Jul 09, 2018
Ralph Rosenberg, Head of KKR Real Estate, explains the evolution of KKR’s real estate business and where we go from here.
Head of Global Real Estate, KKR
Thank you very much. I am very happy to be here. My name is Ralph Rosenberg and I run the global real estate business for KKR. I am going to basically illustrate in the context of the real estate business several of the things that Henry, Joe and Scott mentioned this morning.
We have an incredible brand, a robust balance sheet, a differentiated culture and a global presence. In 2011 when I joined KKR, we had zero fee paying AUM that was dedicated to commercial real estate. This is basically the story of the beginning of the scaling of a sector of the KKR franchise that runs fee paying real estate capital in an industry that Joe pointed out is an $800 billion industry that we have a very, very, very small fraction of the AUM currently under management. I am going to walk you through from where we have come to where we are, and where the future might lead us.
To give you two seconds of background, I have been in and around the real estate investing business both debt and equity since I graduated from college in 1986. I joined KKR in 2011. As you are going to see, we raised our first dollar of fee paying AUM in 2013.
KKR Global Real Estate – What We Do
As Joe mentioned, we are not just in the AUM aggregation business. We are in the AUM business where it is the high value AUM − high value with respect to earning fees, high value with respect to earning promote.
In both the debt and the equity space in commercial real estate, we are always migrating towards complexity, investing capital and originating credit in situations that are complicated. The story is differentiated, etc. Then we effectively work to create a very simple fact pattern with respect to that asset. Then we sell that fact pattern to the next buyer or in the context of debt, we get refinanced out.
In this world that we are living in where risk-free rates are very, very low globally, we are investing primarily in assets that can be created in a defensive context that can create a lot of cash flow which resonates very, very much with our investor base. Additionally, we are globally looking for market inefficiencies where we can use our balance sheet and use our AUM to basically do things that other people cannot do.
KKR Global Real Estate – Our History
This is a timeline effectively from when I joined the firm in 2011 to where we are today. As I mentioned, we started with the idea of high value add, high fee paying, high promote opportunities in the US equity business which was 2013 when we raised our first dollar of AUM. We migrated to taking advantage of a market opportunity in India. Then we migrated to the United States to effectively set up an integrated credit platform which I am going to tell you more about.
Then we launched a European equity business. We listed one of our credit businesses in the US in the New York Stock Exchange and created permanent capital that Scott referenced earlier. We took advantage of Dodd-Frank and risk retention. We raised the largest risk retention vehicle in the credit space in the real estate industry and now control about 40% of the market share there.
Then just last December, we raised our second successor US equity fund. As Joe said, that is like the beginning of this incredible journey that we can take to creating real scale in a business unit where we have planted a lot of seeds that are now just starting to grow.
Then lastly, as Joe mentioned, the opportunity in Asia is quite extraordinary. We have been investing off our balance sheet in Asia for many years, but we just recently hired a gentleman named John Pattar who starts next week who is one of the more formidable players in the real estate equity investing business in Asia. As you would expect, the playbook should be to raise dedicated fee paying AUM around his joining of the firm.
Importantly on the bottom of this page, you can see we started with a vision. We had five people when I joined back in 2011. Now, we have 63 people. We are in seven offices in five countries.
KKR Global Real Estate – Team Overview
This shows you the cities that we are in. We are obviously a global business. We also importantly have dedicated professionals who work with Suzanne in the client and partners group. We have dedicated professionals in the capital markets business. Just as we do in private equity, we have this adjacency where we can create opportunities to earn fees from a capital markets perspective in the real estate space just as we do in private equity. I am going to tell you a little more about that.
Lastly, you can see on the right-hand side of the page, we started with nothing in 2011 with respect to AUM. Now, we run in terms of actual fee paying AUM $4.7 billion, and the KKR balance sheet along with employees have invested $800 million in the businesses that I have currently pointed out to you guys.
Importantly, the difference between the $6 billion of AUM and the $4.7 billion that you are seeing in this chart is AUM that we have not yet drawn on that is only fee-paying when we draw on it. We have actually returned several hundreds of millions of AUM as we have harvested transactions throughout the world.
KKR Global Real Estate – Our History
Here is how we look from a geographic perspective. In North America, we have a traditional real estate private equity 11-year fund life business. We have a core plus platform that is actually a permanent capital vehicle that is only about $400 million right now. Then as I mentioned, we have two credit vehicles. One is this B-Piece Risk Retention vehicle which reacted to the Dodd-Frank legislation. Importantly, that is ten-year capital and we control 40% of the market share as I mentioned. Then lastly, KREF is our permanent capital vehicle that is listed in the New York Stock Exchange.
In Europe, we have a traditional private equity real estate fund called Real Estate Partners Europe. We have a direct investment off our balance sheet in an integrated asset manager in Germany that runs core real estate all the way through the risk spectrum to opportunistic real estate in the German market which is a very, very closed market that primarily attracts German domestic capital.
Then lastly as I mentioned, there is a huge opportunity in Asia. You should expect that we are going to leverage our balance sheet and our franchise to create permanent AUM in Asia. I also mentioned we have a credit business in India.
KKR Global Real Estate – Our Performance
As Joe mentioned, it is all about performance if you really want to scale. This slide really illustrates our performance to date across the strategies that report. Real Estate Partners America, close to a 20% gross IRR. As of the end of Q1, we have distributed back 85% of the invested capital. We are just getting to a point now where we can see visibility on hitting our pref and hitting a multiple of money that will allow us to really start booking both realized and unrealized promote as these investments continue to season.
In Real Estate Partners Europe, we are off to a great start, almost a 22% gross IRR. This is at a fund stage where we are not yet at a point where we even can book unrealized promote because we have not yet hit an inflection point to see visibility on the hurdle and the multiple of money.
Then you can see on the bottom of the page, on the credit side, we have had very, very strong returns as well. We pay out a fairly high current yield which is very attractive to investors in our public stock which is KREF and also was one of the differentiated aspects of the product in the BP space to attracting a lot of global capital to that product, primarily insurance companies.
Our successor fund in the US just got closed at the end of last year. It is a $2 billion fund. We are not yet in a position to report either IRRs or multiple of money because everything effectively is held at cost.
KKR Global Real Estate – Our History
When I mentioned the incredible opportunity available to KKR with respect to brand, balance sheet, global reach and culture, I was really referring to this particular slide. As Henry mentioned at the beginning of the day, our culture is incredibly differentiated relative to our competitors. That is absolutely true as it relates to the real estate space.
If you think about real estate private equity firms, the overwhelming majority of them are standalone investors who only operate in the real estate private equity world. Because we are adjacent to all these other parts of the firm, we can create incredible sourcing channels. We can create incredible access to information. We can create incredible access to capital markets information. We can create incredible synergies internally to creating operational improvements at the investment level in the real estate space.
We are really drawing day in and day out across the firm to really differentiate ourselves in the context of a real estate asset management universe that quite frankly is pretty crowded. As Joe mentioned, there is $800 billion of AUM that is managed in the real estate space globally. By definition, there are lots of people we compete with. It is all about how do we differentiate ourselves from our competitive set. In my opinion, it all comes back to this particular page.
KKR Global Real Estate Business – Evolution
As I mentioned, on the left-hand side of this page, for those of you who were here on investor day 2013, I had been here about a year and a quarter, we had no AUM. We were using our balance sheet − Scott referenced that − to do proof of concept investing. Now, you fast forward and we are really hitting on all cylinders across all product types in all regions other than Asia − but that is to come − and we have had incredible results from an investment return standpoint.
As you can see on the bottom of the page, you start to see the fruits of our labor. The balance sheet has invested about $800 million. The returns on that direct balance sheet investing are not shown on this page. When I mention we are up 20% in our US equity business, we are up 20% plus in our European business, that direct balance sheet allocation of those businesses does not show up on the bottom of this slide. But we did want to illustrate to you the power of this franchise with respect to starting to earn fees and recurring income for the P&L of KKR.
Management fees are kicking in. Capital markets fees are kicking in. As I mentioned, we are just starting to see the fruits of our labor with respect to promote.
Where Does Real Estate Go From Here?
Where do we go from here? In 2013, we started with a high-margin, high promote-paying vehicle in the United States. That is Real Estate Partners America I.
Today, in the equity space, we have Real Estate Partners America II, and we have Real Estate Partners Europe. There are incredible opportunities to create adjacent products that not only are complementary to successor funds like Joe mentioned but that allow us to go up the safety spectrum in the real estate world and then continue to capture fee paying AUM.
In the real estate world, the safest product is what is called the core investment product. Then we run the higher-margin, higher fee-paying, higher risk-taking funds and value and opportunistic. The spectrum between core and where we are today is incredible. Our ability to leverage what we have today and to move towards the core product and to raise additional AUM that is fee-paying and promote-paying is extraordinary.
I mentioned we have got the opportunity in the equity space to raise an Asia fund. In credit, we are continuing to leverage off our Real Estate Credit Opportunity Partners fund which is this B-Piece Risk Retention fund. We are currently in the process of a successor vehicle there. We continue to have very, very strong results in KREF which is our permanent capital vehicle. You would expect over time that we will continue to issue primary shares in KREF and continue to scale that permanent capital vehicle.
In the credit space in the bottom-right-hand side of this slide, you can see that there are also incredible opportunities for adjacencies to our existing credit products to increase AUM but to do so in a way where it is both fee-paying and promote-earning over time.
I would conclude in saying the following: that in my opinion, in an industry that has $800 billion of fee paying AUM that is being captured by GPs globally that KKR with our brand, our balance sheet, our global reach and our culture should be able to capture more than our fair share of that $805 billion of AUM.
Today and historically, we have effectively gotten to $6 billion. There is a huge opportunity for us going forward. I am going to pause there. I am going to offer everybody the opportunity to take a 15-minute break and then we are going to continue the program.
DisclaimerInvestor Day podcasts and corresponding transcripts have been prepared for KKR & Co. Inc. (NYSE:KKR) for the benefit of its public stockholders and is not intended to be a solicitation or sale of any of the securities, funds or services that they may discuss. Please find a copy of the presentation here.