Kennedy-Wilson Holdings Inc

NYSE:KW

Earnings Call Transcript 2019-Q3

[Operator]

Good day and welcome to the Kennedy-Wilson Third Quarter 2019 Earnings Call and Webcast. Today’s conference is being recorded. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]

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

[Daven Bhavsar, Vice President, 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 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 the reconciliation of the most directly comparable GAAP financial measure and our third quarter 2019 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, Chief Executive Officer]

Thanks Daven. Good morning, everybody, and thank you for joining us today. We are pleased to report another solid quarter of results, highlighted by continued strong same property results, completion of approximately $775 million in investment transactions and the further growth of our investment management business.

We’re off to an active start in the fourth quarter, including a $300 million preferred equity investment from Eldridge Industries, alongside an increased separate account platform of $1.5 billion in assets.

This morning we’ll discuss our financial and property operating results for the quarter and then update you on the progress we’ve made on our key strategic initiatives as well as review our key highlights, as we celebrate our 10 year anniversary since going public in November 2009.

So starting with our results, for the quarter, GAAP EPS was $0.15 per share, up from $0.09 in Q3 of 2018. Adjusted EBITDA was $143 million in the quarter compared to a $142 million in Q3 of 2018. Both GAAP EPS and adjusted EPS represented a record third quarter for Kennedy-Wilson. Adjusted net income totaled $74 million in the quarter, flat compared to Q3 of 2018.

Our same property portfolio continues to perform very well with same property revenues up 4% and NOI up 5%. Our apartment portfolio continues to drive our same property results. In Q3, we saw robust growth in our same property multifamily platform portfolio in the Pacific Northwest, Mountain States, Southern California, and Dublin, Ireland, which all saw NOI grow by 7% or more.

Our largest investment region, the Pacific Northwest, and in particular, the Greater Seattle area continues to perform well, with occupancies increasing by 1% and same property NOI up 7.1% in Q3. The east side of Seattle in particular continues to see significant growth.

According to CBRE, there is approximately 18 million square feet of office under development in the Greater Seattle area, which 80% is pre-leased, including almost 11 million square feet on the east side, which is the primary Kennedy-Wilson investment market.

Amazon, which recently surpassed 50,000 employees in the broader Seattle region, currently has over 10,000 full-time job openings and is adding over 5 million square feet to its existing 12 million square feet footprint in the Seattle and Bellevue region. Facebook also continues to grow with over 5,000 employees in the region and space for 2,000 more.

There are now more than a 130 companies from around the world that have setup engineering outposts throughout the Seattle market. And so we remain very optimistic that significant new jobs will continue to fuel the growth of this market.

Our second largest region in our portfolio is the Mountain States. which includes Salt Lake, Boise and Reno, which saw same store property revenues increase by 6% and NOI increase by 7% in the quarter. Our thesis here remains intact. Strong population and job growth coupled with affordable cost of living, and a much desired outdoor recreational lifestyle, is drawing residents from expensive coastal cities like San Francisco. Plus, Washington and the Mountain States both benefit from significantly lower state income taxes than California.

The Greater Salt Lake area continues to grow at a robust pace across the board and Utah’s economy continues to be one of the best performing in the country. In September, the unemployment rate fell to 2.7%, the lowest in 12 years and job growth totaled 3%, more than double the national average.

Utah ranks number 2 for job growth and number 1 for private sector job growth in the country. There is almost 3.8 million square feet of office under construction that is expected to be delivered by yearend 2021, 56% of which is pre-leased. Average rents at our Mountain State’s apartments stand at $1,173 dollars, which represents the lowest monthly rate in our global portfolio.

Thus we are confident that there is further upside both from the positive economic activity in this region as well as completion of our value-add initiatives.

Finally, in Ireland, our growing multifamily portfolio continues to perform well. Occupancy has increased by 1.6% to 98%, which resulted in quarterly NOI growth of 7%. Our high-quality rental product and unique amenity package continues to draw demand for rental housing from both local and international residents that are relocating from other parts of Europe and the U.S.

Large U.S. technology companies, such as Google, Facebook, Salesforce and Microsoft, are all looking to expand their presence in Dublin, as well as growth from medical technology, pharma, financial services and IT companies. The market continues to perform very well and Mary will provide some color in just a moment.

Turning to our stabilized commercial portfolio, where our various office investment platforms, through which we added a net 3 assets globally, totaling 1.7 million square feet, same property revenue from our commercial assets was up 4% and NOI up 5%. Our U.S. portfolio saw robust NOI growth of 21% as a result of the burn off of free rent from Q3 of last year.

Additionally, Mary will highlight in a moment the strong leasing momentum in the U.K. post quarter end. Now, I’d like to review our 3 key strategic global initiatives that we believe will be the drivers of our growth in the future.

Number 1, growing our property NOI over the next 3 years. Number 2, growing our investment management and fee business through raising additional fee-bearing capital. And, number 3, executing our capital recycling and asset sale program, where we’re producing outsized returns on our investments and recycling capital into other strategic opportunities.

So, starting with number 1, in the U.S. we continue to focus on completing strategic value-add CapEx projects, which are aimed at growing our NOI organically. In total, our U.S. multifamily team completed another 268 multifamily unit renovations in the quarter, bringing our year-to-date total to approximately 650, with an average return on cost of 22%.

We currently have over 1,000 units we’d like to renovate, finish renovating by end of next year, which will continue to drive our NOI organically. We also continue to make great progress on our development and leasing initiatives, which includes 4,300 market rate and affordable multifamily units, 3 million square feet of commercial properties and one hotel development.

We expect all of our current construction to be stabilized by the end of 2023. And based on current market conditions, we expect these assets to add approximately $110 million of annual NOI, 40% of which is expected to be delivered in the next 2 years. Globally, we expect to invest approximately $200 million of cash by the end of next year across both our CapEx and development initiatives.

In the U.S., we have over 2,000 units under development through our vintage housing joint venture, which is engaged in the management and development of senior and affordable housing. We expect to stabilize almost 600 units in the fourth quarter and another 1,500 by the end of 2021. These projects will add $6 million in estimated annual NOI.

We remain on track to grow this joint venture to 10,000 units over the next 3 years, with minimal cash required from KW. 53% of our current development pipeline is in Dublin, where we were able to build cap rates that are 2% higher than where we could buy similar assets. Additionally, the permanent financing market in Ireland allows borrowing rates that are 1.5% to 2% lower than those in the United States.

With that, I’d like to hand the call over to Mary Ricks to discuss greater details.

[Mary Ricks, President]

Thanks, Bill. Q3 was a solid leasing quarter in Europe, across the U.K., Ireland and Spain. The European portfolio generates $205 million or 51% of KW’s global estimated annual NOI. Our stabilized occupancy remains strong with the commercial portfolio at 96% and our apartment portfolio at 98% occupied at the end of Q3. We have good visibility on growing our NOI through a combination of positive leasing and asset management momentum in process and expected to deliver in Q4.

Longer term, our strong development pipeline is expected to add $67 million of the $110 million in NOI expected to be delivered by 2023 from our global development and unstabilized portfolio. Focusing on what we’ve delivered in the quarter, leasing transactions have been key. We’ve completed 40 lease transactions across 333,000 square feet, up an impressive 12% over previous rent and adding term certain of over 7 years.

New leases have been the main driver followed by renewals and rent review activity. This adds to the fantastic work the asset management team delivered in the first half of the year, bringing our year-to-date total to 112 lease transactions which have added incremental income of over $5 million.

Q3 had a strong activity in our UK industrial portfolio at Orion Business Park, a 203,000 square feet industrial asset in Ipswich. We significantly increased rents by expanding an existing regional logistics tenant into the adjoining space, now leasing the entire property from us. The new lease grows the rental income by almost 30% and is on a 19-year term certain. At our industrial asset in Swindon, we delivered 30% rent review increase and still have 10 years term certain on the lease. This is our first 5-year rent review as part of a successful asset management story where our yield on cost is now 16%.

Now turning to UK office at Towers Business Park which is a 289,000 square feet campus in Manchester, we signed a new 10-year lease with St. Peter Group, at £24 per foot, a 33% increase in rent from the previous tenant. The occupancy at Towers remains high as 96%, illustrating the unique offering of the business park which continues to benefit from blue-chip UK and international industry leaders. Our asset management program has delivered solid rental growth across this asset of 15% since acquisition.

The UK investment market hit 13 billion in Q3 of 2019 which is showing its strength, which is the strongest quarter of the year. Healthy occupier dynamics in central London office continued in Q3 with absorption increasing 11% to 3.4 million square feet, rising above the 10-year quarterly average.

Tenant demand in the Victoria submarket continues to be strong with vacancy at only 3.2%, the lowest of any London suburb other than Southbank submarket, which has a vacancy of 2.2% and where our Friars Bridge Court asset is located. Our leasing momentum has continued into October and we’re expecting a very strong Q4 for the UK. At 111 Buckingham Palace Road, our largest Central London UK office asset which is located in Victoria, we’ve recently completed a lease renewal with Telegraph and Shop Direct ensuring over 11 years to expiry on 93,000 square feet of space. We are also in discussion to lease out the remaining vacant space on the fourth floor at attractive rents and upon completion 111 BPR will be a 100% occupied.

The office demand in Ireland continues to be strong as seen at The Chase, our 173,000 square foot prime suburban South Dublin office asset. Our thesis of prime South Dublin office is trading at an excessive discount on both rents and value to prime Dublin continues to play out. We bought The Chase with 30% vacancy and at an average rent of £19 – €19 per foot back in 2016. Following a redesign of the reception area and a re-launch of the building, we leased the majority of the vacant space to Google, bringing the average building rent to €23 per foot. The building is a 100% occupied and rents continue to rise.

In Q3 we completed a significant renewal and rent review at about €30 per foot. Increasing the average rent per square foot in the building to €26 or 37% above rents and acquisition and creating good evidence for further rent increases in 2020.

Also post quarter end we sold the Portmarnock Hotel & Golf Links for €49 million, a luxury resort hotel and 18-hole championship links golf course. After acquiring this unsigned hotel in 2014, we comprehensively refurbished the 134 guest rooms, improving the golf offering, adding an award winning spa and fully upgrading the conferencing and banqueting facilities. During our ownership the ADR increased by 93% with occupancy of 75% at sale, all contributing to a 74% increase in NOI and helping us achieve a significant return on investment at this asset.

Now looking at the main contributors to NOI growth from near-term development to 2021 at Clancy Quay Phase 3 totaling 266 units, making Clancy Quay, the largest residential project in Ireland with 865 units once complete. We are making great progress and are on track to be on time and budget – on budget, to bring this development to the market by the end of Q2 2020. At 10 Hanover Quay, our unique 69,000 square foot industrial office conversion, which is directly adjacent to our Capital Dock campus, the demolition work is completed and construction started in the quarter.

We’re expecting to reach practical completion in early 2021 and it has seen good early leasing interest. And at our 20 Kildare Street, 64,000 square foot office development near St. Stephen’s Green and the Shelbourne, the demolition work is almost complete and we’re set to begin construction by the end of this year. Both 10 Hanover Quay and 20 Kildare have started marketing to potential tenants with very good leasing prospects.

We have also submitted our planning applications for Leisureplex, our mixed-use resi and commercial assets, Phase 1 of the Grange which includes 287 resi units and the 390,000 square foot commercial component of Coopers Cross. Additionally in August, we secured full planning for 458 units for the residential component of Coopers Cross. Thus we continue to make great progress across our European development.

Our second key global initiative is growing our investment management and fee business in the U.S. and Europe, we continue to raise fee bearing capital both through our discretionary commingled funds and our separate account businesses. We had a productive quarter with our fee bearing capital growing to $2.5 billion at quarter end, up 15% in 2019.

Post quarter end, we announced an upsizing of our platform with security benefit to $1.5 billion of assets, which when completely invested, we expect will total in excess of $400 million of fee bearing capital. This capital is being deployed in a manner where KW is able to grow its recurring fee stream and ultimately generate mid-teen leverage return – leverage yields on our investment. In addition, we currently have another $400 million of new global fee bearing capital in our pipeline and are expecting to further grow our investment management business in the fourth quarter.

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

[William McMorrow, Chief Executive Officer]

Thanks very much, Mary. So turning to our Capital Recycling and Asset Sale program. We saw a meaningful pickup in activity during the quarter. On the acquisition front, we completed $562 million of new investments, which our share was 15%. Year-to-date, we have completed $990 million of acquisitions of which our share is 20%.

The largest acquisition in the quarter was Sunset North, a 464,000 square foot office campus in Bellevue, Washington that we acquired for $227 million. This was the first asset we purchased in our new joint venture platform with security benefit that is targeting high quality investment opportunities in the Western U.S.

In Q3, we also sold $211 million of assets of which our share was 57%. We expect to recycle a significant portion of the cash proceeds from these sales into a tax-deferred 1031 exchange into a high quality office campus in Marin County, San Francisco suburb. This purchase which is expected to close this afternoon will generate almost $8 million of NOI to KW versus the $5 million of annual NOI produced by the 2 apartment assets that we sold in Q3. Year-to-date, we have sold $873 million of assets of which our share was 39%.

Looking ahead, we expect a very active Q4 to close out the year. We are currently under contract on over $1.1 billion in investment transactions including almost $700 million of acquisitions of which we expect to own approximately 46% and $455 million of dispositions of which we own 23%. Additionally, we have a number of other dispositions that we are currently – that we currently have on market as well as several other acquisitions that we are evaluating.

Turning into the capital markets, as I mentioned, post quarter end we announced a $300 million investment by Eldridge Industries, which came in the form of a convertible preferred stock. We intend to use these proceeds to pay off our line of credit and term loan in full as well as to fund our development pipeline. The transaction helps to further strengthen our balance sheet through deleveraging and providing us more liquidity as we head into 2020.

Finally, we are in the midst of reaching a historical milestone here at Kennedy-Wilson. Next month we celebrate our 10th year as a public company and I’d like to take a quick moment to pause and reflect on the progress we’ve made. Since going public 10 years ago, I’m pleased with how we’ve been able to substantially grow all parts of our business. We’ve completed $34 billion of gross investment transactions during that period including $12 billion of dispositions.

Assets bought and sold in the last decade have generated a weighted average gross IRR of 26% to Kennedy-Wilson. Our NOI has grown from $55 million to $400 million, which has supported our dividend growth of 375%. Back in 2009, we had an ownership interest in about 10,000 multifamily units and today we’re closing in on 30,000 units globally. Our market cap has grown from $300 million to approximately $3.6 billion after including the Eldridge transaction.

Our adjusted EBITDA has grown from $37 million to approximately $650 million on a trailing 12-month basis. In 2009, we had no presence in Europe and now we have approximately 100 employees primarily in Dublin and London and a very high quality European portfolio generating over $200 million in annual NOI.

I’d like to take a moment to thank all of our KW team members for their hard work in helping us achieve these fantastic results. We’re proud of reaching these historic milestones and are grateful to our global team and continues to work together to help build a one of a kind global real estate company. I’d also like to take a moment to thank our shareholders and our other major capital providers, who without this we would never have achieved these results.

And so, as we head into what will be a very active fourth quarter, I’m pleased with the way our business is positioned today and we are very optimistic for our continued growth prospects in 2020 and beyond.

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

[Operator]

Thank you. And we will now begin the question-and-answer session. [Operator Instructions] All right, and our first question comes from Tony Paolone with JP Morgan. Please go ahead, sir.

[Anthony Paolone, JP Morgan]

Okay, thank you. My first question relates to the deal activity that’s picking up into the fourth quarter that you mentioned. Is it just a matter of timing? Or are you seeing something different out there that has changed in the market or areas that you like better for some reason or another?

[William McMorrow, Chief Executive Officer]

It’s really just a function of timing, Tony. And I think I said in the last quarterly call that this year – it varies from year-to-year – but this year particularly a lot of the activity that we have really underway in the second quarter was really back-weighted to the fourth quarter in terms of closing. And so, it’s the timing issue. But I would say that the basic markets that we’re operating in that, Mary and I just went through, are all extremely sound right now.

[Anthony Paolone, JP Morgan]

Okay. And you talked about the strength in some of the Mountain States earlier in your commentary. Are there still opportunities to do deals there or is that getting tougher given the relatively smaller size of those markets, and some of which seem to have been discovered by other institutional capital at this point?

[William McMorrow, Chief Executive Officer]

Yeah, I mean, it’s – over the 30-plus-years that Mary and I’ve been together here, we always tend to find opportunities because of our sourcing capability. And I think the one thing I should have mentioned in the script was that, in Boise for example, we have now almost 1,500 units under construction. And so, it’s the same dynamic though there that it is in Ireland. We’re able to build those properties to cap rates. Those are considerably higher than what we could actually buyout.

But we will always find opportunities. I said on the prior call I think in the markets that we’re in today, globally, you have to look harder to find your opportunities. And you have to put everything under – not that you didn’t before, but it has to be under very, very great scrutiny, given what has happened with cap rates globally.

[Anthony Paolone, JP Morgan]

Okay. And then, maybe a question for Mary, can you talk a bit more about what you’re seeing on the ground in the UK, as this activity level seems to have picked up a bit? Is it pent up? Do decision makers feel a little bit more comfortable moving forward with decisions or what do you think is happening there?

[Mary Ricks, President]

I mean, we’ve seen actually from, just after the referendum vote in June 2016, we’ve seen occupiers continue to make decisions there. And the sort of concern of every bank leaving the city and things like that in London, that just hasn’t materialized. I mean, you have seen a lot of banks have other EMEA headquarters, which Ireland has been the beneficiary of that obviously. They won I think 86 announcements of companies needing to sort of have another headquarter, if you will.

But decision-makers in London with companies, they continue to want to be in London. It’s a global city. People want to live there. London just remains really, really strong. And we’ve seen it actually pick up a little bit in Q3. In terms of investment volumes, you still have a mass amount of capital looking to invest in and around the UK. So we feel good about the long-term prospects.

[William McMorrow, Chief Executive Officer]

Mary, I too, I mean, you might correct me here, but there are 550,000 financial services jobs in the United Kingdom. And at the beginning of Brexit there was this, I would call, hysteria that that was going to just shrink dramatically. The last time I looked, the job relocation or dislocation was less than 10,000 people. So what always tends to happen in these sets of circumstances is that there tends to be somewhat of an overreaction to what I call headline news.

[Mary Ricks, President]

Yeah.

[William McMorrow, Chief Executive Officer]

But the fundamental fact is that you’ve got 65 million people living in the United Kingdom. And, it continues to be one of the major financial hubs in the world. And as I said too, Mary, on the prior call, when you think about the freedom of capital flows, it still is one of those places in the world where everybody feels very comfortable investing capital, because there’s a complete freedom of movement of capital.

[Anthony Paolone, JP Morgan]

All right. And then last question from me, if I look in your supplemental on Page 24, the schedule unstabilized assets, you expect $35.8 million of NOI. Any sense as to how much of that is basically done that has been pre-leased at this point?

[William McMorrow, Chief Executive Officer]

Tony, I’m going to let Matt answer that question.

[Matt Windisch, Executive Vice President]

Yeah. There’s – roughly 50% of that is leased and we’re just waiting for the tenants to take occupancy. The balance of it will require additional leasing activity.

[Anthony Paolone, JP Morgan]

Okay. Thank you.

[Operator]

Thank you. Our next question comes from Mitch Germain with JMP Group. Please go ahead, sir.

[Mitchell Germain, JMP Group LLC]

Good morning. I know that you’ve got commingled fund and now you’ve got security benefit and you buy stuff on balance sheet. So how do you work through various agreements with regards to what pocket of capital you use for a specific investment?

[Mary Ricks, President]

Hey, Mitch. It’s pretty clear, because of these different platforms in our commingled funds that there’s a different return parameter for each of those, and just in terms of timing of holding the asset. So it becomes actually really, really clear how that – how – when an asset comes in the door and there’s an opportunity where that should go.

[Mitchell Germain, JMP Group LLC]

Besides timing, is there also a risk element that’s included in terms of people is willing to invest?

[Mary Ricks, President]

I mean, yeah, our funds have a limit on, for example, what kind of development risk they can take. So there’s certain limitation and certain guidelines as to the investment guidelines. So I would say, yes.

[Mitchell Germain, JMP Group LLC]

Development schedule, it seems like a couple of the stabilization needs pushed [Technical Difficulty] anything that we should know about there?

[Matt Windisch, Executive Vice President]

Yeah, Mitch, its Matt. There’s nothing specifically that’s an issue. It’s just timing and we thought some stuff was going to get done in Q4 of 2019. And it looks like it’s going to be Q1 of 2020. So nothing beyond just a couple of months delay in getting things stabilized and completed.

[Mitchell Germain, JMP Group LLC]

Okay. Lastly, Bill, I’d love to get your thoughts on the Eldridge investment, why structure it in the – as the convertible preferred? And kind of what are your thoughts around bringing them into the fold as an investor that type of capital?

[William McMorrow, Chief Executive Officer]

Well, I would say, first of all, we’re very, I would say, honored to have them as the major shareholder once they convert. And I think it really is a testament to the platform when you think about some of our major shareholders like Eldridge and Fairfax, which are, I would call them, both value investors. And so in its – I’ve always felt that if you can have a shareholder upsize like that where you actually are aligned in terms of the things you’re doing on the investing side just like we did with Fairfax and when I think back to the beginning of time with Fairfax, the first transaction we did with them was in 2011.

[Matt Windisch, Executive Vice President]

2010.

[William McMorrow, Chief Executive Officer]

2010. And so we did a $100 million plus convertible with them. And alongside that they gave us $250 million in a separate account. That investment grew to almost 13 million shares of stock which today, I guess, are valued at close to $300 million. But the separate accounts that we have with them grew over time to almost $2 billion. And so when you can have that kind of alignment where you’ve got a long-term shareholder that also is willing to invest capital alongside with you that is helping you earn returns both on fees and on the investment returns. Then you have perfect alignment. And that’s how we looked at the Eldridge transaction.

[Mitchell Germain, JMP Group LLC]

Thank you.

[Operator]

Thank you. [Operator Instructions] We’ll now go to Sheila McGrath with Evercore. Please go ahead.

[Sheila McGrath, Evercore Inc.]

Yes. Good morning. On the security benefit life transaction, just wondered what types of assets that venture will target? And bigger picture, are you seeing life companies or I guess that’s an annuity company, generally looking to target more capital to commercial real estate given where bond yields are right now?

[William McMorrow, Chief Executive Officer]

Yeah, Matt and I’ll both answer this question, Sheila. Good morning. The – we’ve said in prior calls that and I don’t know that it’s coincidental or not, but when you think about our biggest platforms right now in our separate accounts with AXA in Europe that Mary’s team put together that is very large platform with Fairfax, with now security benefits. And some of the lending activity that we’ve previously announced with MetLife, they all have – there’s a common threat and it’s a common threat for, I guess, all industries globally, but particularly the insurance companies. They have a need to generate yield. So it has been a great source of capital for us.

And we started kind of down this road about a year-ago, it wasn’t more than 15 months ago, and so it has been a really, really great outcome for the company to create these relationships. But in terms of what we’re going to be doing with the security benefit, I’d like Matt to address that.

[Matt Windisch, Executive Vice President]

Thanks, Bill. So obviously we bought Sunset North in Q3. So that’s a high quality suburban office asset with a good yield going in, a core plus type property. And we’re evaluating several other acquisitions with them now, including a multifamily portfolio that we have under contract. And so I think primarily it’ll be office and multifamily in the Western U.S., but with flexibility to do other product types if it makes sense from a return and a risk perspective.

[Sheila McGrath, Evercore Inc.]

Okay. Great. And then just on that fee bearing capital theme, what’s your outlook for adding additional capital to the platform? And you did decrease G&A, exiting the research business. Is there a point at which you think that the fee streams from the third-party capital business will cover a meaningful amount of the corporate G&A?

[William McMorrow, Chief Executive Officer]

Yeah, very good question. Yeah. I mean, as we said in the body of the script, when you add up those numbers, we hope, and it’s no guarantee, but we hope to close the year around $3 billion of fee bearing capital, which should be up by 35% from the beginning of the year. It’s becoming a more meaningful part of our income stream. And you’re correct, what – 2 of our goals this year on the expense side was to basically reduce our G&A, and obviously, reduce our personnel costs as we have, and so both of those have had been very positive.

I would also say that we don’t expect to add any significant overhead. And then you’re talking minimal amounts of personnel needs. So you’re not going to see really either of those categories grow as we continue to grow our fee bearing capital base.

[Sheila McGrath, Evercore Inc.]

Okay. And last question. Bill, you mentioned an acquisition in Marin County with $8 million of NOI. What kind of capital was that – what kind of asset? And how do in place rents compared to market?

[William McMorrow, Chief Executive Officer]

Yeah. It’s – Mary and I will both answer that question. But I think when you think about the strategy, as we’ve talked about on prior calls. We’ve been trying to upgrade the quality of our income streams. By that I mean younger assets, newer assets and in many cases at higher cap rates. And so this was one where we sold 2 older apartment buildings that were both owned in joint ventures 50-50. But the age of those assets was probably around 30, 35 years of age. But we sold them at significant profits. We took all of those gains, put it into an exchange account and bought what’s called Hamilton Landing that hopefully is going to close this afternoon.

We sold those that had an NOI of around $5 million and at a cap rate of, say, 4.5%, when you fully load in taxes, 4.5% to 5%. We bought Hamilton Landing at a cap rate of 7%. And we expect that cap rate to actually grow up into the 7.5% to 8% range over time.

To answer the last part of it, I mean, Hamilton Landing is a business park that has 7 separate buildings and a house both I would call mid-sized tenants, but it has some very high-quality tenants in it too. Fortune 500 companies are based in this business park.

So it’s – and it’s – to, Matt, it’s one of those irreplaceable pieces of land that you could never get entitled today. You couldn’t replicate this asset. So there are very, very high barriers to entry. Whereas the two apartment houses that we sold, as I said, were almost 35-years-old and probably not as high a quality in terms of barrier to entry.

[Matt Windisch, Executive Vice President]

I think just the last thing I’d add is from a rent perspective, if you look at kind of the value proposition here is you’ve got a property where the rents are 50% below rents in San Francisco and provide a really great campus environment for tenants. And it’s right on the bay. So we’re very excited about closing this acquisition later today.

[Sheila McGrath, Evercore Inc.]

Okay, great. Thank you.

[Operator]

Thank you. And our final question will come from Tom Hennessy with Deutsche Bank. Please go ahead, sir.

[Tom Hennessy, Deutsche Bank]

Good morning. So my first question, I guess, in light of the continued strong growth on multifamily, I mean, both from the revenue side and NOI, but I mean, the hot topic this quarter on West Coast residential has been the new California rent control law. Could you perhaps quantify the impact on next year’s NOI and just generally how you view it?

[Matt Windisch, Executive Vice President]

Sure. Yeah, so to give you a sense of background, California apartments represent just a little over 10% of the NOI of the company. So it’s meaningful, but obviously, a minority of the overall NOI. We already have 40% of those apartments that are undergoing some form of rent control and have been for many years. But if you look at this particular bill that was passed, it’s really – it’s a CPI plus 5% maximum increase. So for us, we expected to have a very minimal impact in our portfolio.

Additionally, vacancy decontrol was still kept in place. And if you look at our portfolio, we generally turn our units 40% to 50% a year. So to the extent, we’re only able to raise rents a certain amount. Once the tenant leaves, we can move those rents back to market. So all in all, we expect a very minimal impact on our portfolio next year.

[Tom Hennessy, Deutsche Bank]

Okay, great. That’s really helpful. And then, I guess, over to the UK, I mean, between the continued Brexit chatter and, I guess, the WeWork fallout, maybe difficult to distinguish between the two. But I mean generally, did you notice any change in leasing impact or any tone from potential tenants after the WeWork fallout and then, generally, on shared space? How much of the total portfolio would you be comfortable leasing up? And does that view differ between the U.S. and UK?

[Mary Ricks, President]

I mean, we haven’t seen any fallout in the UK in terms of what’s going on with WeWork. So we’re not saying that there’s any impact. I mean, I think WeWork has done very well in London, that’s one of their sort of most profitable, best performing locations, with a lot of enterprise type tenants. So we don’t see any issue there. And I don’t think that we see a difference as well in the U.S. markets that we’re in. So we’re not really seeing any issues there.

[William McMorrow, Chief Executive Officer]

Right and I think, Mary too, when you think about that, all the Brexit noise is now going on now for 3 years, we did 112 leases so far this year.

[Mary Ricks, President]

Yeah, and Q4 is going to be a record in the UK actually.

[William McMorrow, Chief Executive Officer]

Right.

[Mary Ricks, President]

There’s a lot more to come.

[William McMorrow, Chief Executive Officer]

And so, I think that what gets varied in all of these headlines, Tom, is that London still continues to be one of the top investment markets in the world for new investment and the leasing activity. And I think as Mary pointed out too, the leases that her team has been doing are actually significantly above what prior rents were.

And so, the Brexit takes a lot of headlines, but the reality is that the property level, all of our properties are performing extremely well.

[Tom Hennessy, Deutsche Bank]

Okay, great. Thanks.

[William McMorrow, Chief Executive Officer]

Thanks.

[Operator]

Thank you. And this concludes our question-and-answer session. I would like to turn the conference back over to Bill.

[William McMorrow, Chief Executive Officer]

So thanks, everybody, for listening. And as I said in my remarks, we appreciate everybody’s support. And we’re looking forward to a great close out of 2019. Thank you.

[Operator]

And the conference has now concluded. Thank you for attending today’s presentation.