Go Irish and Take Advantage of the Continued Bank Deleveraging in Europe

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Earlier this month it was announced that Kennedy Wilson (NYSE: KW) was in the running to acquire at least portion of approximately $2.6 billion in loans that are predominantly backed by Irish real estate.  The loans are being sold by Lloyds Banking Group Plc (NYSE: LYG).  According to an article published by Bloomberg, the sale is part of the Irish unit Lloyds purchased four years ago in connection with its takeover of HBOS Plc.  Two years after this acquisition Lloyds made the decision to shut down the Irish unit and reportedly has taken impairment charges of $18.9 billion since the collapse of the Irish real estate market.  According to information gathered by Bloomberg from Investment Property Databank, Ltd., commercial real estate prices in Ireland are down approximately 67% and residential prices have dropped 50% since peaking in 2007.

This is not the first time at bat in Ireland for Kennedy Wilson.  In June 2011, the company acquired the real estate investment management business of the Bank of Ireland (NYSE: IRE).  The purchase of Bank of Ireland Real Estate Investment Management was the initial investment into the Irish market for Kennedy Wilson.  With offices now located in Dublin and London this acquisition gave the company a platform for future investments in the U.K., Ireland and potentially a larger part of Europe.

Wasting little time, Kennedy Wilson partnered with Fairfax Financial Holdings Limited (NASDAQOTH: FRFHF.PK) and other institutional investors to make another acquisition from the Bank of Ireland in October 2011.  This acquisition consisted of a $1.8 billion loan portfolio secured primarily by office, multifamily and retail properties in London.  In addition, the company led a group of investors in a $1.5 billion recapitalization of the Bank of Ireland in which the company supplied advisory services and participated with a small investment.

In March 2012, Kennedy Wilson and Fairfax Financial were at it again with the formation of a €278 million partnership to focus initially on Ireland and the UK.  Three months later the new partnership acquired the Alliance Building in Dublin, Ireland for €40 million.  The Alliance Building is a 210-unit apartment building that is part of the Gasworks estate which is adjacent to Google’s European headquarters.

In August 2012, Kennedy Wilson teamed up with Deutsche Bank AG (NYSE: DB) to acquire a €361 million loan portfolio.  The portfolio consisted of mostly commercial properties predominantly located in Dublin, Ireland.  During the same month, the company announced that it acquired a 50% interest in Brooklawn House for €15 million.  Brooklawn House is a 45,105 square foot office building also located in Dublin.

It would appear that Kennedy Wilson intends to aggressively pursue its European strategy taking advantage of the fallout from the European banking crisis.  To date, most of the European acquisitions have consisted of properties located in Ireland and the UK which is the current focus of the company’s efforts.  So what makes this relatively small and unknown company think it has the expertise to invest in such troubled markets?  Well, it is not the first time the company has crossed international waters to do business in distressed markets.  In the early 1990s, Kennedy Wilson opportunistically entered the Japanese market after the real estate bubble popped.  In 2002, the company successfully completed the initial public offering of Kennedy Wilson Japan which became listed on the Tokyo Stock Exchange.

For an investor that wants to take a diversified approach to exposure in European real estate, Kennedy Wilson may fit the bill.  The company already has a strong position in the red-hot multifamily market in the United States and the acquisition of Bank of Ireland Real Estate Investment Management brought expertise in-house to advance the European expansion.  The company’s real estate investments tend to be geographically focused and are mainly in the western US, Japan, Ireland and the UK.  In addition to its owned real estate related investments, Kennedy Wilson provides a broad array of real estate services to primarily institutions and investors.  The company currently has approximately $12 billion in assets under management which provides a steady stream of fee income. 

If you do decide that Kennedy Wilson is an investment for your portfolio, you will be in good company.  As mentioned earlier, Fairfax Financial has partnered with Kennedy Wilson on several of its European deals and also became a partner in the company’s Japanese apartment portfolio in 2010.  Fairfax is headed by Prem Watsa which has been compared to Berkshire Hathaway’s Warren Buffet by many in the investment community. 

Fool blogger Alex Gray does not own shares in any of the companies mentioned in this entry. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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