Kennedy Wilson Europe launched a £100m share buyback programme this week as part of a continuing strategy to strengthen its balance sheet.
Despite posting a 5% rise in adjusted net asset value and a 33% rise in gross profit in the first half of the year, the company has been trading at about a 20% discount to NAV.
This has created an opportunity to buy and cancel £100m of shares at a price below what the company would normally expect, considering the value of its assets.
Kennedy Wilson’s buyback will start during its closed period from 5 October. The company will not use debt to fund the programme but has the option to use equity from property sales.
The programme follows the £200m in new bonds the company issued earlier this month, along with a continuing pipeline of disposals that have totalled more than £300m in the past year.
Share buybacks: Q&A
Why do firms do buybacks?
If a company is trading at a discount to its net asset value, buying its own shares sends a message to the market that it believes it is being undervalued. By buying shares with debt, it can substantially boost its earnings, although the loan-to-value ratio of its portfolio will also rise. The other option is selling assets to cover costs, which helps lower the amount of debt in the portfolio and focus it on core assets.
What happens to the shares?
The company can either cancel the shares or keep them in its treasury. If it cancels, its earnings per share will rise, all else being equal, while its share capital goes down. If it holds the shares, it can issue them again in the future – for example, if the company starts trading at a premium – or use them to satisfy its employees’ share options at a cheaper cost than issuing new shares. No dividends are paid on held shares.
Comment: John Lutzius, managing director, Green Street Advisors
Buybacks are more rare than they should be. Listening to capital market signals, both premiums and discounts, is something we think is a key part of managing a listed real estate company. It is an advantage that the listed real estate companies have over private companies.
From time to time, even good companies are going to trade at discounts, but the fact that a company is trading at a discount is not an indicator that it is not a great company. There is just this temporary concern in the listed market about property values.
The news of Kennedy Wilson Europe is interesting because it appears to be trading at a discount and funding its buyback from property sales. Not enough listed companies monitor this arbitrage opportunity the way they should. And when they do see an opportunity, they often fund it with debt instead of selling property to bring up the leverage.
We should be more sensitive to what the capital markets are telling us. What surprised me during the stronger days of pricing was that more companies did not issue more shares at a premium, strengthening their balance sheets and bringing down their leverage.
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