customary exceptions, not to dispose of the ordinary shares acquired by it pursuant to the Issue at the time of the Company's flotation, for a period of 12 months from 28 February 2014. In addition, for a period of 12 months after the expiration of such 12-month lock-up period from the date of admission and/or in certain other circumstances, such ordinary shares held by KW Europe Investors Ltd and KW Carried Interest Partner LP may be sold, provided that any such sale shall be in accordance with the requirements and terms and conditions of the Company's broker so as to maintain an orderly market in the Company's publicly traded securities.
In December 2014 the lock-up restrictions on KW CIP were waived.
Pursuant to a conditional deed of novation and variation dated 25 February 2014 between (1) the British Overseas Bank Nominees Limited and WGTC Nominees Limited in their capacity as nominees for and on behalf of National Westminster Bank plc as trustee of the Scottish Widows Investment Property Partnership Trust (an un-related party)(the Artemis Sellers) (2) Dionysus Limited, Niobe Limited and Agamemnon Limited (the Artemis Original Purchasers) (being related parties as entities in the KWI group) (3) KW Niobe Limited, KW Dionysus Limited and KW Agamemnon Limited (the Artemis New Purchasers) (being entities within the Group) and (4) KWI, (the Artemis Novation Agreement) the Artemis Acquisition Agreement (the acquisition agreement dated 23 December 2013 between the Artemis Sellers and the Artemis Original Purchasers) was novated from the Artemis Original Purchasers (as original purchasers) to the Artemis New Purchasers (as the new purchasers), as a result of which the Group acquired the Artemis Portfolio from the Artemis Sellers. The acquisition of the Artemis portfolio completed in March 2014.
On 9 May 2014 the Company announced that, through certain wholly-owned subsidiaries, it had entered into a conditional agreement to acquire a portfolio of residential and commercial properties located in Dublin (the Central Park Portfolio) from KW EU Investors X, LLC by acquiring the entire participating share capital issued by KW Real Estate plc, in respect of its sub-fund, KW Irish Real Estate Fund IX, for a total consideration of approximately €88.1 million (approximately £71.4 million), comprising approximately €30.7 million (approximately £24.9 million) of cash and approximately €57.4 million (approximately £46.5 million) of assumed non-recourse debt (the Central Park Acquisition), and a separate conditional agreement to acquire a portfolio of properties located across Dublin, with one in Cork (the Opera Portfolio) from VF Opera LLC and KWF Real Estate Venture XV, LP and KWI by acquiring the entire participating share capital issued by Cavalli Investments plc, in respect of its sub-fund Cavalli Real Estate Fund I, for a total consideration of approximately €391.4 million (approximately £317.1 million), comprising approximately €194.9 million (approximately £157.9 million) of cash and approximately €196.5 million (approximately £159.2 million) of assumed non-recourse debt (the Opera Acquisition). Each of the Central Park Acquisition and the Opera Acquisition were conditional on shareholder approval which was received on 12 June 2014, and both the Central Park Acquisition and the Opera Acquisition completed in June 2014.
B. Transactions with key management personnel
The Directors of the Company received total fees for the period as follows:
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Period ended 31 December 2014
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Charlotte Valeur |
£147,682 |
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William McMorrow |
- |
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Mark McNicholas |
£101,849 |
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Simon Radford |
£93,082 |
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Mary Ricks |
- |
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£342,613 |
Pursuant to the terms of the Investment Management Agreement between the Investment Manager and the Company, each of William McMorrow and Mary Ricks has waived his/her fees as Directors of the Company.
The Investment Manager is considered to be included within the definition of key management personnel. The total investment management fee for the period ended 31 December 2014 is £8.4 million, details of which are set out in Note 29A of the Annual Report and Accounts.
The Directors' interests in the shares of the Company are detailed below:
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31 December 2014 Number of ordinary shares held |
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Charlotte Valeur |
- |
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William McMorrow |
80,916 |
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Mark McNicholas |
- |
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Simon Radford |
- |
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Mary Ricks |
80,916 |
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161,832 |
C. Other related parties
There were no transactions with other related parties.
Directors' statement of responsibilities
The following responsibility statement is repeated here solely for the purposes of complying with Disclosure and Transparency Rule 6.3.5. This statement relates to and is extracted from the Annual Report 2014. It is not connected to the extracted information presented in this announcement or the results announcement released on 26 February 2015.
Responsibility statement
Each of the directors, whose names and functions are listed on pages 54 to 55 of the Annual Report 2014, confirm that, to the best of each person's knowledge:
· The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position of the Group at 31 December 2014 and of the profit or loss of the Group for the period then ended
· The Directors' report, together with the Strategic report, contained in the Annual Report, includes a fair review of the development and performance of the business and the position of the Group (taken as a whole), together with a description of the principal risks and uncertainties faced by the Company and the undertakings included in the consolidation, taken as a whole
· The annual report and financial statements, taken as a whole, provides the information necessary to assess the Group's performance, business model and strategy and is fair, balanced and understandable
Signed on behalf of the Board by:
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Charlotte Valeur Chair 13 March 2015 |
Simon Radford Director
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-Ends-
For further information, please contact:
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Investors Juliana Weiss Dalton +44 (0) 20 7479 7249 |
Press Richard Sunderland/Dido Laurimore +44 (0) 20 3727 1000 |
About Kennedy Wilson Europe Real Estate Plc
Kennedy Wilson Europe Real Estate Plc is a listed property company that floated on the Premium Segment of the London Stock Exchange (LSE: KWE) in February 2014 to invest in real estate and real estate loans across Europe. The Company's primary objectives are to generate and grow long term cash flows to pay dividends and to enhance capital values by way of focused asset management and strategic acquisitions, with the intention of creating value for shareholders. The Company continues to pursue a pan-European investment strategy and has acquired a significant portfolio invested across a variety of subsectors with the majority weighted towards office and retail. The portfolio is currently located across the UK, Ireland and Spain, and weighted towards London, the South East and Dublin. The Company is externally managed by Kennedy Wilson through a wholly-owned subsidiary acting as investment manager. It benefits from a strong team of real estate and real estate debt professionals operating from offices in London, Dublin, Madrid and Jersey. The Company is regulated by the Jersey Financial Services Commission. For further information on Kennedy Wilson Europe Real Estate Plc, please visit www.kennedywilson.eu
About Kennedy Wilson
Founded in 1977, Kennedy Wilson (NYSE: KW) is a vertically integrated global real estate investment and services company headquartered in Beverly Hills, CA, with 25 offices in the U.S., U.K., Ireland, Spain, Japan and Jersey. The company, on its own or with partners, invests opportunistically in a variety of real estate related investments, including commercial, multifamily, loan purchases and originations, residential, and hotels. Kennedy Wilson offers a comprehensive array of real estate services including investment management, property services, auction, conventional sales, brokerage and research. For further information on Kennedy Wilson, please visit www.kennedywilson.com
Cautionary Statement and Forward Looking Statements
This announcement has been prepared for, and only for the members of the Company, as a body, and no other persons. The Company, its directors, employees, agents or advisers do not accept or assume responsibility to any other person to whom this document is shown or into whose hands it may come and any such responsibility or liability is expressly disclaimed. By their nature, the statements concerning the risks and uncertainties facing the Company and/ or the Group in this announcement involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. This announcement may contain certain forward-looking statements with respect to Kennedy Wilson Europe Real Estate Plc (the "Company") and its subsidiaries (together, the "Group"), and the Group's financial condition, results of operations, business, future plans and strategies, anticipated events or trends, and similar matters, that are not historical facts. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results of operations, performance or achievements of the Group or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements speak only as at the date of this announcement. The Company undertakes no obligation to release publicly any revisions or updates to these forward-looking statements to reflect future events, circumstances, unanticipated events, new information or otherwise except as required by law or any appropriate regulatory authority. Past performance is no guide to future performance and persons needing advice should consult an independent financial adviser. Nothing in this announcement should be construed as a profit forecast.