Kennedy-Wilson Holdings Inc

NYSE:KW

Earnings Call Transcript 2021-Q1

[Operator]

Good day and welcome to the Kennedy-Wilson First Quarter 2021 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded.

I will now extend the conference over to Daven Bhavsar, Vice President of Investor Relations. Please go ahead.

[Daven Bhavsar, executive]

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, Kennedy-Wilson; and Justin Enbody, Chief Financial Officer, Kennedy-Wilson.

Today's call will be webcast live and will be archived for replay. The replay will be available by phone for 1 week and by webcast for 3 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 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.

[William J. McMorrow, executive]

Thanks, Daven. And good morning, everybody. 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 and 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 and beyond.

Starting with our financial results in Q1, we had a GAAP loss per diluted share of $0.04 compared to a loss of $0.07 in Q1 of last year. Adjusted net income grew by 5% to $47 million. These results include the impact of a 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 $0.04 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 to maintain high occupancy and once again, collected 97% of our rents. In total, our office and multifamily same-store NOI was up 2.1% in Q1 due to strong results out of our Mountain States apartments and the burn-off of free rent in our office portfolio. These results compare very favorably against many of our peers.

In Q1, we continued to grow our investment management platform and in our fee-bearing capital, which has grown by 86% since the beginning of 2019 and now totals $4.1 billion. Growth in the quarter of 5% was primarily driven by the expansion of 2 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'll detail in a moment.

Our disposition program continued to take advantage of a 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 103,000 square foot office property located in the Southbank sub-market 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 were actively recycling the proceeds from our Q1 sales into new investments and have built a pipeline of approximately $514 million in 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 to $398 million and our fee-bearing capital to $4.3 billion after accounting for these Q2 transactions.

Looking at our balance sheet, we continue to maintain $1.1 billion in proforma liquidity with minimal debt maturities remaining in 2021. As I discussed on our last call, in Q1, we refinanced all of our 2024 bonds with a new $1.2 billion unsecured bond offering across 2 separate tranches with a weighted average coupon of 4.875% and a weighted average maturity of 9 years.

In April, we made further progress on our unsecured KWE bonds due in 2022 and repaid another $207 million, with $300 million remaining. Proforma for both bond paydowns, our cost of debt improved from 3.7% at year-end to 3.5% and our weighted average maturity extended from 4.1 years to 5.9 years. These 2 transactions will reduce our annual interest expense by approximately $18 million.

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 is down 60% through divesting of 2 non-core divisions. And we are coming out of COVID a much leaner and more focused company with ample dry powder to continue growing our business.

Our strategic initiatives includes 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 have a number of advantages against our competitors in this space. First, we approach our loan investments through the lens of an owner-operator rather than purely a lender. Our debt platform leverages the expertise of our real estate underwriting teams as well as our relationship network that we have cultivated at KW over the past 3 decades. Finally, our loan portfolio is backed by large, well-capitalized institutional sponsors. We have a 9% ownership interest in our loan portfolio, which has generated double digit, unlevered returns to KW. Post quarter end, our debt platform grew to approximately $1.2 billion, and we have a strong pipeline that will allow us to continue growing this platform in 2021.

Our $1 billion European logistics platform is less than 6 months old and off to a fast start. This platform is focusing on smaller last-mile facilities located close to city centers. The fundamentals in this asset-class remain extremely positive as demand continues to be driven by higher levels of e-commerce and the need for efficient supply chains. The platform, which KW has an ownership interest of 20%, has $444 million of assets as of quarter end and a robust pipeline of another $300 million of opportunities across the UK, Ireland and Spain that we are evaluating. Given the additional capacity we have in all of our announced platforms, we have the potential to add another $2 billion of 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.

[Mary L. Ricks, executive]

Thanks, Bill. 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 rent stood at $1,675 per month. Our largest market rate multifamily region is in the Mountain States. The performance in this region continues to be very strong. States such as Idaho, Utah, Nevada, Arizona and Colorado continue to attract new residents due to a 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 had the highest percentage growth in its labor force in the country. These trends are positively impacting our Mountain States results, which had another strong quarter with same-property revenue up 4.4% and NOI up 4.7%.

Post quarter end, we acquired off-market The Lofts at 10 Mile, a wholly owned 240-unit community in Meridian, a fast growing sub-market of Boise. NOI at The Lofts is approximately $3 million. We are excited to expand our portfolio in Boise, where we made our first investment back in 2014 and since have become one of the largest owners of market rate and multifamily in the city. This acquisition brings our Mountain State portfolio up to over 9,800 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 that 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 Dublin began 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% with a weighted average lease term of 4.9 years to break, across our stabilized portfolio. For the quarter, rent collections continue to remain very strong as we, once again, collected 99% of our office rent.

And Bill referenced the strong level of industrial acquisitions since year-end. Looking forward, this is a 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. We've had strong asset management wins as the strength in occupational markets is 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 plans, adding term and delivering double digit rental growth.

In our value-add fund, in early Q2, we signed a 50,000 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 Friars Bridge Court office property in London, I'd like to provide some background information. We originally acquired this asset in 2014 through our loan-to-own strategy via a CMBS loan enforcement. In Q1, we signed a new a 103,000 square foot lease for the entire building to a leading provider of laboratory diagnostic services backed by the U.K. government for 20 years term certain after negotiating a surrender with the existing tenant. In conjunction with completing the new lease, we sold Friars Bridge Court to a 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 acquisitions 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 UK. Globally, we saw strong leasing activity in the first quarter of 2021. We completed 311,000 square feet of new leases and extensions with a WALT of 10.7 years. In addition, post quarter end, we've already completed another 195,000 square feet of lease transactions. We also have over 411,000 square feet of leases in legals, and are 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 predominantly by a single tenant or are located in an office park.

Finally, at the Shelburne Hotel, as I've reported previously, it took the brunt of COVID 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. A significant amount of 2020 international business has re-booked into 2021 and 2022.

As the EU looks to welcome international travelers this summer, we are very optimistic in the near-term outlook for the Shelburne and look forward to getting this iconic hotel fully opened soon.

With that, I'd like to turn the call back over to Bill.

[William J. McMorrow, executive]

Thanks, Mary. I'd now like to discuss the progress we are making at our development and lease-up projects. Our development pipeline is building to, on average, a 6% yield on costs in markets where assets are trading at significantly lower cap rates. In total, we have over 3,900 multi-family units, 2.3 million commercial square feet, and 1 hotel in 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 stabilized, these projects are estimated to add $100,000,000 of estimated annual NOI to KW. In the quarter, we stabilized 4 separate projects totaling 657 units and 247,000 commercial square feet, including the first phase of Clara in Boise, Idaho; Phase 1 of 38° North in Santa Rosa; 400 California in San Francisco; and The View by Vintage. The stabilization of these projects added $6 million of estimated annual NOI to KW.

Looking ahead, the Clara Phase 2 in Boise totaling 148 units will be delivered by the end of Q2 and stabilized in Q3. We also are making great progress at River Point, an 89-unit property in Boise, that will complete in early 2022. This development is adjacent to another one of our communities totaling 204 units, which is averaging a 97% occupancy.

Within our Vintage Housing joint venture, in addition to stabilizing The View, in the quarter we added a new project to the pipeline called Springview, which will add another 180 units in the Mountain States. We have over 1,700 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% to $3 million per quarter. In total, including resyndications, we've received $160 million of distributions from Vintage.

Finally, in Dublin, our 2 projects, Hanover Quay and Kildare, totaling 133,000 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're confident in the lease-up of these 2 exciting developments.

Clancy Quay, which totals 865 multi-family units across 3 phases, is expected to have $20 million of estimated annual NOI at stabilization, which our share is 50%, making it one of the largest market rate assets in our portfolio. Leasing at Phase 3, which totals 279 units, is progressing well and is a good indicator of the demand for this high quality offering. We're now 70% leased, up from 50% we reported to you at the end of February, with rents ahead of business plan. We remain on track to stabilize this asset in total in Q3.

And 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 have plenty of capacity to continue growing. As I've said on prior calls, our key priorities are 2: number one, growing our recurring NOI through new acquisitions, organic NOI growth, and the completion of our construction of lease-up projects; and, two, leveraging our strategic institutional partnerships to meaningfully grow our investment management platform and our fee-bearing capital.

I'd like to thank our shareholders, our co-investment partners, and 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 a stronger company that is well positioned for continued growth.

So with that, Daven, I'd like to open it up to any questions.

[Operator]

[Operator Instructions] The first question will be from Anthony Paolone of JPMorgan.

[Anthony Paolone, analyst]

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?

[William J. McMorrow, executive]

Well, I think, Tony, as an overview, these low interest rates that you can finance at, of course, have 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 real estate as an asset class, which has also had an effect, as you can see from the sale that we did at Friars Bridge Court.

I would say that we're very fortunate in the sense that we got into most of the markets that we're in today a long time ago. And so we have very, very good footprints there. But it's competitive on the buy side today. And our real strength, I think, on the buy side has been the relationships that we've created over these 3 decades that most of us have been together.

And so we're always trying to find that off-market opportunity. And I think the other part of it, the decisions that we made as far as new construction really started almost 7 years ago. And it takes a long time to fill the pipeline, so to speak, and then have projects finish like Clancy Quay. We bought Clancy Quay in 2013 and there were only 420 units there. And as I said in my remarks, now we're going to have 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 business is a business you have to try and get into these markets early. You have to get a good footprint in these markets. And then the decisions that we made to do the new construction has really proven out to be a great, great plus. And as I said, most of this construction that we're doing is going to come online here in -- before -- the end of 2023 and some into 2024.

But assuming these rates, which everybody is saying they're going to stay level, the cap rates, are going to continue to be at the levels that we're at today. But we're still finding opportunities. We are, and both on the buy side and on the new construction side.

We're starting 2 new projects. One next to our project in Santa Rosa, what we're calling Santa Rosa Phase 2. It's land adjacent to Santa Rosa Phase 1. So that project when it's done will have 300 units out. We also just bought a property in Boise, Idaho called Jasper. But next to that -- that project is 240 and next to that is land for another 240 units, which we're going to start on this summer.

So while the market's competitive, we're still finding opportunities that make sense for us to buy. And then the last thing, I know it's a long-winded answer, unless it's in a vehicle that has a short-term hold horizon, we're locking in spreads by using fixed rate debt. That generally is in the 10-year term here in the United States and in Europe more in the 5- to 7-year term. But that is the key, and my opinion is that you've got to lock in your spreads and not try and take advantage of rates.

And I'd say too, the last piece of it, when you really think about it, is our asset management capability. And there was a lot of uncertainty starting last March of 2020 when we all went remote. But we've demonstrated that we collect rents at a very, very high level and unlike a lot of our peers, and I'm not critiquing them, 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, that give me an awful lot of confidence in the future, even with the competition and these lower cap rates.

[Anthony Paolone, analyst]

Got it. And are your investor partners, are they adjusting down return expectations or adjusting to an environment where there's an enormous amount of liquidity? Or how does that conversation work with you as you're raising capital?

[William J. McMorrow, executive]

Yes, I mean I think I started saying 3 or 4 years ago on these calls that the days of underwriting, when you've got basically 0 cost of debt in certain parts of the world, the days of underwriting initial yield to 15% to 20% or 25% returns, that we may have gotten 8 or 9 years ago, was actually a fool's game. And so everybody has had to adjust their return expectations. But it's separated.

We're a 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. That's 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 have lowered their yield expectations to satisfy their own needs. And so that's 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 has lowered their expectation to more core returns, but seeking core risk adjusted returns where they're not going way out on a 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 capital we can put to work in core returns, and we've got capital that we can put to work in value-add returns, and we've got capital that we can put to work in the debt platform. And so there's nothing really in each of those categories that we don't have capital for.

And I would say too the last piece is that the relationships that we've built, these relationships take years if not decades to build, because they're all built on trust. And so we've just got very, very strong institutional partner relationships that will fulfill every bucket of return.

[Mary L. Ricks, executive]

Yes, and I would also say, Tony, the core plus vehicle that we have in the industrial space in Europe right now is growing immensely. And I think our partners and ourselves understand really that asset class and really that band of return sort of the 9 to 11 levered. And going in, we might be going in at a 5, but we're growing that to, say, a 6. And we're seeing tremendous demand in all of our markets. And a lot of those deals we're sourcing off market. And I'm just looking at a pipeline right now, we have $300 million worth of new industrial assets throughout Europe that we're evaluating. So yes, really excited about the growth in that platform.

[Operator]

The next question is from Derek Johnston of Deutsche Bank.

[Derek Johnston, analyst]

Key KW expertise is distressed opportunities and special situations that really seem to have been elusive this cycle so far. There have been a lot of funds raised across the industry explicitly to target these scenarios. I mean has it gotten more competitive to source deals? And if the government intervention really did eliminate a lot of distress this cycle, where do you go from here? Do you still expect to see some distress, just be it a bit more delayed? And which of your core sectors stand out as likely having more opportunities: office, multifamily or other?

[William J. McMorrow, executive]

Well, I think there clearly hasn't, except really 2 sectors, really the hotel market and retail. All of the other asset classes -- and it of course depends on where you're at geographically and what governmental restrictions came down in terms of your ability to collect rent. But other than those 2 asset classes, there hasn't been really any distress to speak of. And I think it's a combination of factors. It's not just the government intervention and the rates being kept so low, but it also has been the banking system. It really 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. But 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 if tolerance is the right word, but they were willing to work with all of their borrowers that may have had issues.

I don't think you're going to see a lot of distress in this market here over the next couple years. I think an awful lot depends what's going to happen with interest rates. I've never been very good at forecasting that, but you can take any kind of wager you want today on where you think interest rates are going based on what you think or your expectations for inflation. And so I don't see near term any real distress. And so our real opportunity is just the footprint that we already have in growth markets. And we're very fortunate to be in the Western United States where there's significant job growth going on that's driven in large part by the tech sector and all the ancillary businesses to that. You have very high barriers to entry in most markets that we're in in terms of entitlements and scarcity of really good land.

And I think the same thing is really true in Ireland. And we have a very positive view on the recovery that's going to take place in the United Kingdom. And so as Mary said in her remarks, we're redeploying some of the capital from the Friars Bridge sale, that very attractive cap rates and per square foot prices. So that's a long-winded answer. But I don't see on the near term, except for the 2 asset classes that I've mentioned, I just don't see much distress.

[Derek Johnston, analyst]

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 a 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 100 or 150 basis points in your opinion, as I feel you would historically develop at higher yields? Really just trying to get a sense of possible multi-family development yield compression, if you could.

[William J. McMorrow, executive]

It's a very good question. It's no news to anybody that you're seeing commodity prices across the board increase. Oil, steel, copper, everything. But we're lucky we have really 2 extremely capable teams that run the construction side of our business. And what we've always done on these projects is really lock in our costs before we start construction. And so a very, very, very high percentage of our construction that's underway already has the costs locked in and fixed. And in a lot of cases, we get a little bit ahead of ourselves in terms of 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 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. And your land cost per unit are lower. And so we're very cognizant of the issues that you're talking about. And when I say 6%, that's just a target. I mean as I said, Clancy, which is the largest individual multi-family project in Ireland, which has almost 900 units now, we're stabilizing a super high-quality property there at 7%. And so what we've always tried to do when we're underwriting these things is start with a conservative number that we know we can achieve and then hopefully market conditions and rent conditions allow us to outperform even our own expectations.

[Mary L. Ricks, executive]

And we're seeing that actually. Clancy 3 that Bill mentioned in his remarks at 70% let, we're doing 7 units a week ahead of budget. So as Bill said, those are target numbers. But 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. Lot of what we own is around outdoor space. We're providing dog parks and kids' areas to play. So all these things that the market really needs, I think, people are really willing to pay for that.

[William J. McMorrow, executive]

Yes. And I think too, Derek, to Mary's point that she just made, I mean to give you an example, at The Clara in Boise, I can't remember whether it was March or April, in one of those months we leased 67 units in 1 month. And all of those leases were done ahead of what we thought our initial underwriting was. And so to Mary's point, and if you saw -- if you could be on the ground and see Clara, it's a super highly amenitized project. I mean the main buildings in terms of the clubhouse, the fitness centers, the pools are just ultra first class. And so that's really what we've tried to do both here and in Ireland is we amenitize these properties at an extremely high level.

And I would say too, again, not complimenting ourselves but just our construction management teams, our asset management teams, both here and in Europe, across all asset classes are really fantastic teams that have been together for a long period of time. And I've said that the biggest thing, not that I needed to relearn 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 decades, in my case with Mary and I 3 decades, it took a lot of the mystery out of what we each needed to do every day. That's about it.

[Mary L. Ricks, executive]

I think, Bill, just one last thing. Derek, that asset management is what is giving us those value-add returns. So while we're not necessarily seeing distress in our markets and so we're not making really the money when we're buying a deal let's say, we're not buying something at a big discount, but we're adding the value and putting up what would seem to be value-add and/or returns that you would get in a distressed kind of market. So the return is really being driven by growing income at these particular assets and then finding a spot and finding the right buyer to sell those and putting up, in many cases, 40% IRRs. So I would say that's really where we're adding value through our asset management teams.

[Operator]

The next question is from Sheila McGrath of Evercore ISI.

[Sheila McGrath, analyst]

Your Mountain States multifamily has outperformed significantly, and California is more challenged. Just wondering, once you restabilize 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 allocating more capital to the Mountain States?

[William J. McMorrow, executive]

That's a very good question, Sheila. I think California will make a comeback, and it'll come back big. And I think there's a lot of reasons that -- we've faced some of the issues here in California that are not worth getting into a political speech about, but I think that you're 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, and we operate in almost 16 different jurisdictions here in California, was 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 biggest issues. But clearly over the last 15-plus years, our decision was made to diversify ourselves away from California. But that decision was made 15 years ago.

And so when you look at our foothold, for example, in the Seattle market, both in our market rate apartments, in our vintage portfolio, and in the office properties that we own in various vehicles, they're 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 that 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 in around Southern California where you saw Fortune 500 companies being purchased by out-of-state companies. And so today you've got more Fortune 500 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 we have too -- the Santa Rosa project 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. And Mary, you might comment on.

[Mary L. Ricks, executive]

Yes. I mean we're really focused on California markets. If we are going to buy in California, that are surrounding really tech-centric areas. We're seeing those certain sub-markets continue to grow. And we're also seeing life science. We just bought an asset in Fremont, California; one life science tenant that is looking to go public right now. So there's a lot of great and positive really stories around life science and technology still going on in California. But we're definitely being selective with what we're buying.

[Matthew Windisch, executive]

I'm just going to add too, I was just going to say that as of today roughly 20% of our NOI is in California, and that's down from over 50% if you go back 5 or 6 years. And then if you look at the development pipeline, it's roughly 10% California. So pro forma for that, we're going to be down at 15%. So like Bill and Mary said, we do strongly believe in those markets, but we have been redeploying capital out of California into the Pacific Northwest and the Mountain States over the past 10 years.

[William J. McMorrow, executive]

Right. And I think, Sheila, the point Matt's making is that these were decisions that were really made 10 or 15 years ago. It had nothing to do with the political environment in California or the pandemic. And I think we clearly learned -- in addition I said about our people at Kennedy-Wilson earlier that having not product diversity but having diverse geographic locations in this crisis, I'll call it, that we all went through here the last 15 months served us really, really well. And convinced me that, not that I needed convincing, that there are still more opportunities, Sheila, in other, I would call it, smaller markets around the Western United States. And I think I mentioned earlier, we're about to start a pretty good-size development with a partner in Bozeman, Montana. And we still see other markets in the Western United States that are as attractive or more attractive than California.

[Sheila McGrath, analyst]

Okay. That's helpful. And then just, I know you touched on the industrial venture, but you did double your investments, or the portfolio size there. Just talk about your thoughts on industrial, KW's history in that segment, and will any of your U.S. funds invest in that property type? Also, how were you able to source that kind of volume in Europe when it is like the most sought-after asset class?

[Mary L. Ricks, executive]

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 since we really began in Europe. It was just a smaller part of our business, but we have really, really deep relationships in all those markets and the team's done a great job. And our focus really has been last-mile, well-connected assets with low site cover, established distribution locations. A lot of what we are 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 I think we'll continue to grow that business, I'm sure of it, in Europe. And then in the U.S. we are looking 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 in our value-add fund right now in the U.S. And we have a couple of deals under offer, again, Mountain States, really focus where the growth is going. And that's just -- really those markets are booming in the logistics distribution space. So we're excited.

[Sheila McGrath, analyst]

Okay. Last question. When is The Shelbourne opening and was it fully shut for all of first quarter?

[Mary L. Ricks, executive]

I love that you asked that. I can always count on you, Sheila, to ask about The Shelbourne. It was shut for all of first quarter and we are going to be reopening. We've been effectively closed for basically over a year. And we're focused on really the Irish traveler doing a lot of staycations. But we have had a lot of international travel rebook into this year, later this year and 2022. So we have currently 11% of total room nights for 2021 already spoken for it at pre-COVID rates. And then really, like I said, the beginning of the reopening will be focused on staycations. And then as Ireland and Europe opens up, which we've been hearing about and we're excited about, we think later this year, we're going to see a lot more international travelers.

[Operator]

[Operator Instructions] The next question will be from Jamie Feldman of Bank of America Merrill Lynch.

[James Feldman, analyst]

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's picking up, we're seeing the headlines on return to office. I just want 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.

[William J. McMorrow, executive]

As far as office, Jamie, you mean?

[James Feldman, analyst]

Yes, 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 to people as they look for lower cost of living? And I saw Google's article in the Journal this morning about -- or their press release yesterday that people can work from anywhere or at least a certain percent. What does that do to like Midwestern markets or lower cost of living markets? Just curious where you're headed, given you see so much.

[William J. McMorrow, executive]

Well, I mean look, it's just a personal belief that remote working will never last long term. The things you're missing without people being together are critical to any business succeeding. So I mean our company is no different than any; we're reopening the office full-time June -- beginning of June. We're going to start with a Tuesday-Wednesday-Thursday policy. But we all need to be in the office and we need to travel, and our business is one that you need to be with people.

And it's the little anecdotal conversations that we all know on this call that you have with a peer or outside relationship that actually leads you to opportunities. So the office market 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. And clearly the suburban low-rise, and when I say low-rise I'm talking under 10-story type of building, are going to perform better over time than the high-rise center-city kinds of locations. And whether that's a long-term trend or not, I don't know. But I'm highly, highly confident that people are all going to go back to work. I mean you've seen the announcements from JPMorgan, Goldman Sachs, and you can go on and on down the line. And the only ones that have made these, I would say, out-of-the-box kind of comments have been the tech companies. And even those I don't see long-term being completely remote. I mean yes, there might be a day a week or 2 days a week where people work remotely but eventually people will need to be together. As far as -- anyway, I'm positive as far as the outlook for office, particularly suburban office low-rise.

And as far as other markets in the Western United States, we've gone into other markets. We have our eyes on a couple that I'd rather keep to myself for now; we always like to get there first. But there's a couple others that we think have real, real opportunities. And I would say 2 in general, in the state of California, some of the best markets are ones that you might not have expected. We have properties we own in Santa Maria, for example, which is kind of a coastal market but that market has performed extremely well. And so I think even in the state of California, you're going to see these suburban multi-family markets continue to do well. After all there's 40 million people in the state of California; they've got to live somewhere.

I do think though it is a long-term trend that you're going to see the 25 to 35-year-olds and the 55 and olders moving to more -- people vote with their wallet, and you're going to see them moving to these more affordable markets that have lower tax bases -- income tax bases and have lower rents and in the mind of the individual have a higher quality of living. So the markets that we're in, in my opinion, are going to continue to grow long term.

[James Feldman, analyst]

Okay. That's very helpful. And then I know it's ways off and may never happen, but how do you think a repeal of the 1031 would impact real estate in general and your business?

[William J. McMorrow, executive]

I mean we were debating all of that this morning. There's a lot of negotiation that's going to go on, on this entire tax bill. How it's going to turn out, again like anybody, I have no idea. The 1031s have been in existence since 1920. Although there's a lot of discussion around it, the 1031s impact a lot of industries besides the real estate industry. You've got the farmers, you've got all kinds of industries that it impacts. And so what ends up happening -- I never try and think about things that I don't know what the outcome's going to be. We're obviously mindful that it's going on, but I don't know. It's been around for an awful long time and we'll just have to wait and see. I think that with the amount of capital though there is that wants to invest in real estate, whether the 1031 stays around or doesn't stay around, it's not going to have a big impact on values.

[Operator]

And this concludes our question-and-answer session. I would now like to turn it back over to Bill McMorrow for any closing remarks.

[William J. McMorrow, executive]

Okay. Well listen, as I said, at the beginning of my prepared remarks, we appreciate the interest and the support that we get from all of you. And as I always say, any questions that you think of or follow-up, Mary, myself, Kevin, Matt, Justin, any of us, are here to continue the dialogue. So have a great day and thank you for your time today.

[Operator]

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