In its latest move in what’s already been a very busy year, Fairfax Financial (CA:FFH, US:FRFHF) announced on June 5 that it would acquire $2 billion in real estate construction loans from Kennedy-Wilson Holdings (US:KW). (All figures in U.S. dollars unless noted otherwise.)

It was a quick flip for Kennedy-Wilson, Beverly Hills-based global real estate investment firm specializing in commercial and multifamily assets.

The company acquired 74 real estate construction loans from Los Angeles-based regional bank PacWest Bancorp (US:PACW) in late May for $2.4 billion. That sum was $200 million less than the aggregate principal balance outstanding. The floating-rate loans carry an average interest rate of 8.4%. As part of the purchase, it is responsible for $2.7 billion in future funding obligations under the loans.

Two weeks later, it sold 95% of 63 of these loans to Fairfax. Approximately 70% are for multifamily and student residence projects. The remainder is for future industrial, life sciences office space, and hotel properties. KW will own the remaining 5%, or $100 million.

In addition to buying $2 billion in construction loans, Fairfax also made a Buffett-esque move acquiring $200 million in Kennedy-Wilson preferred stock paying 6% annual interest. The stock is callable at any time by Kennedy-Wilson.

Deal Deets

In its SEC filing on the PacWest buy, Kennedy-Wilson said its total investment in the transaction would be between 2.5% and 5% of the $5.1 billion, which includes the purchase price and future funding obligations.

Fairfax’s press release stated that the loan’s weighted average remaining term to maturity was 1.7 years with possible two one-year extensions. Although the loans are variable-rate, Fairfax has used interest rate swaps to effectively fix the interest rate at 8.6% for the life of the loans. It expects to generate an average annual return of over 10% on loans. The average loan-to-value ratio of the loans is 51%.

“We are excited to continue our great partnership with Kennedy Wilson, led by Bill McMorrow, and to acquire an interest in a stable and attractive loan portfolio that further strengthens the foundation of interest and dividend income-generating assets that will benefit Fairfax over the next two to three years,” said Prem Watsa, Chairman and CEO of Fairfax Financial Holdings Limited.

Also included in the transaction were seven-year warrants to buy 12.3 million shares of KW stock at an exercise price of $16.21 a share.

This is not the first time that Fairfax has bought a large piece of KW stock. It acquired $100 million in 2010. It also acquired $300 million in preferred shares in 2022, paying a 4.75% annual dividend. Assuming the additional shares are exercised, Fairfax would own 23.5% of Kennedy-Wilson, making Fairfax the investment company’s largest shareholder.

Already in 2023

At the end of March, Poseidon Acquisition, a private company established by the controlling shareholders of Atlas Corp. (US:ATCO) — Fairfax, the Washington Family, David Sokol, and Ocean Network Express — acquired the owner of Seaspan for $11 billion, a 34% premium to its closing share price before discussions began in August 2022.

In April, Fairfax announced that it would acquire an additional 46.32% of Gulf Insurance Group from the Kuwait Projects Company for $860 million, including an upfront payment of $200 million, plus four annual payments of $165 million beginning on the first anniversary of the deal’s closing. As a result of the purchase, it owns 90.01% of one of the most diversified insurance companies in the Middle East.

Doing Something Right

Management of Toronto-based Fairfax seems to be making all of the right moves. FFH stock is up 22.6% in 2023 and 46% over the last 12 months.

The company more than doubled its first-quarter earnings. Analysts surveyed by S&P Capital IQ expect normalized earnings per share of $27.40 for the current June-end second quarter.

Fund Sentiment on Fintel’s quant dashboard is at a respectable 85.03. The top investors include fund behemoth Vanguard, which holds FFH stock in a number of its funds, including its Total International Stock Index Fund Investor Shares (US:VGTSX) and Developed Markets Index Fund Admiral Shares (US:VTMGX).

That Fund Sentiment metric, or Ownership Accumulation score, is Fintel’s proprietary quantitative model that ranks companies based on levels of ownership accumulation. To calculate the ranking, we look at two key factors: the change in the number of disclosed owners over the prior quarter, and the change in portfolio allocation of existing owners over the prior quarter.

This article originally appeared on Fintel

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