Kennedy-Wilson Holdings Inc

NYSE:KW

Earnings Call Transcript 2020-Q3

[Operator]

Good morning and welcome to the Kennedy Wilson Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn 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, Kennedy Wilson; Matt Windisch, Executive Vice President of Kennedy Wilson; and Justin Enbody, Chief Financial Officer of Kennedy Wilson.

Today's call will be webcast live and will be archived for replay. The replay will be available by phone for 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 third quarter 2020 earnings release, which is posted on the Investor Relations section of our website. Statements made during this call may include forward-looking statements. Actual results may materially differ from forward-looking information discussed on this call, due to a number of risks, uncertainties and other factors indicated in reports and filings with the Securities and Exchange Commission. I would now like to turn the call over to our Chairman and CEO, Bill McMorrow.

[William J. McMorrow, executive]

Daven, thanks very much and good morning, everybody, and thank you for joining us today. We hope everybody that's on this call, that you and your families are healthy and you continue to do well in this period of time we're in. I'd like to start by touching on the key highlights for the quarter.

In Q3, we continued to successfully grow our investment management business by deploying capital in our debt platform and we made great progress in our development and lease-up portfolio, positively growing our NOI. We also saw continued high occupancy and strong rent collection across our largely suburban multifamily and office assets, which together comprise 81% of our stabilized portfolio. Across our investment markets, real estate volumes remained low in the third quarter, similar to what we saw in Q2. Q3 sales transactions in our markets fell between 40% to 60%.

As a result of these changing market dynamics, we temporarily paused our asset sale program in Q2 and Q3. However, as seen by the disposition of Baggot Plaza, generated cash of $165 million and a gain of $85 million to Kennedy Wilson; and the $198 million acquisition of an 888-unit Mountain State portfolio, both of which were announced last Friday, we will have higher levels of transactions in the fourth quarter, where we expect to complete the majority of our 2020 asset sales. I'll discuss both of these transactions in greater detail in just a moment.

So looking at our financial results in Q3, we produced adjusted EBITDA of $76 million and adjusted net income of $27 million. For the year, we produced adjusted EBITDA of $261 million and adjusted net income of $84 million. The slower transaction market of course impacted our results with lower gains on the sale in the quarter, which we expect to make up in the fourth quarter.

Now I'd like to update you on our balance sheet and liquidity. We continue to maintain a strong liquidity position with $793 million in cash and $300 million of availability on our line of credit at quarter end. We currently have a total of $4 billion in discretionary purchasing power across Kennedy Wilson in our discretionary funds. We also have various strategic partners that remain well positioned with ample liquidity and a strong interest in partnering with Kennedy Wilson.

Our debt maturity profile remains very favorable, with only $22 million maturing in Q4 and $158 million maturing next year. All of these maturities through 2021 are non-recourse, property-level financings, which we anticipate refinancing. Post quarter end via a tender offer, we successfully retired $168 million of the KWE unsecured bonds maturing in 2022, carrying a coupon of 3.95%. We utilized existing cash and $129 million from 2 new property-level secured financings, each with a rate of 3% and a final maturity date of 2025. This tender helped improve our maturity schedule and reduce our cost of debt. And so with the liquidity on hand and the limited debt maturities through next year, that keeps us in a very strong financial position. As a result, our Board of Directors approved yesterday expanding our existing $250 million share repurchase plan to $500 million. Since the $250 million share repurchase plan was authorized on March 20, 2018, the company has purchased 12.9 -- repurchased 12.9 million shares at a weighted average price of $18.04, with only $18 million remaining under the initial plan as of 9/30.

Our track record of investing in debt coupled with the strong institutional demand for yield resulted in the launch of our $2 billion debt platform in May. The platform is targeting first mortgage loans secured by high-quality real estate in the Western United States, Ireland and the United Kingdom. In the quarter, we completed loan investments of $335 million, which brings our total loan platform to $750 million in investments. Kennedy Wilson has a 12% ownership interest in this portfolio. The pipeline for future debt investment opportunities is extremely robust, with $180 million in origination opportunities that we have signed term sheets on and many more deals that we're currently evaluating. Thus our loan platform in a very short period of time is on track to hit approximately $1 billion in the near term.

As a result, we added $300 million to our fee-bearing capital, representing a growth of 9% from Q2 and 27% thus far in 2020. This is now up 111% since the beginning of 2018. Given the additional capacity in our debt platform with Fairfax, our real estate and debt platforms with Security Benefit, our multifamily joint venture in Ireland with AXA and our ongoing fundraising efforts in Europe, we have approximately $2 billion of fee-bearing capital in our pipeline to add to our existing $3.9 billion in fee-bearing capital over the next 2 years.

Now I'd like to turn the call over to our President, Mary Ricks, to discuss our rent collections and our multifamily and office portfolio. Mary?

[Mary L. Ricks, executive]

Thanks, Bill. Before I delve into our strong rent collections, I'd like to update you on the Shelbourne Hotel. I reported last quarter that our iconic Shelbourne Hotel reopened at the end of Q2. This spacious, 5-star, 265-room hotel with over 240,000 square feet, better facilitates social distancing than competing hotels and we've seen that benefit come through since reopening.

I'm pleased to report that the Shelbourne's market share is outperforming its direct competitor set and has been profitable for Q3, a big achievement since closing its doors on the 20th of March. Post quarter end, Ireland has gone back into a level 5 lockdown until early December, adding further restrictions to the hotel's operations. Nevertheless, we have a good pipeline of business for the permitted services and subject to further restrictions, December looks promising. The hotel has successfully reoriented itself to more domestic business and there remains a solid book of business for 2021.

On to the rent collections. I'm happy to report that we continue to see strong level of collections across our portfolio. This speaks to the quality of our portfolio and the intensive asset management we engage across the board. Our 2 largest asset classes globally, multifamily and office, account for 86% of our Q3 billed rents. We collected 97% of our rents across these 2 asset classes in Q3, maintaining the strong collection levels we saw in Q2.

Suburban assets account for 89% of our multifamily NOI. Average monthly rents in our global portfolio were $1,678, and occupancy remained solid during the quarter at 94.4% compared to 94.5% as of Q2. In the U.S., we have strategically shifted our apartment portfolio over the past few years, out of areas such as Northern California, where we own now only 3 market rate assets, 2 of which are suburban, and expanded significantly in the Mountain States and the Pacific Northwest, where we saw an opportunity to materially grow our NOI. This has resulted in having a U.S. apartment portfolio that is 91% suburban, with the Mountain States and the Pacific Northwest as our top 2 regions.

States such as Idaho, Nevada, Utah and Washington have been some of the fastest-growing states over the last few years. Our Mountain States portfolio in particular had a strong quarter, with same-property revenue up 4% and NOI up 5.6% in Q3, as these communities continue to benefit from an influx of new renters who seek a lower cost of living and lower taxes. In total, our U.S. market rate portfolio saw same-property NOIs remain flat and our vintage affordable portfolio saw NOI growth of 2.5% in the quarter.

Not only were our same-property metrics strong given the current market, but these results significantly outperformed our multifamily peers, who, on average, saw same-property NOI decrease by over 5%. In Dublin, our multifamily portfolio also continues to perform well for us, with occupancy at 93% at the end of Q3, which is in line with Q2. Rent collections have been very strong at over 99% in Q2 and Q3, a trend we expect to see continue in Q4. Both virtual leasing and signing is now active across the entire portfolio and we are now continuing the rollout of a resident app across the entire portfolio and expect to have this complete by the first half of 2021.

We remain very strong believers in the long-term prospects of Irish multifamily fundamentals, supported by a young and growing population and a structural shortage of apartments. Also, large multinational companies are committed to growing in Dublin and choosing Dublin as their European headquarters, as seen by recent announcements by companies such as Amazon, Indeed and Bytedance, who are looking to expand their headcount in the area. Less than 10% of the Irish population live in apartments versus an average for EU countries of more than 40%, which bodes well for sustained demand for our PRS product. Our Irish portfolio continues to draw residents who are looking to upgrade their lifestyle with our high amenity offering, which also allows for a better work-from-home environment.

Now turning to our global office portfolio. Occupancy remained stable at 94.5% at the end of Q3 compared to 95% at the end of Q2. An attractive weighted average lease term of 7.7 years provides secure income from a roster of high-quality credit tenants. Our top 20 global tenants account for 64% of our office rent roll and include high-quality companies like Costco, Microsoft, KPMG, State Street, Indeed and the U.K. and Italian governments, to name a few.

For the quarter, we collected 96% of our office rents. Looking ahead, one of the attractive features of European lease structures is that a majority of our office tenants pay their rents quarterly in advance. Thus, we have a head start on our Q4 office rents for our European tenants and have already collected over 97% of billed office rents. Our office portfolio of mostly low- and mid-rise suburban properties is competitively positioned to meet the changing needs of what companies are looking for in a post-COVID world. It is worth noting that 98% of our office NOI is generated from either low- or mid-rise buildings and 75% of the NOI is generated from buildings that are either occupied predominantly by a single tenant or in an office park. Benefits include lower density space, shorter commutes, more space control, a move towards the hub-and-spoke and rents that are substantial discounts to the local CBD market while avoiding COVID-related logistical issues faced by high-rise buildings.

Globally, we had a strong leasing activity, completing new leases and lease extensions across 364,000 commercial square feet in Q3 with a WALT of 6.1 years, which brings our total to 1.8 million square feet of commercial leasing in 2020. Over the last 2 months, we have seen an uptick in inquiries for our assets on the outskirts of London and in business park locations. We are also seeing a handful of expansion requirements from the technology sector, where tenants are looking to upgrade their space. The pipeline for lease transactions remains strong, with another 478,000 square feet in [ lease-up ]. We are working hard to complete these lease transactions to give us a strong momentum for 2021. And with that, I'd like to turn the call back over to Bill.

[William J. McMorrow, executive]

Mary, thanks very much. Now I'd like to update all of you on our development projects and our leasing initiatives, which are currently expected to be completed by 2023 and include 4,500 multifamily units, 2.8 million commercial square feet and 1 hotel. Many of our projects are 50-50 joint ventures with strategic partners. And in total, we have a 59% ownership interest in our development and lease-up portfolio. We have continued to make great progress on our construction projects and lease-up initiatives throughout the entire year.

In Q3, we completed the development at Stockley Park, a 54,000 square foot suburban office asset in the United Kingdom. We also completed the first phase of a development called 38° North. That first phase is 120 units located in Santa Rosa, leasing up very quickly with almost 60% of the units leased in 3 months. We're under contract to acquire 11 acres adjacent to this property, where we would add an additional 172 units, bringing the 38° North community to a total of 292 units when completed. We also finished construction and lease-up of Rosewood, a 66-unit multifamily property in Boise, Idaho, which is now 100% occupied after 3 months of leasing, well ahead of our schedule, rents above our pro forma. These 66 units were added to an existing stabilized community and in total, Rosewood now totals 234 units.

Finally, our Irish multifamily JV with AXA continues to perform strongly. Lease-up at Clancy Quay Phase III is performing ahead of expectations. We began leasing this final phase in the third quarter. And very quickly, we leased 20% of the units by the end of the quarter. That number is now at 35%, and at rents ahead of our business plan. We are seeing strong interest in our institutional quality assets, offering plenty of outdoor space, a variety of amenities and professional on-site management. At 865 units when complete, Clancy Quay is the largest multifamily community in Ireland, with a stabilized yield on cost of 7.5%. At The Grange, we are on track to add 287 new units by 2023 as part of our Phase I development. This will grow The Grange multifamily community to 561 units. During the quarter, we successfully signed the main contract to begin construction works and successfully put in place attractive construction financing.

We're on track to grow the AXA joint venture from approximately 1,200 units to 3,300 units by 2023, including the sites that are under development. Looking ahead to our developments that are expected to complete next year. In Dublin, we are currently on track to finish the construction of our 2 active office projects, Hanover Quay and Kildare, which combined total 133,000 square feet. In the U.S., we are on track to deliver The Clara, a 277-unit multifamily property in Boise, Idaho. We've already completed the first phase of 45 units, which is now 100% leased. [ In total ], our development and lease-up portfolio is currently expected to add over $100 million of estimated annual NOI to KW once completed.

As mentioned at the start of the call, we're seeing transactional activity pick up in the fourth quarter. Post quarter end, as I mentioned, we acquired 3 multifamily properties totaling 880 units for $198 million. We acquired this portfolio off-market and from a seller that we had previously done business. Two of these properties are located in Colorado, suburban Denver and Colorado Springs, and one in Tempe, Arizona. In total, we have a 40% ownership interest in this portfolio, which grows our Mountain State multifamily portfolio to 9,400 units, including units under development.

On the disposition side, post quarter, as I mentioned, we sold our first significant development in Ireland, Baggot Plaza, an office property in Dublin. The sale was completed at a 4% cap rate, generating $165 million of cash to KW. The Baggot Plaza story represents the full life cycle and team approach at KW. This asset was originally acquired as part of a larger nonperforming loan portfolio in 2013. As part of a loan-to-own strategy, we participated in various parts of the capital structure, ultimately taking ownership of the asset. At the time, the asset was functionally obsolete. Our Irish development team oversaw an extensive redevelopment of this asset, taking it down to the frame, and also creating an additional 38,000 square feet, added to the existing 92,000 square feet.

On completion of the redevelopment, our asset management team delivered a 25-year lease through the Bank of Ireland. The sale of this unlevered asset generated cash of 125 -- $165 million and a gain of $85 million. The transaction supports our view that we've talked about many times on this call, that as a result of interest rates globally remaining low for an extended period of time, combined for the hunt for yield by institutional capital, we continue to anticipate a compression in cap rates in the type of assets we own.

And finally, in October, we sold our interest in our property management and brokerage business,

Kennedy-Wilson Properties. This sale reduced our overhead and compensation for KW by $13 million annually. Combined with the sale of Meyers Research in 2018, these 2 transactions will have reduced our annual cost by $30 million and help simplify our business into 2 core businesses: Our high-quality real estate portfolio; and our growing investment management business, both of which are seeing significant growth.

It is in our DNA as a company to respond to rapidly changing environments like the one we are in today and to continue executing opportunistically to create long-term value for our shareholders. As we look ahead to 2021, I believe there are very high-quality assets in constrained, well-located diverse markets. Our unique relationship network and the liquidity we have on our own balance sheet and with our strategic partners positions us well to take advantage of future investment opportunities across the capital structure. We anticipate higher levels of transactions over the next 15 months.

I want to thank all of our great team members at KW, our shareholders and our capital partners, our Board of Directors and everyone else for your continued commitment and support of Kennedy Wilson. So with that, Daven, I'd like to open it up to any questions.

[Operator]

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

[Anthony Paolone, analyst]

My first question relates to just capital allocation, because it seems like you made some investments, the debt stuff is going well, but you've also upped the buyback. So just wondering if you can walk us through a little bit of how you're prioritizing where you want your capital to go?

[William J. McMorrow, executive]

Well, Tony, I'm oversimplifying slightly, but there's basically 4 buckets that we can deploy capital into. Of course, new investments, the CapEx that we have going on both rehabbing existing properties and our apartment portfolio and new investments, as you saw from the 880-unit transaction. And of course, as you also saw, we are paying down debt. We paid down almost $170 million of unsecured debt.

And lastly, and not in any order of priority, it's the stock repurchases. I would say that -- and to maintain, I would say, lastly, we want to continue to maintain the levels of liquidity roughly around the levels that we're at right now. And so that's the set of constraints that we're operating within. Our first priority really is to continue to grow the business. And to the extent that we have opportunities to grow the business, of course, that's where we're going to deploy our capital into. We're fortunate because we have a lot of very, very high-quality assets that are both generating cash or to the extent that we feel that we have an opportunity to receive an attractive price, we can sell.

So I wouldn't really put any priority in terms of how we're going to spend the money other than to say that, of course, we're committed to the CapEx and any new investments that come along over the next 15 months. We have a belief that the investment market in 2021 will be somewhat more attractive than it has been during this year for obvious reasons. So -- and as we think about the stock repurchase, it's going to be handled over an extended period of time. So that's a long-winded say that where we want to keep the liquidity levels at the level we're at right now. We're paying down unsecured debt. We have great investment opportunities, particularly right now in our debt platform. And we have to complete the construction, the very large amount of construction that we've obligated ourselves to over the next couple of years.

[Anthony Paolone, analyst]

Okay. And the disposition that you made in Ireland post-quarter at a 4% cap, I mean I know there was a long-term lease there, so maybe it was unique. But I do think cap rates are generally lower there and you seem to be able to get a positive spread with redeploying the money into Western apartments, right? Is that something you think there's more to do there? Or do you think that, that sort of swap is just a bit more unique to the circumstances?

[William J. McMorrow, executive]

Well, I would say it just depends on the circumstances and the opportunity. I mean I think the -- we're very focused on growing the NOI and the net income of the business. And we made a decision -- see, these construction projects that you're doing can take a very long period of time. They can take up to 5 years by the time you conceive of the idea and to finish and to stabilization. And so I think the thing that we clearly have learned, we own -- we have ownership interest in slightly over 300 assets, some small, some very large. The higher the quality that you have, particularly in the multifamily space today, the more attractive it is for people to live there.

And I think the other interesting thing when you think about both Hanover Quay and Kildare Street, basically, the asset that we sold, Baggot Plaza, was roughly the same size as the 2 assets we're finishing this year. Both of those obviously will be brand-new. So I do have a belief, and I've been saying this on these calls for 2 or 3 years now, that we are going to be in an extended period of time of low interest rates. And particularly in Europe, where interest rates are in some cases negative, they're clearly near 0. And here in the United States, of course, I think as everybody knows, when you look at the 10-year bond rate, even though it's fluctuating up and down these days, it's near historical lows. And so that -- for us, to the extent that we want to have realizations, puts us in a very attractive position, particularly on these higher-quality assets.

[Anthony Paolone, analyst]

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

[William J. McMorrow, executive]

Well, yes. I mean I think over time, we will -- depending on market circumstances -- and I would say on the debt platform, what we are doing is staying basically in the same markets that we already have ownership interest in. And so that, as I said earlier, the Western United States, Ireland and the United Kingdom. Then what that allows us to do is utilize the great skill sets, the existing people that we have in those various platforms. And so even though Matt Windisch has direct responsibility for the debt platform and we have our own dedicated team in that debt platform, to the extent, for example, that we're doing an apartment loan in the Western United States, we utilize the multifamily team to help us underwrite and do due diligence. So yes, we want to grow that business. But again, it just -- it depends on whether there's an opportunity that we find to be attractive and whether that opportunity, not only interest rate-wise, but in terms of the quality of the sponsorship and the quality of the collateral, fits within what we think are the right framework.

Then the last thing I would add, Tony, is that during the credit crisis, either through purchases or originations, we were involved in almost $7 billion of debt transactions. And so we've had a very long history of doing these type of transactions. So we'll just see, if the opportunities continue to materialize that fit our requirements.

[Mary L. Ricks, executive]

Bill, I think it's worth noting that our European business was really started on the back of a very large debt deal that we bought.

[William J. McMorrow, executive]

Yes.

[Mary L. Ricks, executive]

And the other thing to add is Baggot Plaza came out of a debt portfolio where we ended up -- it was a broken CMBS deal and that was roughly a EUR 300 million transaction with multiple assets in it. And so I think as Bill is pointing out, KW has an excellent ability to, when there's nonperforming loans coming up, which we think 2021, we'll see more of that, we can seize that opportunity.

[William J. McMorrow, executive]

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

[Operator]

Next question comes from Sheila McGrath of Evercore.

[Sheila McGrath, analyst]

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

[William J. McMorrow, executive]

Matt, I'd like you to answer that question.

[Matthew Windisch, executive]

Sure. Sheila. So yes, so if you look at the third quarter, we invested in 6 different loans in the quarter, 3 in the multifamily space, 3 in the office space. All, as Bill mentioned, in the Western U.S. in markets that we currently own assets and have expertise. So the overall coupon was right around 5%, on the whole loans. But in some cases, we structure these with an A/B structure, where Kennedy Wilson will take a first loss position and get a higher coupon. So if you combine that with the servicing fees we're receiving, we're achieving on those 6 loans right around 10.5% is the annual return to KW when you combine the coupon plus the servicing fee. And that's unlevered. We're doing this all with -- we're not using repo lines or any financing. This is all just cash investments.

[Sheila McGrath, analyst]

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

[William J. McMorrow, executive]

Matt, you want to tackle that?

[Matthew Windisch, executive]

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

[Mary L. Ricks, executive]

And I would add to that, Sheila, and just say over multiple cycles, Kennedy Wilson has we've really built our businesses on transacting with financial institutions. And so if you -- just in the last downturn or dislocation, if you just look at what we did in Europe to create that whole business, the first 2 years of that business, all we did was really transact with financial institutions, buying really distressed nonperforming or sub-performing loans that we have a dedicated debt team, obviously, that Matt is running and that we also have in Europe. But we also alongside our real estate executives and expertise that we have in real estate, we're able to price everything as if we were going to own every piece of real estate. So I think given just if you look at the history of KW, the relationships that we have with financial institutions and what we most recently did in the last dislocation and this one, you can anticipate that there will be more plentiful opportunities for KW in the space.

[William J. McMorrow, executive]

Sheila, I think the last thing I would say is that -- we may have mentioned this on other calls, but we have, we have several work streams going on. But one of them we call our relationship management system. And that, over the 3 decades that Mary and I've been together at KW, of course, we've been able -- because of our teams, we've been able to create very deep relationships with financial institutions in the marketplaces that we like. And some are medium-sized, but many of these are very large financial institutions. And so for the last, I would say, Mary, 7 or 8 months, we've been very, very focused outreaching to financial institutions in our marketplace. And to the extent that there are opportunities to buy loans on a discounted basis, it's very much part of our history, as Mary's pointed out. But we're on it. And if there are opportunities that surface, I would say the other great news and why I said earlier that we're maintaining our levels of liquidity where we're at, is that we also have partnerships, long-term partnerships, with very large institutions that are partners with us and they've done well with us. And so we've got the great ability to move with speed to the extent that these transactions present themselves.

[Sheila McGrath, analyst]

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

[William J. McMorrow, executive]

Mary, do you want to answer that?

[Mary L. Ricks, executive]

Sure. I mean Sheila, we're not overly concerned about tenants, the work from home as a long-term trend. I like to use the really good example of Microsoft. They announced on October 9, okay, all workers, you can opt to work remotely on a more permanent basis. Okay, so that same article said they'd likely go to some hybrid model, where employees would go to the office part of the week, and everyone would be subject to -- that would all be subject to manager approval. Furthermore, on the same day, Microsoft's VP of Global Real Estate, his name is Michael Ford, he spoke at the Puget Sound Business Journal event and he started by saying that the company will need more space due to social distancing and that we are not going to have the dense workplaces that we've had in the past. And furthermore, Microsoft will likely need millions of additional square feet in the Puget Sound due to their significant growth in their cloud computing investment.

So really, I think while some tech companies are out there messaging that they're going to -- their employees can work from home permanently, that's not really what we're seeing on the ground. I think Microsoft is -- it's a huge example and it's a great example. I mean they're experiencing tremendous growth driven by a transition in their senior leadership, their cloud computing investments. And we've just come across quite a few reports showing that Microsoft and they're tenants of ours and we haven't seen it in our existing portfolio. So to sustain the increase in their revenues and their operational scale, that must be supported by a correlated increase in employee headcount and thereby office space. So we don't -- we really are not concerned about it. And we also think, to add to that, Sheila, that our portfolio, which really is mostly suburban office, low-rise or tenants have their own front door, we've got a very, very defensive office portfolio company-wide. So we feel really strongly about what we own.

[Operator]

[Operator Instructions] The next question is from Derek Johnston of Deutsche Bank.

[Derek Johnston, analyst]

I jumped on late, so I apologize if I dupe anything. But when you look at the multifamily markets and specifically the new markets you've entered, are you specifically looking to diversify away from core dense urban properties when it comes to multifamily? And then also within the 3 multifamily acquisitions, are there any value-add opportunities within this portfolio? And what could we expect it to contribute over the next 4 to 6 quarters?

[William J. McMorrow, executive]

Yes. I mean I think just to get a little more granular on that 3 asset portfolio, the property that I mentioned earlier in Colorado, Colorado Springs, we bought on our own balance sheet and the other 2 were done in partnership ventures, 1 with a new partner that has great capacity. I would say almost always in our apartment acquisitions, there's some component of value-add, whether that's upgrade -- the one in Tempe, Arizona, will be one where we're upgrading amenities and doing unit turns. And so we never -- generally never buy these with kind of a status quo in mind and the whole idea over time is we're implementing our rehabs of the amenities -- so on is to obviously grow the NOI. And I think a very good example of that is -- and I would say the last thing, too, is that the company has always had a history of trying to get into these markets where we think there are growth opportunities on the multifamily space and then developing enough of a major beachhead that we can have scale. And so when you think about Boise, Idaho, for example, or Salt Lake City, a little foggy on the dates, but we probably started in Boise 5 or 6 years ago. We started in Seattle, 16 or 17 years ago. And today, we're one of the largest multifamily owners, both in the market rate and the affordable and senior platform. And in Salt Lake City, we probably started out there close to 10 years ago and we've got a great portfolio. That allows you to have better management teams, better management focus.

And the other thing we've also learned is that getting into these markets early before other people are there, it allows you to -- think about the first Boise asset that we bought, it was a very, very, very tired property that we implemented a very big overhaul of. And today, based on our cost structure and our acquisition price and what we spent on the rehab, our cap rate on that asset is well over 10%, it might even be higher, closer to 15%. And so the key is to get enough scale in these markets. And to more directly answer your question about these very urban markets, we made a decision many years ago to, say, for example, avoid places like center city San Francisco, Downtown Los Angeles. Those were markets that we just -- we saw an awful lot of product being built. And we felt that long term, the rent structures that people were going to have to achieve based on the cost to build were just not sustainable. So it's proven to be the case. And so it wasn't that we had a strategy to diversify away from those markets. We just didn't like the overall economics of what we thought was going on in these center city markets. And I would say, Mary, it's kind of the opposite in Ireland, would you say?

[Mary L. Ricks, executive]

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

[Derek Johnston, analyst]

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

[William J. McMorrow, executive]

Mary?

[Mary L. Ricks, executive]

Yes. I mean that's a great question. We've had a lot of success in the industrial space with our European team, especially in the U.K. We've done quite a few deals where we've round-tripped them and our IRRs have been very high 20% type range. We are seeing a lot of opportunities in the value-add space in the smaller, I'm going to say, smaller lot sizes in the U.K., where we're compiling those assets and we're doing that with several partners and growing that into a platform. So where there's not -- we're seeing a lot of competition in big portfolios where the Blackstones and the big names are trying to buy very large portfolios and that's getting priced to levels that we don't like. But making the effort to buy the single lot sizes and then combining those into a portfolio and/or a platform, which is what we're looking to do right now, that would cover the U.K., Ireland and a small allocation to Spain, we're really excited about. So that is a space that we look for us to grow in, for sure.

[Operator]

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

[James Feldman, analyst]

I was hoping to just get your thoughts on just tenant behavior across the different regions in your residential portfolio. Just when you think about when the pandemic started and people wanted to get out of the cities, I'm sure you saw an uptick in the Mountain States. Now people are thinking vaccine. So I guess when you think about the volume of incoming interest for your properties, where would you say we are in that -- I don't know if you want to call it a cycle, but just the pattern of behavior in terms of people thinking maybe one day you do actually go back.

[William J. McMorrow, executive]

Well, I would say that you're seeing a very -- I'd say, accelerating trend that Mary talked about earlier, where you're seeing, I would say, people between the ages of 25 and early 30s that are in some of these urban -- maybe even grew up in some of these urban markets, where the affordability is just -- it's a real challenge. And where your quality of life is not real -- and it's a very mobile group of people. So you've got your quality of life, you've got lower state income taxes. And so you're seeing a very clear migration of kind of that age group into these Mountain States. And what's also key to all of this, what's following this is the job growth. The tremendous job growth in the Mountain States, Denver, Salt Lake City, Boise, Idaho, and then in the Pacific Northwest and that's all buttressed against very strong educational systems. And so when you look at rents, like, for example, this Rosewood property that we just finished, I mean it was 100% leased in 90 days. And -- but the rents that we're getting, although they work very well for us in terms of our returns, are as much as half of what they would be in California. And so I'm not picking on California, but there are just real affordable issues here. And so I see this trend not diminishing at all. And so one of the great things we've been able to do over the last really 24 months is kind of get our flag posted, not only in the Mountain States, but we bought a property in Albuquerque. We, one that Mary and her team just bought in Tempe is the first asset that we've owned, actually, in Arizona. And so we continue to think that all of these, the non-California markets, are going to be growers over time, both in terms of jobs and in terms of population.

[James Feldman, analyst]

Okay. That's helpful. And then as you think about over the next 12 or 18 months and the kind of distress you might see and your experience over cycles, how do you differentiate between stuff that looks attractive because it's off market rents or values have really declined and property types that really have a secular issue and may not recover? How willing are you -- how do you manage that risk of kind of digging a little too deep when there may actually be longer-term changes in trends?

[William J. McMorrow, executive]

Well, I mean Mary, I would -- you might have a different answer to that, but I think the great strength of our company is our people, that these teams -- our teams have been together for -- like I said, Mary and I have been together for 3 decades. Matt and others, Matt's over 15 years. And so we have a very, very clear -- we're value investors. But we're value investors that have a long-term outlook. And I think the other part of it, too, to the extent that we're dealing with a financial institution, reputationally, we've been viewed over the years as a very, very good counterparty. I mean we do what we say we're going to do. So it just -- it always, it just -- but I would say the last thing, too, is we never ever, ever start any period of time, whether it's a year or a quarter and we say: "Look, we've got to deploy this much capital." That is a recipe for having a bad outcome. We're always looking for opportunities that meet our criteria, but we don't have any like annual goals of how much capital we would like to deploy. It's just got to -- it's got to make sense. And I don't know, Mary, if you have anything to add to that.

[Mary L. Ricks, executive]

I mean what I would add is just as always, we would be very conservative in our underwriting assumptions and anything that we would buy, we would just -- I think in this market, you want to have multiple exit strategies. So I think you just -- it depends on what you're talking about. But if you're talking about, for example, buying retail, then perhaps there's a reuse option there that we'd be looking at. So I think, as Bill said, I mean over the years, we've been very, very careful. We'll continue to be that. We'll be disciplined and we'll be very conservative in our underwriting.

[James Feldman, analyst]

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

[William J. McMorrow, executive]

That we wouldn't touch?

[James Feldman, analyst]

Yes.

[William J. McMorrow, executive]

I don't know that I would say that. Mary, again, it always depends on what the value proposition is. And the steeper -- the higher the risk, the steeper the discount has to be for us. And so as I said earlier, one of the great things about Kennedy Wilson is because we both -- we're -- under Matt's direction, we're originating debt, we're buying debt. And we also are equity investors and we operate in every part of the capital stack in real estate. And so we have these very great built-in appraisal systems in the markets that we operate in. I would say the only constraint geographically is that we don't really have any plans to go outside of the footprint that we're already in. We really feel, without exception, that there's going to be plenty of opportunities in the markets that we're already in.

[James Feldman, analyst]

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

[William J. McMorrow, executive]

So Matt, you want to answer that question?

[Matthew Windisch, executive]

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

[Operator]

Next question comes from Alan Parsow of Elkhorn Partners.

[Alan Parsow;Elkhorn Partners;General Partner, analyst]

With regard to a little bit of a follow-up to the JPMorgan question on cap rates, can you elaborate -- I mean obviously, the Baggot sale was a great sale at a 4% cap rate. Obviously, interest rates in Europe are much lower than they are in the United States, albeit they're very low here also. Can you talk about the differences between the cap rates you're seeing, both on buying and selling properties, in the United States versus the U.K.?

[William J. McMorrow, executive]

Mary, you want to tackle that one?

[Mary L. Ricks, executive]

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

[Alan Parsow;Elkhorn Partners;General Partner, analyst]

I guess what I'm asking is, you're not seeing...

[William J. McMorrow, executive]

Alan, just to amplify a little bit on Mary, we made a very clear strategic decision almost 5 or 6 years ago that we just felt this was coming. And one way to really be a value creator is through the new building that we've done as demonstrated by Baggot. At the time we finished Baggot, Mary, I believe the stabilized cap rate on that was over 8%, wasn't it?

[Mary L. Ricks, executive]

Yes, 8.6%, that's right.

[William J. McMorrow, executive]

8.6%. And so even though we are very conservative in telling you where we think these cap rates are going to be once we've stabilized new construction, we've always generally achieved higher cap rates than we -- sorry, higher cash returns on our investment than we originally underwrote. And so even though I think everybody in the financial world wants to only give you credit for your development pipeline once it's built and finished, the amount of work that goes into actually even getting it started and on the way to finishing is really creating value. So and we -- virtually, all of the construction we're doing, it's like an assembly line. We rolled up some this year. We're going to roll up more next year and more the following year and then almost all of it by the end of 2023. But it's going to be -- all of it is going to stabilize at very attractive cap rates.

[Alan Parsow;Elkhorn Partners;General Partner, analyst]

I guess one of the -- what I'm actually asking is, is it true or untrue that cap rates in Europe will remain lower than cap rates in the United States, because of the interest rate differentials between the U.S. and the U.K. and Europe?

[William J. McMorrow, executive]

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

[Mary L. Ricks, executive]

Yes. And I think it's really about the asset class, too. Like core assets, Alan, like in Europe, will -- I mean you're seeing core yields in France and Paris be in the 3% range. So in Ireland, if you look at the buyers in Ireland, the core buyers, 75% of those deals that have been done this year in the core space are German funds. So 4% is an attractive yield for them, as we've been talking about, given negative interest rates.

[Operator]

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

[William J. McMorrow, executive]

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

[Operator]

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