Q1 2021 Kennedy-Wilson Holdings Inc Earnings Call
[music].
Good day and welcome to the Kennedy Wilson of first quarter 2021 earnings conference call and webcast. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two.
Please note this event is being recorded.
I'd now like to turn the conference over to Devan Bhavsar Vice President of Investor Relations. Please go ahead.
Good morning, this is Devin boster and joining us today are bill Mcmorrow, Chairman and CEO of Kennedy Wilson, Mary Ricks, President of Kennedy Wilson, Matt Windisch Executive Vice President Kennedy Wilson, adjusted and body Chief Financial Officer. Kennedy Wilson today's call will be webcast live and will be archived for replay of the replay will be available by phone.
I for one week and by webcast for three months. Please see the Investor Relations website for more information.
On this call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA and adjusted net income you can find the description of these items along with the reconciliation of the most directly comparable GAAP financial measure and our first quarter of 2021 earnings release, which is posted on the Investor Relations section of our website statements made during this.
Call May include forward looking statements actual results may materially differ from forward looking information discussed on this call due to a number of risks uncertainties and other factors indicated in reports and filings with the Securities and Exchange Commission I would now like to turn the call over to our chairman and CEO Bill Mcmorrow.
Thanks, Devin and good morning, everybody and thank you for joining us today.
I'm pleased with the Q1 earnings that we reported yesterday as the fundamentals in our markets continue to recover from the pandemic. The strong momentum we had in Q4 carried into an active start for the year.
We anticipate that the global economy will continue to rebound from the strong institutional demand for well located real estate assets bodes well for our existing portfolio and our strategic growth initiatives.
And we have built an extremely robust investment and leasing pipeline that will drive growth.
For us for the balance of the year of the AWN.
Starting with our financial results in Q1, we had a GAAP loss per diluted share of <unk> compared to a loss of seven cents in Q1 of last year.
Adjusted net income grew by 5% to 47 million the.
These results include the impact of of onetime $15 million loss on the early extinguishment of corporate debt in Q1 related to the refinance of our 2024 bonds.
Which will result in $10 million of annual interest savings.
Excluding this onetime loss GAAP net income would have been four cents per diluted share and adjusted net income would have been $58 million.
Finally, adjusted EBITDA grew by 14% to $128 million.
Our stabilized portfolio ended the quarter with $389 million in estimated annual NOI.
The operational performance across our largely suburban multifamily and office portfolio, which accounts for 82% of our estimated annual NOI was strong as we continued demand high octane maintain high occupancy.
And once again collected 97% of our routes.
In total our office and multifamily same store NOI was up two 1% in Q1 due to strong results out of our mountain states apartments, and the burn off of free rent of our office portfolio.
These results compare very favorably against many of our peers.
In Q1, we continued to grow our investment management platform and our fee bearing capital, which has grown by 86% since the beginning of 2019 and now totals $4 1 billion.
Yes.
Growth in the quarter of 5% was primarily driven by the expansion of two new platforms, we launched last year.
In Q1, we completed $209 million of new investments in our urban logistics platform and $137 million in new loan investments via our debt platform.
Both platforms have strong new deal pipelines, which we will detail in a moment.
Our disposition program continued to take advantage of the strong real estate market and we selectively are harvesting the value we created in our existing portfolio.
We successfully sold $556 million of assets in Q1.
Which our share was approximately 50%.
The key disposition for US was the $220 million sale of Friars Bridge Court.
A wholly owned 103000 square foot office property located in the South Bank Submarket of London.
The sale was completed at a sub 4% cap rate and once again illustrates the high quality nature of our real estate portfolio and the continued institutional demand for well located office properties on long term leases.
The sale generated a net gain of approximately $65 million to Kennedy Wilson.
And post quarter end, we are actively recycling the proceeds from our Q1 sales into new investments and have built a pipeline of approximately $514 million and gross investments, 70% of which has already been closed.
In total.
Our Q2 pipeline is expected to add another $9 million of estimated annual NOI to kw and $200 million in fee bearing capital.
Which would bring our estimated annual NOI of two $398 million and our fee bearing capital of $4 3 billion. After accounting for these Q2 transactions.
Looking at our balance sheet, we continue to maintain $1 1 billion in pro forma liquidity with minimal debt maturities remaining in 2021.
As I discussed on our last call in Q1, we financed refinanced all of our 2024 bonds with the new $1 $2 billion unsecured bond offering.
Cross two separate tranches with the.
The weighted average coupon of four 875%.
On a weighted average maturity of nine years.
In April.
We made further progress on our unsecured KWE bonds due in 2022 and repaid another $207 million with $300 million remaining.
Pro forma for both bond Paydowns, our cost of debt improved from three 7% at year end of three 5%.
Our weighted average maturity extended from four one years to five nine years.
These two transactions will reduce our annual interest expense by approximately $18 million.
Yes.
Now as we begin to look beyond the pandemic, it's important to highlight our efforts over the last few years to simplify the Kennedy Wilson business model.
Our head count was down 60% through divesting of two non core divisions, and we are coming out of COVID-19 of much leaner and more focused company with ample dry powder to continue growing our business.
Our strategic initiatives include significant growth for both our in place property NOI and our recurring.
Fee income revenue.
Over the last year, our U S debt platform has grown considerably since its launch in May 2020.
This $2 billion platform is focused on loans secured by high quality real estate in our existing U S investment markets.
We are of a number of advantages against our competitors in the space.
We approach our loan investments through the lens of an owner operator, rather than purely of lender.
Our debt platform Leverages, the expertise of our real estate underwriting teams as well as our relationship network that we have cultivated a kw over the past three decades.
Finally, our loan portfolio is backed by large well capitalized institutional sponsors.
We have of 9% ownership interest in our loan portfolio, which is generating double digit unlevered returns to kw.
Yeah.
Post quarter end, our debt platform grew to approximately $1 2 billion and we are of a strong pipeline that will allow us to.
When you're growing this platform in 2021.
Yes.
Our $1 billion of European logistics platform is less than six months old and off to a fast start this.
Of this platform is focusing on smaller last mile facilities located close to the city centers the.
The platform, which kw as an ownership interest of 20%.
$444 million of assets as of quarter end.
And a robust pipeline of another $300 million of opportunities across the UK, Ireland and Spain, we are evaluating.
Given the additional capacity we have in all of our announced platforms. We have the potential of will add another $2 billion, the incremental fee bearing capital to the existing $4 1 billion.
With that I'd like to turn the call over to Mary Ricks, our president to discuss our multifamily and office portfolios in more detail.
Thanks, Bill and.
In our multifamily portfolio occupancy remained steady at 95% from year end suburban assets account for 90% of our multifamily NOI and our average monthly rents.
<unk> hundred $75 per month.
Our largest market rate multifamily region is in the mountain states the perf.
<unk> in this region continues to be very strong.
States, such as Idaho, Utah, Nevada, Arizona, and Colorado continued to attract new residents due to the lower cost of living more space year round access to the outdoors and job growth, resulting in continued positive migration trends in fact in 2020 Salt Lake have the higher.
The percentage growth in its labor force in the country.
These trends are positively impacting our mountain state results.
Which had another strong quarter with the same property revenue up four 4% and NOI up four 7%.
Post quarter end, we acquired off market the loss of 10 mile of <unk>.
Wholly owned 240 unit community in Meridian, the SaaS growing submarket of Boise.
NOI at the loss is approximately $3 million.
We are excited to expand our portfolio in Boise, where we made our first investment back in 2014 and sense of become one of the largest owners of market rate multifamily in the city.
This acquisition brings our mountain state portfolio of up to over 9800 units, including units under development and in lease up.
In Dublin multifamily rent collections once again exceeded 99% and occupancy has continued to improve increasing to 92, 4% from 91, 3% at year end.
These results are particularly encouraging considering the Dublin was in full lockdown during the entire quarter.
As things are rapidly improving we are seeing some very good early signs of activity and growth resuming.
Especially as the return to office picks up and employees, who may have left Devlin begin to return.
Our expectation is that in Q2 as the economy Reopens. We believe we can continue increasing the occupancy throughout our high quality and amenity rich Dublin multifamily portfolio.
Turning to our global office portfolio occupancy remained stable at 93, 7%.
Weighted average lease term at $4 nine years to break.
Our stabilized portfolio for the.
The quarter rent collections continued to remain very strong as we once again collected 99% of our office rents.
And bill referenced the strong level of industrial acquisitions since year end looking forward. This is of strategic asset class for us in Europe and the rapid growth is a testament to our team's ability to execute primarily off market deals.
Had strong asset management wins as the strength in occupational markets as demonstrated by the demand we're seeing for space within our own industrial portfolio and the pipeline of asset management activity remains very solid.
Both deals completed and in Legals are outperforming business plan.
Adding term and delivering double digit rental growth.
And our value add fund in early Q2, we signed a 50000 square foot pre let with LG for a 10 year term certain at our Leighton Buzzard development 25 miles north of London's main orbital motorway.
Related to the sale of the phrase Bridge Court office property in London, I would like to provide some background information.
We originally acquired this asset in 2014 of our loan to own the strategy.
<unk> loan enforcement.
In Q1, we signed the new 103000 square foot lease for the entire building to a leading provider of laboratory diagnostic services backed by the UK government for 20 years term certain after negotiating of surrender with the existing tenant.
In conjunction with completing the new lease we sold prior scripts CT to European core fund for $220 million.
This represented our largest lease and largest disposition in the quarter.
This deal is a great example of the broad depth of experience, which sits within the Kennedy Wilson business from complex acquisition through to value enhancing asset management strategies.
We executed our business plan successfully which culminated in this profitable transaction.
We're looking to recycle the proceeds from the sale in Q2 and are currently evaluating a number of higher returning opportunities in the U K.
Globally, we saw strong leasing activity in the first quarter of 2021, we completed 311000 square feet of new leases and extensions with the wealth of 10 seven years and.
In addition post quarter end, we've already completed another 195000 square feet of lease transactions.
We also have over 411000 square feet of leases and legal and our trading paper on a significant number of leases across the U S and Europe.
As a reminder, 97% of the NOI in our office portfolio comes from low and mid rise properties and 72% of our office NOI is generated from buildings that are either occupied.
Nominally by a single tenant or are located in an office park.
Finally at the Shelburne Hotel as I have reported previously.
The brand of COVID-19 restrictions, which have continued into 2021, having been effectively closed since March of 2020.
We currently expect that we'll be able to gradually reopen beginning in June of significant amount of 2020 International business has rebooked into 2021 and 2022.
As the EU looks to welcome international travelers the summer, we're very optimistic in the near term outlook for the Shelburne and look forward to getting this iconic hotel fully opened.
With that I'd like to turn the call back over to Bill.
Thanks Mary.
I would now like to discuss the progress, we're making at our development and lease up projects are.
The development pipeline is building to on average of 6% yield on cost.
In markets, where assets are trading at a significantly lower cap rates in total we have over 3900 multifamily units $2 3 million in commercial square feet, one hotel on our development and lease up portfolio.
The completion of these initiatives is an important strategic focus for us given the spread in yield.
The majority of our construction is scheduled to be completed by the end of 2023.
Once finished and stabilize these projects are estimated to add $100 million of estimated annual NOI to kw.
In the quarter, we stabilized four separate projects totaling 657 units and 247000 commercial square feet.
Including the first phase of Clara in Boise, Idaho Phase one of 38 degrees North of Santa Rosa 400, California, San Francisco and the view by vintage.
The stabilization of these projects added $6 million of estimated annual NOI of kw.
Looking ahead.
The clarifies two invoices totaling 148 units will be delivered by the end of Q2 and stabilized in Q3.
We also are making great progress of the river point in the 89 unit property in Boise that will complete in early 2022. This.
Of this development is adjacent to.
Another one of our communities totaling 204 units, which is averaging of 97% of occupancy.
Yes.
Within our vintage housing joint venture in addition to stabilizing the view the quarter, we added a new project to the pipeline Cold Spring view, which will add another 180 units in the mountain states.
We have over 1700 affordable units in the development pipeline, which will be completed with minimal equity required from kw.
Since acquiring.
Our stake in vintage back in 2015, we have increased our average quarterly operating distribution by 60%.
The $3 million per quarter.
In total, including recent indications, we have received of $160 million of distributions from vintage.
Finally, a doubling of our two projects handover of key and kill their totaling 133000 square feet of office are on track to complete in the near term.
As the Dublin market continues to reopen and recover from the pandemic. We are confident in the lease up of these two exciting developments.
Clancy key which totals 865 multifamily units across three phases is expected to have a $20 million.
The expected to have $20 million of estimated annual NOI at stabilization, which our share of this 50%.
Making it one of the largest market rate assets in our portfolio.
Leasing at Phase, three which totals 279 units is progressing well and is.
A good indicator of the demand for this high quality offering.
We're now 70% lease.
Up from 50% we reported of due at the end of February with rents of ahead of business plan.
We remain on track to stabilize this asset of total in Q3.
So to summarize we're off to a solid start to the year.
And as I look ahead, I'm very optimistic about our business investment volumes and leasing activity are picking up our platforms of plenty of capacity to continue growing.
So I've said on prior calls.
Our three part of our to our key priorities are to number one growing our recurring NOI through new acquisitions organic NOI growth and the completion of our construction of the lease up projects and to leveraging our strategic institutional partnerships to meaningfully grow our <unk>.
<unk> management platform and our fee bearing capital.
I would like to thank our shareholders our co investment partners on our board for their continued support of kw.
And finally I'd like to thank our employees, who have allowed us to emerge out of the pandemic of stronger company that is well positioned for continued growth.
So with that Devin I'd like to open it up to any questions.
Yes.
Okay.
Okay.
We will now begin the question and the answer session.
Ask the question you May Press Star then one on your Touchtone phone.
You are using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Okay.
The first question will be from Anthony <unk> of Jpmorgan. Please go ahead.
Alright, great. Thank you.
We've heard a lot of anecdotes about where cap rates are for apartments across the country, but you all have a fairly unique footprint can you comment on where.
Cap rates are in some of your mountain States, perhaps Dublin.
And also for your more affordable product.
Yup.
Well I think Tony is an overview of these these.
Low interest rates that you could finance out of course.
<unk>.
Caused cap rates to decline.
And also.
As I think we all know there's hundreds of billions of dollars of capital globally.
That is looking for at.
Net real estate of as an asset class, which has also had an effect as you can see from the sales that we did of Friars Bridge Court.
I would say that.
We're very fortunate in the sense of we got into most of the markets that we're in today, a long time ago.
So we have very very good footprints there.
End of.
But.
It's competitive on the on the buy side today.
Our real strength.
I think on the buy side has been the relationships that we've created over these three decades of most of us of them together.
And so we're always trying to find the off market opportunity.
And I think the other part of it.
The just the decisions that we made as far as new construction really started almost seven years ago.
And.
It takes a long time to fill the pipeline so to speak.
Then have.
<unk> finished like clients of key we bought <unk> in 2013.
And there were only 420 units there and as I said in my remarks, now we're going to have the 865 units, but in that particular case, we're stabilizing clancy at close to a 7% cap rate brand new.
And that property, although we have no plans to sell it would sell at a cap rate today, well below 4%.
So.
The decisions that we made our businesses of.
Business you have to.
Try and get into these markets early.
We have to get a good footprint in these markets and then the decisions that we've made.
To do these the new construction.
Has really proven out to be of gray.
Great Great plus and as I said most of this construction that we're doing is going to come online here in 2020 before the end of 2023.
Some into 2024.
But.
Assuming these rates, which everybody is sanger and the state level the.
The cap rates.
We're going to continue to be at the levels that we're at today.
But we're still finding opportunities we are in.
Both on the buy side.
And on the new construction side.
We're starting.
Two new projects one of next to our project in Santa Rosa.
Calling Santa Rosa phase two of its land adjacent to the Santa Rosa Phase one so that project one of Zon will have 300 units out of it.
We also just bought a property in Boise, Idaho, Idaho called Jasper.
But next to that.
That project's 240 out of snacks to that there's land for another 240 units, which we're going to start on the summer.
So.
While the market's competitive we're still finding opportunities that make sense for us to buy.
And then the last thing of zone, So long winded answer we're.
Unless it's in awe of.
<unk> that has a short term hold the horizon.
We're locking in spreads.
On.
By using fixed rate debt the.
Of the generally is in the.
10 year term here in the United States and in Europe more of the 5% to seven year term.
But that is the key.
The opinion is that you.
<unk> got a lock in your spreads.
Not try and take advantage of.
Rates.
And the.
I'd say marry to the last piece of of when you really think about it is our asset management capability.
There was a lot of uncertainty starting last March of 2021, we all want remote.
But we've demonstrated that we collect rents at a very very high level.
And unlike the.
A lot of our peers and I am not critiquing mill.
We've actually had rent growth.
In the markets that we're in so it's a combination of all of these factors I think the.
Give me an awful lot of confidence in the future even with the competition on these lower cap rates.
Got it and are your Investor partners are they adjusting down return expectations are adjusting to an environment, where there is an enormous amount of liquidity.
How does that conversation work with you as you are raising capital.
Yes.
I think that.
I started saying.
Three or four years ago on these calls debt.
That the days of underwriting when <unk> got basically zero cost of debt in certain parts of the world. The days of underwriting initial yield to 15% to 20% or 25% of returns that we may have gotten eight or nine years ago was actually of pools.
Game.
And so everybody has had to adjust their return expectations.
But it's separated were of value add player. We're always trying to buy things that we can add value to whether that's through better management or building.
Or just.
On the buy side.
Our DNA is to find things, we can add value to having said that.
We have.
Partners, particularly in the insurance industry and others.
That.
We have lowered their yield expectations to satisfy their own needs and so that's the allowed us to get into a space, particularly in the fee bearing capital World, where we're doing what I would consider to be more core returns.
So clearly there is a segment of the institutional investment world that is.
Lowered their expectation to more core returns but.
<unk> core risk adjusted returns where they are not.
Going way out on the limb in terms of the risk they might be taking.
So the good news at Kennedy Wilson is we've got every flavor of capital we've got.
The capital we can put to work in core returns and we've got capital that we can put to work and value add returns and we've got capital that we can put to work and the debt platform.
So there is nothing really in each of those assets are categories that we don't have capital.
Four.
And I would say to marry the the.
Last piece is that the relationships that we've built these relationships take years not decades to build because they are all built on trust.
And so we've just got very very strong institutional partner relationships that will fulfill every.
Bucket of return.
Yes.
And I would also say Tony the core plus vehicles that we have.
The industrial space in Europe right now.
Is growing immensely and I think.
Our partners and ourselves understand really that the asset class and really the band of return sort of the 911 net levered.
And going in we might be going in at a five but we're growing that to say.
The fix and we're seeing tremendous demand and all of our markets and a lot of the sales force we're sourcing off market.
Im just looking at the pipeline right now we have $300 million.
Worth of.
The new industrial assets throughout Europe that were that were evaluating.
So, yes really excited about the growth in the platform.
Okay, great. Thanks for all of the contracts there.
Sure.
The next question is from Derek Johnston of Deutsche Bank.
Hi, good morning.
Key kw expertise as distressed opportunities and special situations that really seem to have been elusive the cycle. So far there have been a lot of funds raised across the industry explicitly the target these scenarios.
Has it gotten more competitive to source deals and if the government intervention really did eliminate a lot of distress the cycle.
Where do you go from here.
Do you still expect to see some distress just be at a bit more delayed and which of your core sectors stand out as likely having more opportunities office multifamily or other.
No.
Well I think there clearly has the except really two sectors really the hotel.
The market in retail.
All of the other asset classes and of course depends on where youre at geographically on what.
Governor metal restrictions came down in terms of your ability to collect rent.
But.
The other than those two.
Asset classes, there hasn't been really any distress to speak of.
And I think it's the combination of factors, it's not just the the government intervention and the rates being kept solo but.
But it also has been the.
The banking system.
He has been in the best financial condition, frankly that I've ever seen and so.
Most distressed markets generally are driven by the banks having challenges.
<unk> globally.
At least the markets that we're in the banks are well capitalized and in very good shape and so they were.
I don't know of tolerance of the right word, but they were willing to work with all of the borrowers that may or may have had issues.
<unk>.
Alright, I don't think youre going to see.
A lot of distress in this market here over the next couple of years.
I think an awful lot depends whats going to half of them with interest rates and you can have never been very good of forecasting that but you can take any kind of wage really want today of where you think interest rates are going based on what you think are your expectations for inflation.
And so.
I don't see near term and of any real distress and so our real opportunity is just the.
The footprint that we already have in growth markets and we're very fortunate to be.
In the Western United States, where there is significant job growth going on.
Driven in large part by the the <unk>.
Tech sector and all of the ancillary businesses two of the App.
You have very high barriers to entry in most markets that we're in in terms of the entitlements.
Scarcity of.
Really.
Good land.
And I think the same thing is really true.
The Ireland.
And we.
We have a very.
Positive view of the recovery, that's going to take place in the United Kingdom.
So we're as Mary said in her remarks, we're redeploying some of the capital from the prior bridge sales.
Very attractive.
Cap rates per square foot prices.
So that's the long winded answer, but I don't see on the near term except for the two asset classes that I mentioned I just don't see much distress.
No I mean, it all makes a lot of sense actually and it's a good segue kind of into my second question.
So you mentioned development targeting the 6% yield.
What compression.
Due to the highly elevated material costs and labor inflation.
As well are you underwriting so I mean is the impact like the 100 of 150 basis points in your opinion as I feel you would historically developed at higher yields.
Really just trying to get a sense of possible multifamily development yields compression.
If you could thank you.
It's a very good question.
It's no news to anybody that you are seeing commodity prices across the board increase.
Oil steel copper everything and so but we're lucky.
We have.
Really two extremely capable teams that run our construction construction side of our business.
And what we've always done on these projects is really locked in our costs.
Before we start construction.
And so a very very very high percentage of our construction that's underway already how is the cost locked in fixed.
And in a lot of cases, we get a little bit of ahead of ourselves in terms of.
The ordering some of the key raw materials, we might just have them sitting there on site or in warehouses. So we're in very good shape on the cost side of everything that we're doing right now.
The.
The the other advantage that we've had Derek is that the cost structures of building in the mountain states, particularly are much better than they are for example here in California.
Youre of the land cost per unit are lower.
And so.
We're very cognizant of the issues that youre talking about.
Yes.
And when I say, 6%.
That's just the target I mean, as I said class C, which is the largest individual multifamily project in Ireland, which is almost 900 units now.
We are stabilizing a.
Super High quality property, there at 7%.
So what we've always tried to do one more underwriting. These things is start with the conservative number that we know we can achieve.
And then hopefully.
Market conditions and rent conditions allow us to kind of outperform outperform even our own expectations. So.
And we're seeing that actually Clancy III.
Net debt Bill mentioned in his remarks at 70%, let we're doing seven units of week ahead of budget.
So as Bill said those are target numbers.
Given the supply demand dynamics, and I think given the product that we're bringing to the market with the amenities and the professional management and the locations are really critical of lot of what we own is around outdoor space were providing dog parks.
Kids areas to play so all of these things that the market really needs.
I think people are really willing.
To pay for them.
Yes, and I think to Derek to Mary's point that you just made I'm going to give you. An example of the Clearone Boise.
Can't remember of those March or April.
And one of those months, we had the 67 units of one month.
And all of those leases were done.
Net of what we thought of our initial underwriting was.
And so.
To Mary's point, and if you saw if you could beyond the grounding of the see clearer assets.
Super highly of monetized.
<unk> I mean the.
The main buildings in terms of the clubhouse the fitness centers of the tools are just you know.
Hope to first class.
And so that's really what we've tried to do both here in Ireland as we.
Monetize these properties of the extremely high level.
And.
Yes.
I would say two again just comp not complementing ourselves, but in addition to our construction management teams.
Our asset management teams.
Both here and in Europe across all asset classes are.
A really fantastic teams that have been together for a long period of time I've said that the.
The biggest thing not the I needed to re learn this but going into this pandemic, where we're all working remotely.
The advantage of having the same team of people with us that had been together in many cases for a couple of decades in my case with Marion I three decades. It took a lot of the mystery.
Out of what we each needed to do every day.
So.
Okay Thats about it I think bill just one last thing Derik that asset management is what is giving us the value of that return so while we're not necessarily seeing distress in our markets.
So we're not making really the money when we're buying of deal, let's say, we're not buying something at a big discount, but were adding the value and putting up.
It would seem to be.
Value add <unk> returns that you would get in of distressed kind of market. So that's the return is really being driven by growing income at these particular assets and then finding of spot and finding the right buyer to sell those and putting up.
In many cases, 40% IRR.
So I would say, that's really where we're adding value to our asset management teams.
Great. Thank you Bill and Mary.
Thank you.
The next question is from Sheila Mcgrath of Evercore ISI.
Good morning.
The multifamily has outperformed significantly.
In California is more challenged just wondering once you re stabilize the California multifamily given the business climate in California, and some out migration of businesses would you consider lightening up on the California multi family exposure and just the allocated more capital to the mountains of data.
Yes, that's a very good question Sheila I think the.
The.
Okay.
California will make a comeback.
It will come back and I think theres a lot of reasons.
We face some of the issues here in California, the Theyre not worth getting into a political speech about but I think that youre going to see it always has and it will.
Come back you have an extremely strong.
Jobs base here in California.
What was really the biggest impact here in California, we operate in an almost 16 different jurisdictions here in California was the the.
The.
I would call it sometimes confusing overlay.
Of.
Rules that were put down in terms of rent collections in those 16 jurisdictions and then rent collection decisions that were made at the state level.
And so I think that was.
One of the.
The biggest issues, but clearly over the last 15 plus years.
R R.
The decision was made to diversify ourselves away from California debt, but that decision was made 15 years ago.
And so when you look at our foothold for example in the Seattle market.
And our market rate.
Apartments, and our vintage portfolio out of the office properties that we own in various vehicles.
They are generally suburban Seattle very few were downtown Seattle, but that decision that we made 15 years ago, where we're now one of the largest property owners in the Seattle market was turned out to be an extremely sound decision.
Just as the decision we made.
I think the first deal we bought in Salt Lake City was probably 10 years ago around there.
And so we've always had this idea that we wanted to have diversification away from California.
But it was primarily driven by what we saw going into it so around southern California, where you saw fortune 500 companies being purchased.
By out of state companies.
And so today, you've got more fortune five hundreds of companies located in Seattle as a headquarters than we do here in Los Angeles, and so that was kind of what drove these decisions.
I would say that were.
We have to.
The Santa Rosa projects that we're going to build on here in California.
We continue to look at California assets, but most of the assets we've been buying here in California have been in our fund business that Mary runs.
Mary you might comment on.
Yes, I mean, what we're really focused on California market. If we are going to buy in California that are surrounding.
Really tech centric areas, we're seeing the certain submarkets continue to grow.
And we're also seeing life science, we just bought an asset in Fremont, California, one of life science tenant that is looking to go public right now so there's a lot of great and positive really.
It really stories around life science, and technology still going on in California, but we're definitely being selective with what we're buying.
I'm just going to ask you.
And just kind of looking ahead.
As of today, roughly 20% of our NOI is in California, and that's down from over 50% of if you go back five or six years.
If you look at the development pipeline, it's roughly 10%, California, So pro forma for that we're going to be down of 15%.
Like Bill of Mary said, we strongly believe in those markets, but we have been redeploying capital out of California, California into the Pacific Northwest and the mountain States over the past 10 years, right and I think Sheila the math point matchmaking. As these were decisions that were really made 10 or 15 years ago.
It had nothing to do with the.
Political environment in California or of the pandemic.
And then I think we clearly learned.
In addition, what I said about our people at Kennedy Wilson earlier the.
Having the.
<unk> net product diversity, but having diverse geographic locations.
And this.
Crisis I'll call. It the we all went through here of the last 15 months.
Served us really really well.
And the.
Convinced me that.
Not that I needed convincing that there are still more opportunities Sheila and other.
I would call it smaller markets.
The western United States.
I think I mentioned earlier, we're about to start of pretty good sized development, where the partner in Bozeman, Montana.
And.
We.
We still see other markets in the western United States that are.
As attractive or more attractive than California.
Okay. That's helpful. And then just I know you touched on the industrial debt of venture.
But you did double year investments are the portfolio size. There just talk about your thoughts on industrial Kw's history in that segment and will any of your use of funds to invest in that property type.
Also how are you able to source of that kind of volume in Europe.
When it is like the most sought after.
Asset class.
Yes, no good question Sheila.
I just think the relationships that we have in that space, we've been doing deals in the industrial space.
We really began in Europe.
It was just in a smaller part of our business that we have really really deep relationships and all of those markets and the teams have done a great job and our focus really has been last mile well connected.
The site cover established distribution.
Locations a lot of what we're buying is off market. We're executing very quickly doing exactly what we say we're going to do so we continue to see a huge demand in the logistics space I think in Q1 in the UK. There was 9 million square feet of take up.
So.
We just continue to see major major growth in those markets and we're seeing it as we're redoing our leases with our existing tenants and are signing new deals.
And we're doing that oftentimes above what we underwrote so.
So I think we will continue to grow in that business I'm sure of it in Europe and then in the U S. We are looking to to do deals as well in a similar kind of fashion sort of smaller boxes, where we're assembling a portfolio. We're looking at that and our value at the time right now in the U S and we have a couple of deals under offer.
Again Mountain States now really focus where the growth is going.
And that's it.
Those markets are booming and the logistics distribution space.
We're excited.
Okay last question when is the Shelburne opening and when.
Is it fully shut for all of first quarter.
I Love that you asked that I can always count on New Zealand to ask about the summer.
It was for all of the first quarter and we are going to be reopening.
We have been effectively closed.
Basically over a year.
And we're focused on.
Really the the Irish traveller doing a lot of Staycations, but we have had a lot of international travel Rebook index.
This year later this year and 2022.
So we have currently 11% of total room nights for 2021 are already spoken for at pre COVID-19 right.
And then really like I said at the beginning of the reopening will be focused on Staycations and then <unk>.
Ireland and Europe opens up which we've been hearing about we're excited about.
Think later this year, we're going to see lots of our international travelers.
Okay. Thank you.
Thank you.
Once again, if you have a question. Please press Star then one the next question will be from Jamie Feldman of Bank of America Merrill Lynch.
Thank you and I apologize. If this has been addressed I got cut off for a little bit but.
Just to kind of take a step back leasing is picking up.
We're seeing the headlines on return to office.
I just wanted to get your kind of big picture views of what you think will really be different going forward.
Maybe focused on the U S specifically.
As far as office Jamie Man.
I guess I should have been more clear, yes office usage and then also on the residential side I mean, we've seen the flight to the mountain States do you think that's permanent do you think there's other cities in the U S that maybe become more interesting the people out.
They look for lower cost of living and <unk>.
<unk> head of like Google's article in the Journal this morning about.
The press release yesterday that people can work from anywhere at least of certain percent what does that do to like the Midwestern markets are lower cost of living markets I'm, just curious where your head is giving you see so much.
I mean look it's just a personal beliefs of remote working will never west long term.
You just the things you are missing without people being together are critical to any business succeeding.
So.
Our company is no different than any we are reopening the office full time.
June <unk>.
Joining of June.
We're going to start with the <unk>.
Tuesday of month Tuesday, Wednesday Thursday.
The policy.
But.
We all need to be in the office and we need to travel and we are businesses won the two you.
You need to be with people.
And it's still a little anecdotal conversations that we all know on this call the <unk>.
You have with.
The pure outside relationship that actually lead you to opportunities so the office market.
It is not over.
I do think that there are certain types of offices in the near term are going to perform way better than others.
Clearly the the suburban.
No rise and when I say low rise I'm talking like under 10 story.
Type of building are going to perform better over time than the <unk>.
High rise center city kinds of locations.
And whether that's the long term trend or not.
Don't know.
But I am highly highly confident that people are all going to go back to work I mean, you've seen the announcements from JP Morgan Goldman Sachs and you can go on and on down the line and the only ones that have made these.
I'd say out of the box kind of comments of the tech companies and.
Even those I don't see long term.
Being completely remote I mean, yes, there might be a day of week or two days of week, where people work remotely, but eventually people will need to be together.
As far as so.
Any way out of my positive as far as the outlook for office, particularly suburban office low rise.
And as far as other markets in the Western United States I mean, we've gone into.
Other markets, we have our eyes on a couple of it.
Rather.
Keep to myself for now.
We always like to get there first.
But.
There's a couple of others that we think have real real opportunities.
And.
I would say two in general and the state of California. Some of the best markets are ones that you might not have expected we of properties we own in Santa Maria for example, which is kind of coastal market, but the market has performed extremely well.
And so I think even in the state of California, Youre going to see these.
These.
Suburban multifamily markets continue to do well after all of those 40 million people in the state of California, they've got to live somewhere.
And the.
I do think though it is of long term trend that youre going to see with.
25% to 35 year olds in the 55 of holders move.
Moving to more people vote with their of wallet.
And youre going to see them moving to these more affordable markets.
That have lower tax basis income tax spaces and have lower rents in the mind of the individual have of higher quality of living.
So the markets that we're in are in my opinion are going to continue to grow.
Long term.
Okay. That's very helpful. And then I know, it's a ways off.
Never happened, but how do you think the repeal of the 10 31.
<unk>.
The real estate in general and the 10 year business.
I mean, we were debating all of that this morning.
They are.
There's a lot of negotiation that is going to go on on this entire tax bill.
How it's going to turn out.
Again like anybody I have no idea.
The $10 30 ones have been in existence since $19 20.
Although there's a lot of discussion around it.
The 10 30 one's impact of a lot of industries. Besides the real estate industry you've got the.
Farm farmers, you've got all kinds of industries that it impacts.
So.
What ends up happening I never try and think about things that I don't know what are what's going to what the outcome is going to be.
We're.
Obviously mindful that its going on.
But.
I don't.
No I don't.
No it's been around for awful long time, and we will just have to wait and see.
I think the with the amount of capital that is.
The wants to invest in real estate, whether the 10 31 stays around or doesn't say around it's not going to have a big impact on values.
Okay. Thank you I appreciate your thoughts.
And this concludes our question and answer session I would now like to turn it back over to Bill Mcmorrow for any closing remarks.
Okay, well listen as I said at the beginning of my prepared remarks, we appreciate the interest the and the support that we get from all of you.
And as I always say.
Questions that you think over follow up Mary myself, Kevin Matt just than any of us are here.
To continue the dialogue so.
Have a great day and thank you for your time today.
Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines have a great day.
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Yes.
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Good day.
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Yes.