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Prem Watsa Adds Shares of Kennedy Wilson

July 06, 2011 | About:
Prem Watsa holds the honor of being branded the "Canadian Warren Buffet," and a simple glance at his performance over the past quarter century explains why. As the founder, chairman, and chief executive of Fairfax Financial Holdings Limited, Watsa has earned a 25-year cumulative return of over 24,000%, with his company book value per share compounding by almost 25% per year. In the past ten years, his cumulative return of 154.6% easily outperformed the 16.4% of the S&P 500.

Watsa has maintained a strategy of purchasing positions in strong companies with superb long term track records and holding them for the long term. In 2007 and 2008, Fairfax delivered strong results as a result of large gains in equity hedges and credit default swaps that were based on Watsa's correct appraisal of the economy before the Great Recession. Recently, he added another 3.6% to his holdings in Kennedy Wilson (KW).

Kennedy Wilson (KW)

Fairfax Financial first entered into a stock purchase agreement with Kennedy Wilson in May of 2010 when Fairfax committed to purchasing up to $100 million of Kennedy Wilson convertible preferred stock. This immediately created a strategic relationship between Fairfax and Kennedy Wilson, with CEO of Kennedy Wilson William McMorrow calling it "the single greatest event in Kennedy Wilson's history thus far." The two companies shared similar long-term, value investing philosophies that facilitated the relationship, and Watsa saw it as an opportunity "to begin selectively participating in commercial real estate opportunities."

Weeks later, Kennedy Wilson announced the planned formation of a new partnership with Fairfax to pursue acquisitions of commercial real estate assets, including purchasing loans and real property, with Fairfax providing up to $250 million in capital investment. Kennedy Wilson would lead the sourcing and negotiation of investment opportunities. In addition, it would be responsible for financing, property management, asset management and disposition.

Watsa noted, "Kennedy Wilson’s strong investment track record and exceptional ability to source, manage and sell properties, make them a unique partner and an excellent choice for Fairfax in pursuing current value in the commercial real estate sector, particularly in California."

In the third quarter of 2010, Watsa bought 11,100,074 shares of Kennedy Wilson at $9.60 per share. This past week, he added another 400,000 to his holdings on the heels of an announcement that Kennedy Wilson had entered into an agreement with two global institutional investors, including an affiliate of Fairfax, to result in gross proceeds of approximately $51.4 million and broaden the company's shareholder base. Under the terms of the definitive agreement, Kennedy Wilson will issue and sell 4,800,000 shares of its common stock at a price of $10.70 per share to fund future acquisitions. KW stock is now traded at a historical high of $12.24, earning Watsa a net gain of more than 27% for the shares he first bought in 2010.

Kennedy Wilson is a vertically-integrated real estate investment and services company. The company offers a comprehensive and diversified array of real estate services including property and asset management, brokerage and auction services, and construction and trust management. Through its fund management and separate account businesses, Kennedy Wilson is a strategic investor and manager of real estate investments in the United States and Japan. The company thrives on opportunity — identifying, creating, seizing and maximizing real estate opportunities.

Since going public in November of 2009, Kennedy Wilson has raised over $1.75 billion of equity and corporate debt for the company, growing assets under management to approximately $10 billion. According to their recent quarterly reports, total revenue decreased by almost $2 million as a result of a significant drop off in sale of real estate since the last quarter. However, increases in both equity in joint venture income and interest income have reversed the $2.5 million net loss last quarter to a $4 million operating income and a net income of $2 million. EBITDA increased by more than 700% to almost $14 million and adjusted EBITDA (adjusted for merger-related and stock-based compensations) increased by 165% to $15 million. The stock is currently traded at a P/B ratio of 1.6 and a P/E ratio of 61.3

On 07/05/2011, Kennedy Wilson announced that it closed two transactions with a combined value of approximately $147 million, bringing year-to-date transactions to a total of $625 million and total acquisitions over the last 18 months to roughly $2.7 billion.

This is part of GuruFocus Real Time Picks report, which reports the stock trades of Gurus within the last few days. For more information, go to Real Time Picks.

Rating: 4.0/5 (10 votes)


Kfh227 - 6 years ago    Report SPAM
Seems to be a gem worth north of $1B from the parts of the business I could understand.

Smaller stock that is under the radar in part because screening for traditional valuation measures like PE and FCF will keep this one hidden.

Watsa seems to be the master of finding hidden catalysts.

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