Kennedy-Wilson Holdings Inc

NYSE:KW

Earnings Call Transcript 2018-Q3

[Operator]

Good morning and welcome to the Kennedy-Wilson Third Quarter 2018 Earnings Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask question. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Daven Bhavsar, Director of Investor Relations. Please go ahead.

[Daven Bhavsar, Director 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 and CEO of Kennedy-Wilson Europe; Matt Windisch, Executive Vice President of Kennedy-Wilson; and Justin Enbody, Chief Financial Officer of Kennedy-Wilson.

Today's call is being 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 2018 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 McMorrow, Chairman and Chief Executive Officer]

Daven thanks. Good morning everybody and thanks for joining us today. We are pleased to report a record third quarter results for Kennedy-Wilson highlighted by our growth in property NOI, a continued strength in same property operating performance and continued progress on our property stabilization initiatives, which allowed us yesterday to announce an 11% increase in our dividend to $0.84 share on an annual basis.

We also continue to make great progress on our third-party fee-bearing capital raising initiatives and the execution of our asset sale program.

Starting with our record financial results for the. GAAP EPS was $0.09 per share, up from a loss of $0.08 a year ago, adjusted EBITDA was $142 million compared to $76 million during Q3, 2017.

The increase in adjusted EBITDA was driven by a $41 million increase in our share of property NOI, which has significantly increased since the acquisition of KWE, which we completed in the fourth quarter of last year.

We also had a $32 million increase in our share of net gains and promotes compared to the third quarter of 2017. We have now produced $535 million of EBITDA year-to-date in 2018 more than double the $255 million we produced for the first nine months of 2017.

Adjusted net income for the quarter was $74 million compared to the $35 million in Q3 of 2017. For the year-to-date, adjusted net income totals $308 million compared to $125 million last year.

I would like to review the highlights of our property operating results for the quarter before discussing our key global growth initiatives for the Company.

Our total, our portfolio today has an estimated annual NOI of $416 million with 46% coming from the Western U.S. and 54% from Europe. We had another solid quarter of property operations with same property revenue and NOI growth of 4% each across our global same property portfolio consisting of more than 18,500 multifamily units, 12.5 million square feet of commercial properties and four hotels.

In particular, our market rate portfolio saw same property revenues and NOI growth of 5% each and continues to benefit from being located across growing markets and from our asset management teams execution of our value-add strategy.

Within our U.S. multifamily portfolio, our Mountain State assets which include our investments in Salt Lake City in Boise Idaho had another standout quarter with revenue and NOI growth of almost 9%. Both of these cities continue to benefit from strong underlying economic fundamentals.

In 2017, Idaho had the fastest growing population in the country, with Utah ranking third. With low unemployment, relative affordability and a lack of housing options for the rapidly growing populations, the outlook for both states remains strong.

Rents at our Mountain States properties are 40% below the rents in our California portfolio, so the affordability in the region positions us well for future growth. Our global commercial portfolio also had a good quarter with 3% revenue growth and 2% NOI growth on a same property basis. In total our stabilized commercial portfolio sits at 95% leased.

In the U.S., our results were largely driven by strong asset management and leasing activity in our Southern California commercial portfolio resulting in a 3% increase in occupancy coupled with the burn off of free rent from Q3 of last year.

In Europe our growth was also driven by significant asset management activity in the quarter including 47 lease transactions across one million square feet resulting in an increase of 7% over previously in-place rents.

Now I would like to focus the remainder of the call on three key strategic global initiatives that we have discussed on prior calls and which continue to be a huge emphasis for us at Kennedy-Wilson.

Number one, growing our NOI both organically and through completion of our development initiatives; number two, substantially growing our investment management business. And number three, continuing to implement our capital recycling and asset sale program.

So starting with number one, growing our property NOI is a key initiative for us and we can accomplish this in a number of ways. First, we look at continue growing the NOI of our existing portfolio organically through our value-add asset management program and leasing initiatives.

In the U.S., we continue completing strategic CapEx projects which are aimed at growing our in place NOI. Few examples for the quarter include the completion of our brand new leasing center at Equinox in Seattle and a new clubhouse, fitness center and tenant lounge at Edgewater, Boise, Idaho. We also renovated 324 multifamily units during the quarter bringing our year-to-date total to 745 units.

We expect to renovate approximately 1300 units next year at an average cost of $10,000 per renovated unit, which typically adds 20% to 30% return on investment. In all across the U.S. multifamily portfolio, we currently plan to spend $25 million on unit interior renovations and common area upgrades in 2019.

Similarly, in Europe we have many ongoing asset management initiatives that look to grow our NOI. At Leavesden Park in the UK which was 75% vacant as of the quarter end, I'm pleased to announce that we have just signed our largest UK leasing transaction today.

A 200,000 square foot lease to global online fashion retailer ASOs for 15 year term certain, which led $7 million to our estimated annual NOI in 2019. This is the largest leasing transaction in the Southeast sub markets since 2016 and it reflects the strong demand we are seeing across our UK office portfolio.

At the Shelbourne Hotel in Dublin, we completed the room renovations and are currently upgrading the lobby as we look to further drive ADR growth. Our CapEx initiatives at the Shelbourne, which includes [$27] (Ph) million spent to-date with another $14 million remaining continues to be well received with this asset.

With NOI doubling from $9 million to $18 million since we acquired the property in 2014. Also are in place UK and Irish office for ads remain 14% below market on average, which presents an opportunity to capture further NOI growth in upcoming rent reviews and as leases expire.

The second important way for us to add NOI is through completing our lease up and development initiatives globally across $3 billion of gross assets at completion, which our shares is $1.6 billion. Our pipeline includes over 3300 market rate and affordable multifamily units, 2.5 million square feet of commercial property and 150 hotel rooms at the Kona Village Resort.

Based on current market conditions, we expect that these assets in total will add a $100 million to our estimated annual NOI by the end of 2023, $26 of which we expect to add by the end of next year alone.

In the U.S., we continue to developing units through our Vintage Housing joint venture, where the demand for affordable and senior housing remains very strong. The portfolio today consists of 6600 units with another 2000 units under development and our goal is set to get this joint venture up to 10,000 units in the short-term with minimal equity from KW. As a side note, we own approximately 62% of that joint venture.

I would now like to hand the call over to Mary Ricks to discuss our European development initiatives. How our European development initiatives play such an important part in our growing property NOI.

And I would also like on this call to congratulate Mary on her very well deserved promotion in August of President of Kennedy-Wilson. Mary and I have been partners here at Kennedy-Wilson for over 25 years and she has played an incredibly important role in the success of our Company.

So with that, I would like to turn the call over to Mary.

[Mary Ricks, President and Chief Executive Officer]

Great. Thanks Bill. In Europe we continue to make excellent progress in stabilizing assets and completing development projects. We added $8 million of estimated NOI in the quarter to leasing up the North Bank Apartments in Dublin and Pioneer Point Apartments in London, and stabilized the 100,000 square foot office building at Capital Dock in Dublin which is fully leased in deed for 20 years and is the first of the three office buildings in Capital Dock to complete.

We remain on-track to complete remainder of Capital Dock by the end of the year. we materially derisked the entire single phase development by preleasing two of the three office buildings to indeed and by signing the third office building to owner occupier JPMorgan.

Great progress has also been made on leasing the 25,000 square feet of retail space with the majority expected to open for business in the first half of 2019. These leases provide strong support our upcoming leasing program for the 190 premium multifamily units, which will open towards the end of this year.

Similarly, we see our acquisition of CB3 which when complete will total approximately 450 multifamily units and 300,000 square feet Grade A office space as the next signature campus development for the Dublin's driving North Dock.

And Hanover Quay, which is adjacent to Capital Dock, we received planning approval for 68,000 square feet of new Class A office space in Q2 and are currently in the design process in anticipation of beginning construction in Q4 of this year.

All together, we are on target to deliver approximately $60 million out of our 100 million globally. An additional estimated NOI from European development and unstabilized assets by 2023 including $20 million by the end of next year.

Our second key global initiative is to significantly grow our investment management business through raising third-party capital. One important part of our business continues to be our ability to raise third-party capital and since 2010 we have raised $10 billion in third-party equity capital to support our investment platform.

In the past five weeks alone, we have raised and invested approximately $300 million of new fee-bearing capital from three separate insurance companies.

I would like to first discuss our capital raising progress both in the U.S. and Europe and then lay out our future targets. In total, we currently have $2 billion of fee-bearing capital of which 40% is invested through our commingled discretionary funds and the remainder through our separate account business.

These platforms, including major institutional investors, such as insurance companies, family offices, public and private pensions and private equity clients located in North America, Europe, the Middle East and Asia.

In the U.S., we remain focused on raising capital for discretionary funds and separate account business. With regards to our U.S. separate account business, in October, we closed our first investment in a new platform with a major insurance company as our partner.

We acquired a core Class A office property in Denver unlevered for $86 million. We have a 5% economic interest in the property and will manage the properties while earning customary fee. We expect to find additional new opportunities for this new core platform over the next 12 months.

In Europe you will recall in Q2 we announced the completion of our 50/50 joint venture with AXA IM real assets focused on Irish multifamily. This has been an important focus for our European business over the last 12 months with an established medium term targets of owning 5,000 units. Our portfolio currently stands at 4,000 units of which almost 2,500 are existing fully operational units with another estimated 1,500 units at various stages of development on existing own sites.

Year-to-date in Ireland, we have added 1,300 units for a total multifamily portfolio. We remain very excited by the fundamentals in the Irish multifamily market, and we and our partners continue pursuing an attractive pipeline of opportunities.

According to PWC, Ireland is likely to be one of the fastest growing economies in the Eurozone until at least 2024, with GDP growth for 2018 expected to be the highest in Europe once again, unemployment is still under 5.1%, its lowest level since early 2008, and wage growth continuous rise with an increase of over 3% expected for 2019.

We see favorable demographic trends in Ireland with the country boasting the highest proportion of 25 to 44 year olds in the EU. This access to talent as a significant driving factor for foreign direct investment in Ireland, which in turn drives demand in the multifamily market.

U.S. chats, FBI continues to be particularly strong, driving over 40% of take up in the Dublin office market year-to-date. The overall population in Ireland continues to grow and is forecast to increase by almost 45% by 2051 which equates to an additional two million people.

On the supply side, it's estimated that Ireland needs about 35,000 units built annually, which has not been met historically and only 18,000 new units are forecast to be delivered this year. As a result, fundamentals for rental housing have never been stronger and we aim to continue playing our part and delivering much needed new housing in Dublin and we remained firmly on-track to hit our near-term goal of growing our portfolio to 5,000 units.

Our joint venture with AXA is both the true endorsement of our outstanding team and the high quality residential projects we are creating in Ireland as well as a significant step in growing our third-party European investment management platform.

At the end of the quarter, we acquired CB3 City Block 3 with both AXA and Cain International as our 50% joint venture partners. CB3 is a $500 million when completed six acre mixed use development project.

Our significant planning and development expertise alongside our experienced JV partners, ensures we are well positioned to achieve similar success at CB3 as we have delivered at Capital Dock.

Earlier this week, we announced the acquisition through our platform with AXA of the range for $183 million and are growing Sandyford submarket at Dublin. So together these two vendors ventures have added over $300 million of fee-bearing capital to our investment management platform.

Looking ahead, our capital raising activity continues to strengthen across the board as we look to further scale this business. We are targeting to raise the minimum of $1 billion globally per year over the next few years in this business. We are planning to do this without any meaningful changes in overhead resulting in high margin growth for our shareholders.

And with that, I would like to turn the call back over Bill.

[William McMorrow, Chairman and Chief Executive Officer]

Thanks Mary. So our third area of focus is our asset sale program on the recycling of capital. In Q3 we continue to selectively sell assets where we have either completed our business plan or the asset doesn't fit long-term for us strategically. We then redeploy that capital into higher return opportunities.

During the quarter, we sold $321 million of assets of which our share was $250 million. Europe accounted for 96% of our asset sales including the largest sale in the quarter, which was an office building in Milan, which we sold for $81 million and a gain of $31 million.

In total our sales generated $159 million of cash to KW for the quarter and year-to-date, we have generated $466 million of cash to KW. In terms of reinvesting these proceeds. Year-to-date, we have allocated capital as follows: 31% was allocated to our stock repurchase plan; 19% to property level CapEx, and 50% to new acquisitions.

Our asset sale programs will continue to focus on selling smaller assets as well as non-core assets or assets where we have completed our value-add business plan. We expect to see an increase in transactional activity and what will be a very active for the quarter.

As it relates to returning capital to our shareholders. So far in 2018, we have returned $269 million in the form of dividends and share repurchases, which equates to $1.88 per share. Year-to-date, we have purchased and retired 8.8 million shares at an average price of $17.92, with $103 million remaining on our share purchase program as of the end of the quarter.

Additionally, as I mentioned yesterday, our Board of Directors declared a fourth quarter dividend of $0.21 per share which is an 11% increase from the prior quarter. We have now increased our annual dividend substantially from $0.16 per sure in 2011 to $0.84 today, which equates to a dividend yield of 4.4% based on our closing share price yesterday.

I would also like to update you on two recent additions yesterday actually that we made to our Board of Directors. First I'm pleased to announce that we have added Richie Boucher who is the former group CEO of the Bank of Ireland group. Richie is highly respected in the banking community and brings with him decades of experience in the European banking sector.

We have also added Trevor Bolin. Trevor was previously a Director and part owner Principal Management Ltd and Entertainment Management Company and prior to that a partner at KPMG Ireland for over a decade.

We have now added four great new board members this year and I believe our shareholders will benefit from our depth of global experience and capital markets accounting and public company management.

So once again, I'm pleased with the results for the quarter and how our businesses is positioned today. We end of the quarter with ample dry powder with $919 million of liquidity between cash and a $500 million undrawn revolver.

We have a fantastic global team that has a clear vision on executing our three key strategic initiatives to continue growing both our business and generating attractive risk adjusted returns for our shareholders.

With that, I would like to open it up to any questions.

[Operator]

[Operator Instructions] The first question will come from the Mitch Germain with JMP Securities. Please go ahead.

[Mitchell Germain, JMP Securities]

Good morning. I'm curious about in Dublin or maybe just even in Ireland itself. My understanding is that the ownership of many of the multifamily properties is highly fragmented. A, am I correct that a assessment and B, is there any larger portfolios that you could foresee maybe coming to the market down the road?

[Mary Ricks, President and Chief Executive Officer]

Hi Mitch, it's Mary. Highly fragmented, I think historically Ireland was when we first bought in, in 2011 that was true, because a lot of these buildings have been built to sell as individual apartments and then when the market turn down the banks and normal ended up with a lot of those buildings and actually we bought a lot of those, but they hadn't been broken up. So they had not been fragmented.

There are a couple of players in the markets that do own more highly fragmented building, but for us, we basically control really the assets that we buy, we want to make sure that we are controlling the common areas, the amenities space, et cetera.

So, in that market, I mean, you really need housing. As I said on the calls on my remarks, it's so underserved, that all the professional managed assets that are now in the market from various competitors and ourselves, I think being the largest if not one of the largest. It's really important to have that as an opportunity for those that live in Dublin.

[Mitchell Germain, JMP Securities]

And the positive capital that you are competing against. Is it foreign, is it local, is it private equity or institutional if you maybe provide some perspective there?

[Mary Ricks, President and Chief Executive Officer]

Yes. It's a good question. That market that sector has really become an institutional sector and it’s a very international now and so we are competing with everyone big names that you would all know a lot of sovereign, because it's a great asset class.

I think our competitive edge is not only that we have as the best team in Ireland who have done a great job on everything that we have owned, we have been in the space for the longest period of time in Ireland and our ability to plan, to design and to deliver via development very high class premium multifamily product to the market is critical.

We have all the relationships necessary to do that, we know what the market needs, what the demands are, where the price point should be. So our finger on the pulse of delivering developed projects, very high quality I think it second to none in Ireland and we will continue doing that.

And the last thing I will say is, I think the testament to all that I said is really the asset joint venture to the best institutional investor in Europe, they are great partners and they chose to invest with Kennedy-Wilson. So we are really excited about the future growth in that business and the team continues to do really, really well.

[William McMorrow, Chairman and Chief Executive Officer]

And then too Mary you might add I mean the scale of our business both the multifamily and the office business that we have in Ireland, it's hard to get completes statistics niche, but we are clearly one of the top one, two or three owners across all asset classes in Ireland.

And as Mary pointed out, it wasn't at the beginning of our time there, but it has become a very institutionalized market, but because of our scale and as Mary pointed out the great team of people that we have there, we just have a great ability to execute in that market.

[Mitchell Germain, JMP Securities]

Great. I know this obviously there was a sale of one of the properties that you have in Milan. I think you have about 800,000 square foot less in that market. You also have some in Spain. Both of those markets or maybe one of the other are those targets for additional sales down the road?

[Mary Ricks, President and Chief Executive Officer]

Yes. I mean on Italy we are working on a couple of sales right now. So that is definitely - and that is really from day one the plan there was to buy those assets and trade them opportunistically, which is the Milan deal was a great deal for us.

The team executed on planning application, which added the value and then enabled us to sell that on to a developer, obviously make great profit on that sale and we are continuing to look to trade out.

In the meantime we are flipping very good income on those assets. As it relates to Spain, we are in the midst of doing a fantastic job on our repositioning of L&G, which is our prime shopping center in North Madrid and a very excellent area.

We have done about 50 lease transactions with regard to - when you think about new leases as well as rehears of our existing tenants, we have completely redone the whole and landscape the whole garden area and open up that space, which brought a lot of restaurants to the centers, which is an amenity not only for the housing owners in the area, but also for the business park office tenants. So that is one very, very well.

And then we have some high street retail that are all very well located and let to a couple of different tenants in Spain. And again, I mean, I think, opportunistically as we execute a business plan with the market allows us to, we will continue to trade in and out of those assets in Spain as well.

[Mitchell Germain, JMP Securities]

Got you. Bill, you have always been a good market timer, what you have done in the West Coast Ireland. I'm curious though many of those markets were very institutional just kind of distressed when you are investing in them. I'm curious about markets like Boise, Reno, which never really had much of a real big institutional presence. Do you think that kind of getting in early maybe ahead of where the other institutional capital is getting in. I guess the question is, do they ever look at those markets or are you really kind of the only real player that is underwriting and buying in some of those markets today?

[William McMorrow, Chairman and Chief Executive Officer]

Yes, good question. See what is really going on here on the West Coast, when you look at California and look California is always going to be a great state with a population now of almost 40 million people.

But you have to put it in context here with a tax rate now in California of 13.5% and you have got housing affordability, if it's not act, it's all time peak is very, very close to us all time peak. And you have got young people graduating from all the major universities here in the state of California.

And, while they are finding jobs, it's challenging to find jobs that can support the level of housing affordability here. And so what is happening in these other states on the West Coast where there is a very, very high quality of living standards.

And I'm talking about Salt Lake City, Boise, Seattle. And Seattle is a very good example, we started there almost 15 years ago. So it was well before Seattle and had been come on the map is being recognized by other people.

We started in Salt Lake City probably five years ago, six years ago and there were really know what I would call institutional or institutionalized projects there and so we have been able to clearly demonstrate that by doing what I call the KW style asset management of putting in new leasing centers and renovating units and doing the common areas with fitness centers and so on. That we have been able to drive rents to extremely attractive returns.

The Boise is a market that you can dominate, you can be a dominant player with say 2,000 units, 2,500 units, which is kind of our bogie that we are headed toward. We have about 1,800 units that we either own or that are in the development pipeline. So, we are getting up to the upper limit of where we think that size market is for us.

But we have also started investing in the Reno market, which is benefiting, as you all know Nevada has a zero income tax rate and jobs are getting created in the Reno market. And then the anchor to all of that really is what is going on in our vintage housing platform.

And so there is no place really in the world, but particularly on the West Coast that we know so well where there isn't a need for senior and that is anybody over 55 or affordable housing. And as I have said on other calls, the affordable housing is the giant misnomer. These are extremely high quality properties.

So when you look at where our construction is going in the Vintage Partnership, we have some very large projects that we are doing in Reno and in the Seattle market and we will be commencing a large one here in California shortly. So you have got all these dynamics working in what I would called a favor.

And the last thing I would say is that we have learned over the years that in order for any of these markets to sustain themselves or has to be great university systems, because they have to be producing younger people that can go into the job market.

And so if you look at Seattle, you look at Northern California, you look at Boise, you look at Dublin, all of those markets have that common characteristic where there are sizable and great university systems that are producing young people that the companies will hire. And then to keep going on it, but the last piece of this is the clear growth in the technology industry that is underpinning the job growth in a lot of these markets.

And believe me we studied large technology companies, their financial statements, we study their ability to continue to grow. When you look at the top 15 technology companies in the worldwide market cap and then really study their balance sheets. These companies are extremely well capitalized.

And so if you look at Dublin your growth in companies like Google, Facebook, Apple, Microsoft, Dell you know you can kind a go on down the line and so the job growth is coming from these major well capitalized companies that in our opinion have a very long runway of growth in front of them.

[Mitchell Germain, JMP Securities]

Thank you.

[Operator]

[Operator Instructions] Our next question is from Derek Johnston with Deutsche Bank. Please go ahead.

[Derek Johnston, Deutsche Bank]

Good morning.

[William McMorrow, Chairman and Chief Executive Officer]

Good morning Derek.

[Derek Johnston, Deutsche Bank]

How are you thinking through the best use of capital with the lighter share buybacks in 3Q. You guys have been active on the development and acquisition side as well as buybacks. But as I look ahead to 2019, how do you stack expected uses and which do you anticipate to be more active than the others going forward?

[William McMorrow, Chairman and Chief Executive Officer]

Well as always these decisions are - they are capital allocation decisions. And I think we have demonstrated not pretty good, a very good track record of being good stewards of shareholders' capital and our partners and so these decisions always lie and not so much what do you think is the best opportunity but the way you are allocating capital.

As Mary has pointed out and I have try to point out, we have a very large CapEx at the existing properties and development initiative going forward and so you have got to way all these factors in. And we start from a standpoint that there is a minimum level of cash that we want to keep and where do we think are the places that we need to allocate capital.

This year alone we have returned almost $300 million to the shareholders in the form of dividends or stock buybacks and we have been doing stock buybacks forever since we have been at Kennedy-Wilson. So it's clearly something that is on our radar screen, it just depends on where we are at in terms of allocating capital to the various opportunities.

[Derek Johnston, Deutsche Bank]

Great. And just getting back to Mitch and the multifamily platform in the U.S. with the recent focus on the Mountain States, how do you feel that will impact the growth trajectory of revenue and NOI?

[William McMorrow, Chairman and Chief Executive Officer]

So I'm going to let now Windisch answer that Derek.

[Matt Windisch, Executive Vice President]

Thanks. So, I would say if you look at the past couple years, as you mentioned, we have purposely shifted the portfolio a bit out of California where we had some great success and produced great returns and shifted some of that capital towards the Mountain States and it's been a couple of reasons.

Number one is affordability and the fact that the rents in those regions are 40% below our California portfolio. The second part is, these are underserved markets with growing populations and we think very vibrant economic growth in front of them.

And if you can see from our results, in particular, this quarter, the Mountain State areas had NOI growth of 9% where the California markets are still very strong, but we are in the low to mid single-digits.

So we think going forward as we continue to focus our efforts on those properties and continue to do our value-add, in those Mountains State properties which we bought relatively recently. We think we can continue to certainly outperform the market and has above market rent growth, particularly in the Mountain State area.

So we think the outlook is very, very strong in the next couple years on the same property side, given the mix of the portfolio.

[William McMorrow, Chairman and Chief Executive Officer]

And, Matt, one thing if I could add to that to Derek, we have learned over the years are surprisingly little differential in rate, borrowing rates depending on these markets and so we are buying two properties in Salt Lake City, one on our found and one that we are exchanging into a Salt Lake and the borrowing rates there are roughly 4.25%, which for 10-year term loans, which is roughly the same that you would pay in a California market.

And I think the other important thing to remember is that the rate differentials that you see in Ireland, particularly Mary, versus what we are borrowing at tyranny United States and so with the 10-year now here in the United States, say touching 320. Mary and her team just put in place a new loan on one of our apartment projects in Ireland there was a seven year term and we borrowed it 270 fixed for 10-years and so the interest only for seven years.

And so we are able to borrow long-term on extremely high quality assets in Ireland, it's up 3%, we are able to borrow below the U.S. government borrowing raised here in the United States and so when you look at where we are allocating capital and how we are looking at these decisions is you know, we really don't like to play the interest rate market.

We like to lock in fixed rate loans but there is a very big differential today between borrowing rates in the United States and here in Europe, but there is really no rate differential at all between borrowing in Salt Lake City and borrowing here in California on apartment projects.

[Derek Johnston, Deutsche Bank]

Excellent point. Thank you. And just lastly for me is in light of rising tenure that you mentioned, what are your thoughts on cap rate trends in your U.S. markets?

[William McMorrow, Chairman and Chief Executive Officer]

Yes. We have very few new assets that we are interested in buying right now at cap rates and there has to be an adjustment period in our opinion on the buy side. We haven’t seen it yet to be fair, but you have to look at this tenure rate I think in terms of historical standards and even if the tenure stabilizes somewhere between where it's at 350, it's almost 300 basis points below the 100 year average for the tenure.

And so even though I know everybody has been sensitized to this rate, these recent rate increases, but any historical standard they are still well below and there is still great ability and the way we do our business. There is great ability to make money for us and our shareholders with these rate levels at or near where is that right now.

[Matt Windisch, Executive Vice President]

And just to add to that too. Our portfolio is obviously 50% Europe, 50% U.S. and so in Europe as was mentioned earlier, the rate differential there is 200 basis points and so really half of our portfolios have seen some interest rate increase the other half hasn't at all.

[William McMorrow, Chairman and Chief Executive Officer]

Yes. I think Matt you are making a really good point. I think the diversity - the high quality nature of our portfolio but the diversity of it geographically at least in our opinion is very, very solid to way to spread a risk for shareholders. So that we are not entirely reliant on any one geographic area to sustain long-term returns.

[Derek Johnston, Deutsche Bank]

Good points. And thank you.

[Operator]

Our next question comes from Craig Bibb with CJS Securities. Please go ahead.

[Michael Hagan, CJS Securities]

Good morning it's actually Michael Hagan dialing in for Craig here. And Mary wanted to ask you a specific question. First of all congrats on your recent promotion.

[Mary Ricks, President and Chief Executive Officer]

Thanks.

[Michael Hagan, CJS Securities]

But specifically we certainly believe that Kennedy-Wilson is an attractive partner for an institutional capital and this $2 billion that we are talking about a fee bearing asset is fantastic start. We are curious how much larger can your assets under management grow call it in a three to five year time range.

[Mary Ricks, President and Chief Executive Officer]

Well thanks for your complement. And we are focused on growing about a $1 billion a year is what we think is an achievable goal and I think we are well on our way to doing that not only with our discretionary funds, obviously we have our U.S. fund that we are going to wrapping up our latest funds.

We are going to be launching what we called KW Europe Fund 2 which is a discretionary fund where we have got some good preliminary interest there and then obviously we have all these separate accounts including this core bucket that we have with the large insurance company.

So yes, I think we are very, very focused there and we don't feel like we need to scale the team, we have got a really high quality team across the globe where we are operating. So I think we are well setup and well positioned with our people and I think reputation and we are doing great and Kennedy-Wilson is a name now that is known across different parts of the world.

And I think it's interesting when you look at our most recent investors obviously access from France and we have had a lot of interest from the Middle East. We always have a big following in the U.S. So as you kind of look how we are spreading our wings if you will around the globe it's super encouraging.

And I think for us it's we need to just keep executing on all of our asset management, on our development plans and keep attracting institutional capital partners that we see the world in the same way. So we are really, really optimistic.

[Michael Hagan, CJS Securities]

Excellent. Thanks, Mary for that color. And actually the other questions we had were gestured. I appreciate your time this morning.

[Mary Ricks, President and Chief Executive Officer]

Thank you.

[William McMorrow, Chairman and Chief Executive Officer]

Thank you.

[Operator]

And this will conclude our question-and-answer session. I would like to turn the conference back over to Bill McMorrow for any closing remarks.

[William McMorrow, Chairman and Chief Executive Officer]

So everybody on the call and obviously those that are not but we have shareholders, we thank you for all your support. We have had a great year-to-date, and we will look forward to talking to you next quarter. Thanks again.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.