Earnings Call Transcript - KW Q3 2020

Operator, Operator

Good morning, and welcome to the Kennedy-Wilson Third Quarter 2020 Earnings Conference Call. This event is being recorded. I would now like to turn the conference over to Daven Bhavsar, Vice President of Investor Relations. Please proceed.

Daven Bhavsar, Vice President of Investor Relations

Thank you, and good morning. This is Daven Bhavsar, and joining us today are Bill McMorrow, Chairman and CEO of Kennedy-Wilson; Mary Ricks, President of Kennedy-Wilson; Matt Windisch, Executive Vice President of Kennedy-Wilson; and Justin Enbody, Chief Financial Officer of Kennedy-Wilson. Today's call will be webcast live and will be archived for replay. The replay will be available by phone 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 a description of these items along with a reconciliation of the most directly comparable GAAP financial measure and our third quarter 2020 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.

Bill McMorrow, Chairman and CEO

Daven, thanks very much. Good morning, everybody. And thank you for joining us today. We hope everybody that's on this call, either you or your families, is healthy and you continue to do well in this period of time we're in. I'd like to start by touching on the key highlights for the quarter. In Q3, we continued to successfully grow our investment management business by deploying capital in our debt platform. We made great progress in our development and lease-up portfolio, positively growing our NOI. We also saw continued high occupancy and strong rent collection across our largely suburban multifamily and office assets, which together comprise 81% of our stabilized portfolio. Across our investment markets, real estate volumes remain low in the third quarter, similar to what we saw in Q2. Q3 sales transactions in our markets fell between 40% to 60%. As a result of these changing market dynamics, we temporarily paused our asset sale program in Q2 and Q3. However, as seen by the disposition of Baggot Plaza, which generated cash of $165 million and a gain of $85 million to Kennedy-Wilson, along with the $198 million acquisition of an 888 unit Mountain State portfolio, both of which were announced last Friday. We anticipate higher levels of transactions in the fourth quarter, where we expect to complete the majority of our 2020 asset sales. I'll discuss both of these transactions in greater detail in just a moment. Looking at our financial results in Q3, we produced adjusted EBITDA of $76 million and adjusted net income of $27 million. For the year, we produced adjusted EBITDA of $261 million and adjusted net income of $84 million. The slower transaction market, of course, impacted our results with lower gains on the sale during the quarter, which we expect to make up in the fourth quarter. Now, I'd like to update you on our balance sheet and liquidity. We continue to maintain a strong liquidity position with $793 million in cash and $300 million of availability on our line of credit at quarter end. We currently have a total of $4 billion in discretionary purchasing power across Kennedy-Wilson and our discretionary funds. We also have various strategic partners that we remain well-positioned with ample liquidity and a strong interest in partnering with Kennedy-Wilson. Our debt maturity profile remains very favorable, with only $22 million maturing in Q4 and $158 million maturing next year. All these maturities through 2021 are non-recourse property level financings, which we anticipate refinancing. Post quarter-end, via tender offer, we successfully retired $168 million of KWE unsecured bonds maturing in 2022, carrying a coupon of 3.95%. We utilized existing cash and $129 million from two new property level secured financings, each with a rate of 3% and a final maturity date of 2025. This tender helped improve our maturity schedule and reduce our cost of debt. As a result, our Board of Directors approved yesterday expanding our existing $250 million share repurchase plan to $500 million. Since the $250 million share repurchase plan was authorized on March 20, 2018, the company has purchased 12.9 million shares at a weighted average price of $18.04, with only $18 million remaining under the initial plan as of 9/30. Our track record of investing in debt, coupled with the strong institutional demand for yield resulted in the launch of our $2 billion debt platform in May. This platform is targeting first mortgage loans secured by high-quality real estate in the western United States, Ireland, and the United Kingdom. In the quarter, we completed loan investments of $335 million, which brings our total loan platform to $750 million in investment. Kennedy-Wilson has a 12% ownership interest in this portfolio. The pipeline for future debt investment opportunities is extremely robust, with $180 million in origination opportunities that we have signed term sheets on and many more deals that we're currently evaluating. Our platform in a very short period of time is on track to hit approximately $1 billion in the near term. As a result, we added $300 million to our fee-bearing capital, representing a growth of 9% from Q2, and 27% thus far in 2020. This is now up 111% since the beginning of 2018. Given the additional capacity in our debt platform with Fairfax, our real estate and debt platforms with Security Benefit, our multifamily joint venture in Ireland with AXA, and our ongoing fundraising efforts in Europe, we have approximately $2 billion of fee-bearing capital in our pipeline to add to our existing $3.9 billion in fee-bearing capital over the next two years. Now, I'd like to turn the call over to our President, Mary Ricks, to discuss our rent collections and our multifamily and office portfolio.

Mary Ricks, President

Thanks, Bill. Before I delve into our strong rent collections, I'd like to update you on the Shelbourne hotel. I reported last quarter that our iconic Shelbourne hotel reopened at the end of Q2. This spacious five-star, 265-room hotel with over 240,000 square feet better facilitates social distancing than competing hotels, and we've seen that benefit come through since reopening. I'm pleased to report that the Shelbourne's market share is outperforming its direct competitors and has been profitable for Q3, a big achievement since closing its doors on the 20th of March. Post quarter-end, Ireland has gone back into a level five lockdown until early December, adding further restrictions to the hotel's operations. Nevertheless, we have a good pipeline of business for the permitted services, and subject to further restrictions, December looks promising. The hotel has successfully reoriented itself to more domestic business and remains a solid book of business for 2021. Under the rent collections, I'm happy to report that we continue to see strong levels of collections across our portfolio. This speaks to the quality of our portfolio and the intensive asset management we engage in across the board. Our two largest asset classes globally, multifamily and office, account for 86% of our Q3 billed rents. We collected 97% of our rents across these two asset classes in Q3, maintaining the strong collection levels we saw in Q2. Suburban assets account for 89% of our multifamily NOI. Average monthly rents in our global portfolio were $1,678, and occupancy remained solid during the quarter at 94.4% compared to 94.5% as of Q2. In the US, we have strategically shifted our apartment portfolio over the past few years out of areas such as Northern California, where we now own only three market rate assets, two of which are suburban, and expanded significantly in the Mountain States and the Pacific Northwest, where we saw an opportunity to materially grow our NOI. This has resulted in our US apartment portfolio being 91% suburban, with the Mountain States and Pacific Northwest as our top two regions. States such as Idaho, Nevada, Utah, and Washington have been some of the fastest growing states over the last few years. Our Mountain States portfolio in particular had a strong quarter with same property revenue of 4% and NOI of 5.6% in Q3, as these communities continue to benefit from an influx of new renters who seek a lower cost of living and lower taxes. In total, our US market rate portfolio saw same property NOI remain flat, and our vintage affordable portfolio saw NOI growth of 2.5% in the quarter. Not only were our same property metrics strong given the current market, but these results significantly outperformed our multifamily peers, who on average saw same property analyze decrease by over 5%. In Dublin, our multifamily portfolio continues to perform well for us, with occupancy at 93% at the end of Q3, which is in line with Q2. Rent collections have been very strong at over 99% in Q2 and Q3, a trend we expect to see continue in Q4. Both virtual leasing and signing are now active across the entire portfolio. We are now continuing the rollout of the resident app across the entire portfolio and expect to have this complete by the first half of 2021. We remain very strong believers in the long-term prospects of Irish multifamily fundamentals, supported by a young and growing population and a structural shortage of apartments. Also, large multinational companies are committed to growing in Dublin and choosing Dublin as their European headquarters, as seen by recent announcements by companies such as Amazon, Indeed, and Bytedance, who are looking to expand their headcount in the area. Less than 10% of the Irish population lives in apartments versus an average for EU countries of more than 40%, which bodes well for sustained demand for our PRS product. Our Irish portfolio continues to draw residents who are looking to upgrade their lifestyle with our high amenity offering, which also allows for a better work-from-home environment. Now turning to our global office portfolio, occupancy remained stable at 94.5% at the end of Q3 compared to 95% at the end of Q2. An attractive weighted average lease term of 7.7 years provides secure income from a roster of high-quality credit tenants. Our top 20 global tenants account for 64% of our office rent roll, and include high-quality companies like Costco, Microsoft, KPMG, State Street, Indeed, and the UK and Italian governments, to name a few. For the quarter, we collected 96% of our office rents. Looking ahead, one of the attractive features of European lease structures is that a majority of our office tenants pay their rents quarterly in advance. Thus, we have a head start on our Q4 office rents for European tenants and have already collected over 97% of billed office rents. Our office portfolio of mostly low and mid-rise suburban properties is competitively positioned to meet the changing needs of what companies are looking for in a post-COVID world. It's worth noting that 98% of our office NOI is generated from either low or mid-rise buildings and 75% of the NOI is generated from buildings that are either occupied predominantly by a single tenant or in an office park. Benefits include lower density space, shorter commute, more space control, a move towards hub and spoke, and rents that are substantial discounts to the local CBD market, while avoiding COVID-related logistical issues faced by high-rise buildings. Globally, we had strong leasing activity, completing new leases and lease extensions across 364,000 commercial square feet in Q3 with a weighted average lease term of 6.1 years, which brings our total to 1.8 million square feet of commercial leasing in 2020. Over the last two months, we have seen an uptick in inquiries for assets on the outskirts of London and in business park locations. We are also seeing a handful of expansion requirements from the technology sector, where tenants are looking to upgrade their space. The pipeline for lease transactions remains strong with another 478,000 square feet in lease-ups. We are working hard to complete these lease transactions to give us strong momentum for 2021. And with that, I'd like to turn the call back over to Bill.

Bill McMorrow, Chairman and CEO

Mary, thanks very much. I'd like to update all of you on our development projects and our leasing initiatives, which are currently expected to be completed by 2023 and include 4,500 multifamily units, 2.8 million commercial square feet, and one hotel. Many of our projects are 50:50 joint ventures with strategic partners, and in total, we have a 59% ownership interest in our development and lease-up portfolio. We have continued to make great progress in our construction projects and lease-up initiatives throughout the entire year. In Q3, we completed the development at Stockley Park, a 54,000 square foot suburban office asset in the United Kingdom. We also completed the first phase of the development called 38 Degrees North. That first phase is 120 units located in Santa Rosa, leasing up very quickly, with almost 60% of the units leased in three months. We are under contract to acquire 11 acres adjacent to this property where we are going to add an additional 172 units, bringing the 38 Degrees North community to a total of 292 units when completed. We also finished construction and lease-up at Rosewood, a 66-unit multifamily property in Boise, Idaho, which is now 100% occupied after three months of leasing well ahead of our schedule, with rents above our pro forma. These 66 units were added to an existing stabilized community, and in total, Rosewood now totals 234 units. Finally, our Irish multifamily joint venture with AXA continues to perform strongly. Lease-up at Clancy Quay phase three is performing ahead of expectations. We began leasing this final phase in the third quarter, and very quickly we leased 20% of the units by the end of the quarter. That number is now at 35% and with rents ahead of our business plan. We're seeing strong interest in our institutional quality assets, offering plenty of outdoor space, a variety of amenities, and professional onsite management. At 865 units when complete, Clancy Quay is the largest multifamily community in Ireland, with a stabilized yield on cost of 7.5%. At the Grange, we're on track to add 287 new units by 2023 as part of our phase one development. This will grow the Grange multifamily community to 561 units. During the quarter, we successfully signed the main contract to begin construction works and also successfully put in place attractive construction financing. They're on track to grow the AXA joint venture from approximately 1,200 units to 3,300 units by 2023, including the sites that are under development. Looking ahead to our developments that are expected to be completed next year; in Dublin, we're currently on track to finish the construction of our two active office projects, Hanover Quay and Kildare, which combined total 133,000 square feet. In the US, we're on track to deliver The Clara, a 277-unit multifamily property in Boise, Idaho. We've already completed the first phase of 45 units, which is now 100% leased. Both our development and lease portfolio are currently expected to add over $100 million of estimated annual NOI to KW once completed. As mentioned at the start of the call, we're seeing transactional activity pick up in the fourth quarter. Post quarter-end, as I mentioned, we acquired three multifamily properties totaling 880 units for $198 million. We acquired this portfolio off market from a seller that we had previously done business with. Two of these properties are located in Colorado, Robin Denver and Colorado Springs, and one in Tempe, Arizona. In total, we have a 40% ownership interest in this portfolio, which grows our Mountain State multifamily portfolio to 9,400 units, including units under development. On the disposition side, post quarter, as I mentioned, we sold our first significant development in Ireland, Baggot Plaza, and an office property in Dublin. That was completed at a 4% cap rate, generating $165 million of cash to KW. The Baggot Plaza story represents the full lifecycle and team approach at KW. This asset was originally acquired as part of a larger non-performing loan portfolio in 2013. As part of the loan-to-own strategy, we participated in various parts of the capital structure, ultimately taking ownership of the asset. At the time, the asset was functionally obsolete. Our Irish development team oversaw an extensive redevelopment of this asset, taking it down to the frame and also creating an additional 38,000 square feet added to the existing 92,000 square feet. On completion of the redevelopment, our asset management team delivered a 25-year lease through the Bank of Ireland. The sale of this unlevered asset generated cash of $165 million and a gain of $85 million. The transaction supports our view that we've talked about many times on this call, that as a result of interest rates globally remaining low for an extended period of time, combined with the hunt for yield by institutional capital, we continue to anticipate a compression in cap rates for the types of assets we own. Finally, in October, we sold our interest in our property management and brokerage business, Kennedy Wilson Properties. This sale reduced our overhead and compensation for KW by $13 million annually. Combined with the sale of Meyers Research in 2018, these two transactions will reduce our annual costs by $30 million and help simplify our business into two core businesses: our high-quality real estate portfolio and our growing investment management business, both of which are seeing significant growth. It is in our DNA as a company to respond to rapidly changing environments like the one we are in today and to continue executing opportunistically to create long-term value for our shareholders. Looking ahead to 2021, I believe there are very high-quality assets in constrained, well-located diverse markets. Our unique relationship network and the liquidity we have on our balance sheet and with our strategic partners positions us well to take advantage of future investment opportunities across the capital structure. We anticipate higher levels of transactions over the next 18 months. I want to thank all of our great team members at KW, our shareholders, our capital partners, our Board of Directors, and everyone else for your continued commitment and support at Kennedy-Wilson. So with that, Daven, I'd like to open it up to any questions.

Operator, Operator

The first question will come from Anthony Paolone of JPMorgan.

Anthony Paolone, Analyst

Yes, thanks. Hi, everybody. My first question relates to just capital allocation, as it seems like you made some investments. But you've also increased the buyback. So just wondering if you can walk us through a little bit of how you're prioritizing where you want your capital to go?

Bill McMorrow, Chairman and CEO

Well, Tony, I'm oversimplifying slightly, but there are basically four buckets that we can deploy capital into: new investments, the CapEx we have going on with both rehabbing existing properties and our apartment portfolio, and new investments, as you saw from the 880-unit transaction. We are also paying down debt; we paid down almost $170 million of unsecured debt. And lastly, and not in any order of priority, it's the stock repurchases. I would say that, and to maintain, I would say, lastly, we want to continue to maintain the levels of liquidity roughly around the levels that we're at right now. And so that's the set of constraints that we're operating within. Our first priority really is to continue to grow the business. To the extent that we have opportunities to grow the business, of course, that's where we're going to deploy our capital into. We're fortunate because we have a lot of very high-quality assets that are both generating cash or to the extent that we feel that we can receive an attractive price, we can sell. So I wouldn't really put any priority in terms of how we're going to spend the money other than to say that, of course, we're committed to the CapEx. And any new investments that come along over the next 15 months, we have a belief that the investment market in 2021 will be somewhat more attractive than it has been during this year for obvious reasons. So, as we think about the stock repurchase, it's going to be handled over an extended period of time. So that's a long one that says that, where we want to keep the liquidity levels at the level we're at right now. We're paying down unsecured debt. We have great investment opportunities, particularly right now in our debt platform. And we have to complete the construction, the very large amount of construction that we've obligated ourselves to over the next couple of years.

Anthony Paolone, Analyst

Okay. In the disposition that you made in Ireland post-quarter, it was at a four cap. I know there was a long-term lease there, so maybe it was unique, but I do think cap rates are generally lower there. Do you think that there's more to do there, or do you think that swap is just a bit more unique to circumstances?

Bill McMorrow, Chairman and CEO

It really depends on the circumstances and the opportunities we encounter. Our main focus is on increasing the net operating income and net income of the business. We recognize that construction projects can take quite a long time, often up to five years from inception to completion and stabilization. We've learned that we have ownership interests in just over 300 assets, varying in size. Higher-quality properties, especially in the multifamily sector, are more appealing for residents. Looking at both Hanover Quay and Kildare Street, the asset we sold, Baggot Plaza, was about the same size as the two new properties we are finishing this year. Both will be brand new. I firmly believe, a sentiment I’ve expressed over the past two to three years, that we are entering a prolonged period of low interest rates. In Europe, interest rates are sometimes negative and mostly near zero. In the United States, the 10-year bond rate, despite its fluctuations, is close to historical lows. This situation places us in a very favorable position to achieve realizations, particularly regarding these higher-quality assets.

Anthony Paolone, Analyst

Okay, and then just the last question for me, it seems like you deployed a lot into this debt platform pretty quickly. Is there a potential to increase the size of that?

Bill McMorrow, Chairman and CEO

Well, yes, I mean, I think over time we will, depending on market circumstances. On the debt platform, what we are doing is staying basically in the same markets that we already have ownership interests in. As I said earlier, the Western United States, Ireland, and the United Kingdom, then what that allows us to do is utilize the great skill sets and the existing people that we have in those various platforms. Even though Matt Windisch has direct responsibility for the debt platform and we have our own dedicated team in that debt platform, to the extent, for example, that we're doing an apartment loan in the Western United States, we utilize the multifamily team to help us underwrite and do due diligence. Yes, we want to grow that business, but again, it just depends on whether there's an opportunity that we find to be attractive, and whether that opportunity, not only interest rate wise, but in terms of the quality of the sponsorship and the quality of the collateral fits within what we think are the right framework. The last thing I would add, Tony, is that during the credit crisis, either through purchases or originations, we were involved in almost $7 billion of debt transactions. We have a very long history of doing these types of transactions. We will just see if the opportunities continue to materialize that fit our requirements.

Mary Ricks, President

Bill, I think it's worth noting that our European business was really started on the back of a very large debt deal that we bought. The other thing to add is that Baggot Plaza came out of a debt portfolio where we ended up; it was a broken CMBS deal. That was roughly EUR 300 million transaction with multiple assets in it. So I think as those are pointing out, KW has an excellent ability to, when there are non-performing loans coming, which we think in 2021 you will see more of that, we can seize that opportunity.

Bill McMorrow, Chairman and CEO

Those are good points, Mary. Really good points. I think, Tony, the other thing I would say is that because we have equity ownership interests in all these markets, we're also lending in, we have a very clear picture. We're building in all of these markets. We have a very clear picture of costs. In an interesting way, we kind of have a built-in appraisal system within our own company. I would say the last thing is that we know some cases personally almost all the players, all the various investors in those markets, so that was really what I was trying to reference that we have a very tight underwriting standard in terms of sponsorship, the quality of assets, and the locations, but they've got to be in our basic markets.

Operator, Operator

The next question comes from Sheila McGrath of Evercore.

Sheila McGrath, Analyst

Hi, yes, good morning. I was just wondering if you could comment on the loan platform again, what kind of coupons are you putting that money out at? And if you include the fees, what do the returns look like to KW?

Matt Windisch, Executive Vice President

Sure. Hi, Sheila. So yes, if you look at the third quarter, we invested in six different loans, three in the multifamily space, three in the office space, all, as Bill mentioned, in the western US end markets that we currently own assets and have expertise. So the overall coupon was right around 5%. In some cases, we structure these with an AB structure where Kennedy-Wilson will take a first loss position and get a higher coupon. So if you combine that with the servicing fees we're receiving, we're achieving on those six loans, right around 10.5% as the annual return to KW when you combine the coupon with the servicing fee. That's unlevered. We're doing this all with; we're not using repo lines or any financing. This is all just cash investments.

Sheila McGrath, Analyst

Okay, great. And then KW has historically created value from loan to own where you purchase loans at a discount. Just wondering if that is something that you plan on doing in the platform? I know, Mary mentioned the office building in Dublin was a loan to own situation.

Matt Windisch, Executive Vice President

Sure, yes. I mean, I'd say to date in the platform, although we've bought a couple loans at small discounts, nothing we've done so far has been a loan to own strategy. That doesn't say that doesn't mean we wouldn't do it in the future. Just today, we haven't. We certainly have the capability and the expertise, and we're looking for those opportunities, but they've got to really fit our criteria. They've got to be in markets that we know and like. I think we're going to be pretty specific on the product types. To the extent we are going outside of office and multifamily, we're going to have to get significant discounts for those investments to make sense. But certainly, Sheila, it is something we're looking at and considering.

Mary Ricks, President

Sheila, I would add to that, and just say over multiple cycles, Kennedy-Wilson has really built our businesses on transacting with financial institutions. If you just in the last downturn or dislocation, if you just look at what we did in Europe to create that whole business, the first two years of that business, all we did was really transact with financial institutions, buying really distressed, non-performing, or sub-performing loans. We have a dedicated debt team, obviously, that Matt is running, and we also have in Europe. Alongside our real estate executives and the expertise that we have in real estate, we're able to price everything as if we were going to own every piece of real estate. Given just if you look at the history of KW, the relationships that we have with financial institutions, and what we most recently did in the last dislocation in this one, you can anticipate that there will be more plentiful opportunities for KW in the space.

Bill McMorrow, Chairman and CEO

Sheila, I think the last thing I would say is that, and we may have mentioned this on other calls, but we have several work streams going on. One of them, we call our relationship management system. Over the three decades that, Mary and I've been together at KW, of course, we've been able because of our teams to create very deep relationships with financial institutions in the marketplaces that we like. Some are medium-sized, but many of these are very large financial institutions. For the last, I would say, Mary, seven or eight months, we've been very, very focused on outreaching to financial institutions in our marketplace. To the extent that there are opportunities to buy loans on a discounted basis, it's very much part of our history, as Mary's pointed out, but we're on it. If there are opportunities that surface, I would say the other great news and why I said earlier that we're maintaining our levels of liquidity at the levels we're at is that we also have partnerships, long-term partnerships with very large institutions that are partners with us. They've done well with us. We’ve got the great ability to move with speed to the extent that these transactions present themselves.

Sheila McGrath, Analyst

Okay, and last question, and sorry, if you already mentioned this, but I just wondered if you could comment on the remote working trend and just your portfolio in mainland US versus Dublin. Just wondering how things are going with all those tech companies in Dublin and remote working there versus here.

Bill McMorrow, Chairman and CEO

Mary, you want to answer that?

Mary Ricks, President

Sure. I mean, Sheila, we're not overly concerned about tenant work from home as a long-term trend. I like to use the really good example of Microsoft; they announced on October 9, all workers can opt to work remotely on a more permanent basis. That same article said they'd likely go to some hybrid model where employees would go to the office part of the week, and everyone would be subject to manager approval. Furthermore, on the same day, Microsoft's VP of global real estate, his name's Michael Ford, spoke at the Puget Sound Business Journal event. He started by saying that the company will need more space due to social distancing, and that we're not going to have the dense workplaces that we've had in the past. Furthermore, Microsoft will likely need millions of additional square feet in the Puget Sound due to their significant growth in their cloud computing investments. So really, I think, while some tech companies are out there messaging that their employees can work from home permanently, that's not really what we're seeing on the ground. I think Microsoft is a huge example, and it's a great example. They're experiencing tremendous growth driven by a transition in their senior leadership and the cloud computing investments. We’ve come across quite a few reports showing that Microsoft and their tenants of ours, and we haven't seen any trouble in our existing portfolio. To sustain the increase in their revenues and their operational scale, that must be supported by a correlated increase in employee headcount, and thereby office space. So we really are not concerned about it. Our portfolio, which is mostly suburban office, low-rise, or tenants have their own front door, makes us have a very defensive office portfolio company-wide. So we feel really strongly about what we own.

Operator, Operator

The next question is from Derrick Johnson of Deutsche Bank.

Derrick Johnson, Analyst

Hi, everybody. Good morning. I jumped on late, so I apologize if I duplicate anything. But when you look at the multifamily markets and specifically the new markets you've entered, are you specifically looking to diversify away from dense urban properties when it comes to multifamily? Also, within the three multifamily acquisitions, are there any value-add opportunities within this portfolio? What can we expect it to contribute over the next four to six quarters?

Bill McMorrow, Chairman and CEO

Yes. I mean, I think just to get a little more granular on that three-asset portfolio, the property that I mentioned earlier in Colorado, Colorado Springs, we bought on our own balance sheet. The other two were done in partnership ventures, one with a new partner that has great capacity. I would say almost always, in our apartment acquisitions, there's some component of value add, whether that's upgrading that one in Tempe, Arizona will be one where we're upgrading amenities and doing unit turns. We generally never buy these with kind of a status quo in mind. The whole idea over time as we're implementing our rehabs of the amenities is to obviously grow the NOI. I think a very good example of that is, and I would say the last thing, too, is that the company has always had a history of mind to get into these markets where we think there are growth opportunities in the multifamily space and then developing enough of a major beachhead that we can have scale. So when you think about Boise, Idaho, we probably started in Boise five or six years ago, we started in Seattle 16 or 17 years ago, and today, we're one of the largest multifamily owners both in the market rate and the affordable and senior platform. In Salt Lake City, we probably started close to 10 years ago, and we've got a great portfolio that allows us to have better management teams and better management focus. Getting into these markets early before other people are there allows you to think about the first Boise asset we bought; it was a very, very, very tired property that we implemented a very big overhaul of. Today, based on our cost structure, our acquisition price, and what we spent on the rehab, our cap rate on that asset is well over 10%, might even be closer to 15%. The key is to get upscale in these markets. To directly answer your question about these very urban markets, we made a decision many years ago to, for example, avoid places like Center City, San Francisco, and downtown Los Angeles. Those were markets that we just saw an awful lot of product being built. We felt that long-term the rent structures that people were going to have to achieve, based on the cost to build, were just not sustainable. It's proven to be the case. It wasn't a strategy to diversify away from those markets; we just didn't like the overall economics of what we thought was going on in these center city markets. I would say Mary would have the opposite experience in Ireland.

Mary Ricks, President

Yes, I mean, I think in Ireland, you've got a lot of people living in the city, but you also have to look at our Clancy Quay asset, which is the largest multifamily asset in all of Ireland. That's adjacent to Phoenix Park, which is the largest park in Ireland. The other thing I've to say about just in general, our Irish multifamily portfolio, we've got really balconies and almost everything that we own there, along with amenity space, outdoor space. We're now creating dog parks, gyms, and business centers. All of these things are critical to the success of our Irish multifamily portfolio.

Derrick Johnson, Analyst

Okay, great. And then staying, I guess, on the international theme, clearly KW is viewed as a leader in capital allocation and understanding where the next great opportunities are. Have you seen anything interesting, both off-balance sheet and on, in the Ireland or UK markets as far as different property types, possibly industrial? Or were there any other avenues of opportunity, given Brexit and the dislocation that may have forced in that market?

Mary Ricks, President

Yes, that's a great question. We've had significant success in the industrial sector with our European team, particularly in the UK. We've completed several transactions that have yielded internal rates of return in the very high 20% range. We're identifying numerous opportunities in the value-add segment, focusing on smaller lot sizes in the UK, where we're consolidating those assets. We're partnering with several players to develop this into a platform. However, there's considerable competition in large portfolios, with major firms like Blackstone trying to acquire very large assets, which has driven prices to levels we find unappealing. Instead, we are concentrating on acquiring single lot sizes and then aggregating them into a portfolio or platform, which is our current strategy. This approach will encompass the UK, Ireland, and a small allocation for Spain, and we are genuinely excited about these prospects. This is definitely the area we are targeting for growth.

Operator, Operator

The next question comes from Jamie Feldman of Bank of America, Merrill Lynch.

Jamie Feldman, Analyst

Thank you. I was hoping to just get your thoughts on tenant behavior across the different regions in your residential portfolio. When you think about, when the pandemic started, people wanted to get out of the cities, and I'm sure you saw an uptick in the Mountain States. Now, with people thinking about the vaccine, where would you say we are in that cycle, that pattern of behavior, in terms of people thinking maybe one day you do actually go back?

Bill McMorrow, Chairman and CEO

I would say that you're seeing a very big accelerating trend that Mary talked about earlier, where you're seeing, I would say, people between the ages of 25 and early 30s that are in some of these urban areas, maybe even grew up in some of these urban markets. Where the affordability is just a real challenge, and where your quality of life is not real; this is a very mobile group of people. You've got quality of life, you've got lower state income taxes. You're seeing a very clear migration of that age group into these Mountain States. What's also key to all of this is the job growth, the tremendous job growth in the Mountain States: Denver, Salt Lake City, Boise, Idaho, and in the Pacific Northwest, that all buttresses against very strong educational systems. When you look at rents, like for example, this Rosewood property that we just finished, it was 100% leased in 90 days. The rents that we're getting, although they work very well for us in terms of our returns, are as much as half of what they would be in California. I'm not picking on California, but there are real affordability issues. I see this trend not diminishing at all.

Jamie Feldman, Analyst

That's helpful. As you consider the next 12 to 18 months and the potential distress that could arise, based on your experience through various cycles, how do you distinguish between opportunities that seem appealing due to decreased market rents or values and property types that face long-term challenges and may not recover? How do you navigate the risk of overinvesting in these situations, especially when there may be enduring shifts in trends?

Bill McMorrow, Chairman and CEO

Mary, you might have a different answer to that. But I think the great strength of our company is our people. Our teams have been together for, like I said, Mary and I've been together for three decades. Matt and others, Matt's over 15 years. We have a very, very clear strategy; we're value investors. But we're value investors with a long-term outlook. The extent of work we're dealing with a financial institution, reputationally, we've been viewed over the years as a very, very good counterparty. We do what we say we're going to do. The last thing is we never, ever start any period of time, whether it's a year or quarter, and we say, look, we've got to deploy this much capital; that is a recipe for having a bad outcome. We're always looking for opportunities that meet our criteria, but we don't have any set annual goals of how much capital we would like to deploy. It's just got to make sense. Mary, do you have anything to add to that?

Mary Ricks, President

I would just add that as always, we would be very conservative in our underwriting assumptions and anything that we would buy. You want to have multiple exit strategies. It depends on what you're talking about. If you're talking about buying retail, perhaps there's a reuse option there that we'd be looking at. We will continue to be disciplined and very conservative in our underwriting.

Jamie Feldman, Analyst

Are there assets or markets you were interested in before the COVID that you wouldn't touch now?

Bill McMorrow, Chairman and CEO

That we wouldn't touch? I don't know that I would say that. Mary, again, it always depends on what the value proposition is. The steeper the risk, the steeper the discount has to be for us. The great thing about Kennedy-Wilson is that because we are originating debt, we're buying debt, we're also equity investors, we operate in every part of the capital stack in real estate. We have these very robust built-in appraisal systems in the markets that we operate in. The only constraint geographically is that we don't have any plans to go outside of the footprint that we're already in. We really feel without exception that there are plenty of opportunities in the markets that we're already in.

Jamie Feldman, Analyst

Okay, and then the last question for me is, where do you see your leverage trending over the next year or so?

Matt Windisch, Executive Vice President

Sure. As Bill mentioned, we successfully tendered for part of our 2022 bonds in Europe. We brought the unsecured debt levels down; I think you'll continue to see that over time. As these developments come online and start to produce cash flow, that will also create value in the business and bring the leverage down. So I think the answer is it, we see it trending down over the next couple of years with the completion of those developments and the repayment of some of this unsecured debt.

Operator, Operator

The next question comes from Alan Parsow of Elkhorn Partners.

Alan Parsow, Analyst

Hi, good morning. With regard to a little bit of a follow-up to the JPMorgan question on cap rates, can you elaborate? Obviously, the Baggot sale was a great sale at a 4% cap rate. Interest rates in Europe are much lower than they are in the United States. Can you talk about the differences between the cap rates you're seeing both on buying and selling properties in the United States versus the UK?

Bill McMorrow, Chairman and CEO

Mary, you want to tackle that one?

Mary Ricks, President

I mean, Alan, what I would say about what's going on in the real estate space as it relates to cap rates is that there's so much dry powder right now for real estate investments. On some research that we've looked at, there's $214 billion for North America and $87 billion for Europe. As you see negative rates across Europe and the UK barely holding on to not going negative, although they could go negative. We think that's going to have a positive impact on cap rates. We think real estate values over time are going to increase just because of the amount of capital and where rates are. That's across all the markets we're operating in.

Alan Parsow, Analyst

I guess what I'm actually asking is.

Bill McMorrow, Chairman and CEO

To amplify a little bit on Mary, we made a very clear strategic decision almost five or six years ago that we just felt this was coming. One way to really be a value creator is through the new building that we've done, demonstrated by Baggot. At the time we finished Baggot, Mary, I believe the stabilized cap rate on that was over 8%, wasn't it?

Mary Ricks, President

Yes, 8.6%.

Bill McMorrow, Chairman and CEO

Even though we are very conservative in telling you where we think these cap rates are going to be, once we've stabilized new construction, we've generally achieved higher cash returns on our investment than we originally underwrote. Even though I think everybody in the financial world wants to only give credit for your development pipeline once it's built and finished, the amount of work that goes into actually even getting it started and on the way to finishing is really creating value. Almost all of the construction we're doing is like an assembly line. We rolled off some this year, we'll roll off more next year, and more the following year, and then almost all of it will stabilize at very attractive cap rates.

Alan Parsow, Analyst

I just want to, what I'm actually asking is, is it true or untrue that cap rates in Europe will remain lower than cap rates in the United States because of the interest rate differentials between the US and the UK and Europe?

Bill McMorrow, Chairman and CEO

It's hard to say. It's a logical conclusion. As Mary pointed out, and as you saw from the Baggot sale, there are investors that need some form of yield today. I think particularly too when the insurance industry, as you well know, is driving so much of this. With the 10-year bond at what is it, 80 basis points? It's very difficult for certain financial institutions to achieve the kind of returns that they need for their basic business at 80 basis points and putting in money out for 10 years. That's created, as we started this debt platform opportunity. Even for somebody that is earning 5%, 6%, or 7%, that's a lot better than earning 80 basis points. Whether the cap rate compression in Europe is going to stay this way or not, we'll just have to see over time; it feels like it. But we'll see.

Mary Ricks, President

Yes, and I think it's really about the asset class too. Like core assets, Alan, in Europe, you're seeing core yields in France and Paris be in the 3% range. In Ireland, if you look at the buyers in Ireland, the core buyers, 75% of the deals that have been done this year in the core space are German funds. For them, 4% is an attractive yield.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Bill McMorrow for any closing remarks.

Bill McMorrow, Chairman and CEO

On behalf of everybody at Kennedy-Wilson, as I said earlier, we appreciate everybody's interest in the company and your support of the company. I hope everybody has a great day. Thanks very much.

Operator, Operator

Thank you, sir. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.