New KKR payout policy buoys investors, profit tops view
Private equity firm KKR & Co LP said on Thursday it will share 40 percent of profits from its own investments with shareholders and reported quarterly earnings that beat expectations, sending its shares to an all-time high.
KKR shares jumped as much as 7 percent to a record $21.59, and were trading up 4.9 percent at $21.17 in afternoon trading, as investors welcomed clarity on how much of KKR's profits from principal investments would go to them. While the payout won't be substantially higher than before, it will be more frequent and predictable.
Uncertainty over the dividend policy had caused KKR shares to close down on February 7, the day it posted 2012 fourth-quarter earnings and announced its highest-ever dividend.
"From a valuation standpoint, KKR is trading ... meaningfully below peers, as well as the traditional asset managers. Moreover, our model calls for distributions per unit to reach $1.24 this year, implying a 6 percent-plus yield," Sandler O'Neill + Partners analyst Michael Kim wrote in a note.
New York-based KKR's cash profits nearly doubled as it took advantage of strong markets to sell shares in companies and sell some assets outright. But using an alternative asset management industry metric, its earnings fell.
First-quarter economic net income (ENI), a measure of profitability that takes into account the mark-to-market valuation of assets, dropped to $647.7 million from $727.2 million a year earlier.
This translated into aftertax ENI of 88 cents per adjusted share, topping the average analyst estimate of 82 cents, according to a Thomson Reuters poll.
KKR's private equity fund portfolio appreciated 5.9 percent in the quarter versus a 9 percent rise a year ago. The value of KKR's principal investments also grew at a slower pace.
Blackstone Group LP , the world's largest alternative asset manager, reported a 28 percent rise in first-quarter ENI last week as its real estate, private equity, credit and hedge fund units successfully sold assets and appreciated in value.
In the first quarter, KKR sold shares in discount retailer Dollar General Corp at 5.5 times its investors' money, hospital operator HCA Holdings Inc at 3.2 times its investors' money and Jazz Pharmaceuticals Plc at four times its investors' money.
It also agreed to sell its 51 percent stake in music rights management company BMG to Bertelsmann AG , Europe's largest media company, and Japanese recruitment services firm Intelligence Holdings Ltd to peer Temp Holdings Co Ltd <2181.T>.
DIVIDEND POLICY
Total distributable earnings, used to pay dividends, jumped to $290.6 million in the first quarter from $164.1 million a year earlier. Just over half of the rise was due to profits from KKR's own investments rather than management and performance fees it got from funds.
Fee-related earnings, mostly reflecting fees it charges to investors and portfolio companies that are not based on KKR's performance, rose to $88 million from $73.4 million a year ago. Realized performance fees from KKR's funds resulted in income of $52.9 million, up from $44.9 million a year ago.
KKR's principal investments made a significant difference. They yielded income of $153.2 million, versus $52.6 million a year ago.
Huge by industry standards, the size of KKR's balance sheet is the legacy of the firm's merger in 2009 with KKR Private Equity Investors, a fund vehicle whose listing KKR transferred to New York from Amsterdam in 2010.
KKR said it would now strive to distribute 40 percent of its balance sheet income as a dividend every quarter.
Previously, about 35 percent to 37 percent of the annual balance sheet gains had been paid out to shareholders in one installment in the fourth quarter. This was to cover their tax liabilities on those dividends.
The 2013 first-quarter dividend is 27 cents per share.
KKR also gave an update on its $17.6 billion 2006 buyout fund, which earns it no cash profits as long as some of the fund investments are marked below initial cost. The amount by which investments are marked below cost is called a netting hole.
The netting hole on the 2006 Fund has now been filled. This means KKR can now receive performance fees from all of its private equity funds with the exception of its European Fund II, its European annex fund, and its China Growth Fund, KKR said.
KKR, which has investments in retailer Toys R Us Inc and Internet domain registration company Go Daddy Group Inc, said assets under management rose to $78.3 billion at the end of March from $75.5 billion at the end of December. Besides private equity, the assets include credit investments, hedge funds, and infrastructure.
KKR also gave an update on its efforts to set up a real estate fund. It has so far committed over $650 million in ten property transactions, with about half of that money coming from KKR itself.
"I think that we'll club together a group of investors, drop some of those investments down into the fund to seed ... but it's very early days on that," Scott Nuttall, KKR's global head of capital and asset management, told analysts on a conference call.
The firm was founded in 1976 by Henry Kravis, George Roberts and Jerome Kohlberg. It gained widespread recognition through its $25 billion leveraged buyout of RJR Nabisco in 1988, a battle that was immortalized in the bestseller, "Barbarians at the Gate."
(Reporting by Greg Roumeliotis in New York; Editing by Jeffrey Benkoe and Tim Dobbyn)