Kennedy-Wilson Holdings Inc

NYSE:KW

Earnings Call Transcript 2017-Q4

[Operator]

Good morning everyone, and welcome to Kennedy-Wilson’s Fourth Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note, this event is being recorded.

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

[Daven Bhavsar, Director, IR]

Thank you. 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 section of Kennedy-Wilson's 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 measures and our fourth quarter 2017 earnings release, which is posted on the Investor Relations section of our website.

Statements made during this call may include forward-looking statements. Actual results may materially differ from forward-looking information discussed on this call due to a number of risks, uncertainties and other factors indicated in reports and filings with the Securities and Exchange Commission.

I would now like to turn the call over to our Chairman and CEO, Bill McMorrow.

[Bill McMorrow, Chairman and CEO]

Thanks, Daven. Good morning everybody and thanks for joining us today. The fourth quarter of 2017 capped off a tremendous year for Kennedy-Wilson. We successfully closed the acquisition of Kennedy-Wilson Europe, this past October, while producing a record quarter and a record year in earnings per share, adjusted net income and adjusted EBITDA, but most importantly the accomplishments of the past year position us well to execute on many growth initiatives and all are compelling real estate opportunities going forward.

So let me recap the year. We reported record financial results across the board. In the fourth quarter we had GAAP net income of $0.69 per diluted share compared to $0.13 per share in Q4 of 2016. For the year, GAAP net income was $0.83 per diluted share, compared to just $0.01 in 2016. These numbers were positively impacted by a one-time tax benefit of $45 million, recorded in the fourth quarter, 2017 related to the new US tax bill.

I would also now like to take you through the results that exclude the $45 million tax benefit. Adjusted EBITDA was up 72% to $201 million for the quarter, compared to a $117 million in Q4 of 2016. Adjusted EBITDA for the year was $456 million, an increase of 30% compared to $350 million in 2016. Finally, adjusted net income was a $114million in Q4 compared to $65 million in Q4, 2016 and for the year, adjusted net income was $243 million compared to a $191 million for 2016.

These great financial results in Q4 gave us strong momentum heading into 2018. We launched the year with a globally diversified high quality real estate portfolio that produces $439 million of annual NOI to KW. This compares to $254 million at the beginning of 2017 or an increase of 72%. This growth is attributable to strong operational results at our properties, along with the acquisition of KWE and we anticipate our NOI will continue increasing throughout the year.

We're primed to complete many key developments and value added initiatives across the portfolio, that we expect will add an additional $35 million of estimated annual NOI by the end of 2019. When you add in some moderate rent growth and layer in our capital recycling plan, focused on selling non-income producing assets, we see a clear path to generating over $500 million of in place annual property NOI by the end of 2019, which would be roughly twice the level we were at, at the beginning of 2017.

We consider our dividend to be an important component of return for our shareholders and consistent year-over-year growth in recurring cash flow to KW, has enabled us to grow the dividend over time. We increased our dividend at the close of the KWE acquisition to $0.19 per share quarterly or $0.76 annually, which equates to a current 4.5% dividend yield as of the close of business yesterday.

This was our seventh dividend increase since we started paying a dividend seven years ago. Over that same period, our dividend has grown from $0.16 annually per share to $0.76 per share, representing a 375% increase. It's also worth noting that our dividend in 2017 was a non-taxable return of capital. In addition to our dividend, we have repurchased approximately $90 million of KW stock in the past 24 months, bringing the total cash return to KW shareholders to $225 million over the past two years.

Looking at our operating performance for the quarter, we have same property revenue growth of 5% and NOI growth of 4% as compared to Q4 of 2016. This same property analysis includes almost 20,000 multifamily units, 13 million square feet of commercial space and five hotels. The commercial and market rate, multifamily portion accounts for almost 90% of the same store NOI. So let's take a closer look at these asset classes.

The demand for apartment living remains very strong in our investment markets. Our market rate multifamily portfolio had another exceptional quarter, with accelerating same property revenue growth of 6%, and NOI growth of almost 9%. Our largest region, the Pacific Northwest, continued to perform exceptionally well. Revenue growth was outstanding at 9%, and that led to NOI growth of 10% for the quarter in that region.

We continue to outperform many of the publicly traded multifamily companies on a same property basis. The largest multifamily REIT had same property revenue and NOI growth of approximately 2.5% in Q4. We attribute our outperformance to KWs presence in high growth markets including Washington state, as well as our unique positioning in those markets. We typically own garden style, low density apartments that offer opportunities to implement a value add asset management plan. This often includes adding amenities such as fitness centers and community club houses, as well as completing unit interior renovations, that drive further value.

We can then offer fully amenitized residences at discounts of 40% to 50% compared to CBD market communities -- apartment communities. Average rents in our global market rate portfolio were $1,526 as of the end of the year. When you consider the federal elimination of state and local deduction that passed in 2017, living in the State of Washington and for that matter, other states that we operate in that have low state income tax rates, or in the State of Washington's case with no state income tax, it looks even more affordable on a rent to income basis.

In summary, our key apartment markets including Seattle, Portland, California, Salt Lake City and Dublin, Ireland, are all experiencing significant job growth and population growth that we believe will drive the rental market demand over the next decade. In addition to our market rate apartment portfolio, our affordable multifamily platform continues to perform well, as a result of area median income growth, particularly in and around Seattle, where most of our units are located. An aging population in the US particularly also bodes well for our senior affordable properties.

In fact, across our affordable portfolio, we are now running at 95% occupancy, with same property rents up 4% and same property NOI up 6% on a year. In addition, we are currently developing or entitling an additional 2,150 affordable units, which will bring our total affordable portfolio to almost 8,000 units by 2020.

Moving on to our office portfolio, this segment comprises one-third of our total NOI and consists of high quality assets, primarily concentrated in the UK and Ireland. The UK and Ireland Office portfolio produces $93 million in NOI. Our assets and income in these markets are supported by high quality tenant -- high quality tenant base, and attractive long-term leases with terms ranging from 10 to 25 years of duration. It is also worth noting that we're one of the largest commercial property owners in all of Ireland.

Our US office portfolio totals $37million in NOI to KW and is driven by a handful of great assets. Southern California is our biggest region with $20 million of NOI. In the Pacific Northwest, we owned 90 East, located in Greater Bellevue. We acquired this class A 573,000 square foot building in June, 2017, for a $153 million, at a cap rate of 8.5%. The property is fully leased to Microsoft and Costco.

Four months after the closing, we extended Costco's lease an additional seven years, through 2027. We financed this asset with a 50% loan for 10 years at a 3.85% fixed interest rate. As a result, 90 East generates a 14% cash on cash return to KW.

Turning to our investment activity we have now together with our partners, we have acquired real estate assets approaching $21 billion, at cost, since going public in 2009. In 2017, we and our partners completed $1.3 billion of acquisitions and $1.9 billion of dispositions. Our share of 2017 acquisitions was $763 million and our share of dispositions was $814 million, which included another $152 million in non-income producing asset sales. Despite being a net seller for the year, we added $6 million of incremental annual NOI, with further upside as we complete value creating asset management initiatives across our new properties,

Selling mature assets and recycling capital into newer, high quality assets with great growth opportunities is a key part of our long-term investment strategy. For example, during the quarter we sold Summer House, a 615 unit multifamily property, just outside of San Francisco in Alameda, California. The sale price was $231 million, which represented the largest single asset multifamily transaction in the entire United States in 2017.

During our seven year hold period, we increased NOI by a 109%, and the sale resulted in a 61% IRR and a seven times equity multiple to Kennedy-Wilson. We took the proceeds from the sale and invested on a tax deferred basis into three multifamily properties, totaling 786 units, two in Portland and one in Greater Seattle, that on average were 40 years newer than Summer House.

As you know, we are always opportunistic in our investment strategy and the acquisition of KWE which closed on October 20, was no different. We successfully acquired the remaining 76% of KWE that we did not already own, creating a leading global real estate investment company in a simplified ownership structure. The total purchase price for the remaining 76% interest in KWE was $1.4 billion, representing a discount of almost $260 million to the original combined equity raised at the IPO on the follow on offering. In purchasing KWE at the time we took advantage of a historically low sterling and bought assets we know well at a discount to their net asset value.

A key part of this thesis has already started to play out and while it's only been four months since the closing, we have seen a significant reversal in the pound and the euro to the dollar. The pound has now strengthened by 10% from 128, when we announced the acquisition to 140 today. We've also seen the euro strengthen by 14% during the same period. The increases in both currencies are positive for us given that half of our global portfolio is now in the UK and Ireland. After the increase in both currencies in early 2018, we have now locked in a majority of our currency exposure through basic currency hedging. Also strong asset sales at KWE have further proven out the value and the strength of the underlying real estate market and our assets.

We are now able to wholly own a fantastic European portfolio with great growth potential and without integration risk. We're able to hit the ground running in 2018.

I'd now like to turn the call over to Mary Ricks, who I think most of you know has been my partner here at Kennedy-Wilson going on 28 years. Mary is the President and CEO of our business in Europe and I think as most of you know, she also recently joined our Board of Directors along with John Taylor who joined the Board at the same time. John Taylor comes to our Board with 38 years of public accounting experience.

So with that, I'd like to turn it over to Mary to talk more about our European portfolio.

[Mary Ricks, President and CEO, Kennedy-Wilson Europe]

Great, thanks Bill. Estimated annual NOI for the total European portfolio, stood at $234 million, at year end, or roughly 53% of Kennedy-Wilson inside estimated annual NOI. I'd like to focus on four areas for Europe. First, to play on value add asset management initiatives to grow our NOI, where we expect to add over $16 million from assets we are currently stabilizing over the next two years. Secondly, executing on our refurbishment and development program where we are targeting an additional $14 million of estimated annual NOI, over the next two years, and delivering and exciting pipeline of future development opportunities.

Thirdly, selling non-core assets and recycling capital into our value add asset management initiatives. We continue to generate attractive returns and demand for assets remains strong across all sectors. Lastly, growing our business, particularly across multifamily, where our ambition is to double our units to 5,000 units and we're achieving this primarily through build to rent. For example at Capital Dock and Clancy Quay with Leisureplex to come and acquisitions where you've seen us acquire North Bank, our Liffey Trust units giving us over 200 units combined in the North Block, an exciting market for us.

I'd like to separately highlight our European office portfolio, which represents the largest sector accounting for 46% of the total European portfolio. The office market in Europe is structurally very different than in the U.S. UK and Irish leases are similar to triple net leases with minimal leases from property level expenses. Office leases in the UK and Ireland also tend to be longer term with upward-only rent reviews every five years in the UK.

For example, the lease we've recently signed with Indeed at Capital Dock was for 20 years with a break in year 13. And this is really only one example of the active leasing here in past [ph] with a 159 lease transactions in the UK alone. This was across 1.8 million square feet and at rents 13% above previous passing.

Now in the UK leasing market, it is normal to give tenants rent free periods and this is the UK equivalent of USPI's tenant incentives. So in our same property UK comp for Q4 NOI this rent free shows up as a reduction in NOI. And if you normalize for rent free, the UK performance was down just over 2% compared to negative 8.7% for the quarter.

In total, our European office portfolio has a weighted average unexpired lease terms of over six years to break and eight point six years to expiring and 95% of our UK and Irish leases are full repairing and insuring FRIs as we call it or triple net equivalent, and lead us to say these aspects make leasing office space in these markets very landlord friendly.

Over 2017, we've been a large net seller in Europe with $85 million in acquisition versus $393 million of disposition. The disposition have crystallized value and we continue to recycle capital, particularly reinvesting across our own portfolio, deploying accretive CapEx across our development and refurbishment program and into new compelling opportunities. At our largest development Capital Dock in December, we fully leased the remaining two office buildings, totaling 216,000 square feet to Indeed the world's number one job site and a subsidiary of the multi-billion dollar company Recruit out of Japan.

So now all 346,000 square feet of office is fully committed between the Indeed lease and the sale of 200 Capital Dock to JPMorgan, that we announced in Q2. We expect to complete this development in the fourth quarter of this year and are on target to deliver another hundred 190 high quality apartments. And this is the largest single phase development in Ireland.

Clancy Quay Phase 2, which delivered a 163 new apartments in the second quarter was 78% leased as at the end of the year, and we have secured planning permission for Phase 3 now of Clancy Quay, which will consist of another 259 units putting us on track to complete all phases by 2020. When it's finished, Clancy Quay will be the largest multifamily apartment community in Ireland at 845, high quality units and unrivaled amenities. We anticipate stabilized NOI to KW, of $50 million across Capital Dock in Phases 2 and 3 of Clancy.

Earlier this month, we also completed a 15,000 square foot lease with a Blue Chip tenant at the Chase in Dublin and proving the building's occupancy from 70% as of year-end to a 100%, generating $5 million of annualized NOI. And this lease increases our Dublin office portfolio occupancy to 98%. So as you can see we're making great progress at these investments.

And with that I'll hand it back to Bill

[Bill McMorrow, Chairman and CEO]

Thanks, Mary. So now let me spend, few minutes to talk about our near-term strategic initiatives and how we will grow the business over time. For our wholly owned assets, we continue to focus on maximizing cash flow growth while being opportunistic in selling mature assets and redeploying the cash into higher growth opportunities. Within our balance sheet portfolio, we're also focused on completing our unstabilized and development initiatives, many of which Mary just went through, that will add another $35 million of the estimated annual NOI by the end of 2019 and more looking out to 2022.

Another key initiative is growing our investment management business. This platform enables us to leverage our 30 year track record of value creation by attracting third-party capital providers that enable us to take advantage of short to medium term investment opportunities. Part of our fund raising effort includes raising third-party capital for investment in both the US and Europe. We're looking to raise upwards of 1 billion of third-party fee bearing capital in 2018.

And lastly, we're continuing to ramp up the sales of our non-core and smaller lower yielding assets. Over the next 12 months, we plan to generate over 500 million of net cash to KW from these sales, that we will invest in our development pipeline to fund our core investment platform and to look for new value add investment opportunities. During the quarter, the fourth quarter of 2017, we sold our services business in Austin and our loan servicing platform in Spain. We're currently looking at strategic options for our research and technology division, as we continue to manage overhead and maximize earnings.

Turning to the balance sheet and our liquidity as of 12/31, we had $751 million in liquidity cash of 351 million and 400 million of undrawn capacity on our line of credit. 80% of our share of debt is either fixed or hedged with interest rate caps with an average term on the debt of 6.4 years at an average rate of 3.8%. We have very limited short term debt maturities with less than 12% of our debt coming due before 2021.

And so in summary, we are very excited about working as one cohesive team in very focused and growing markets. We have created a major global organization now all under one roof with an executive management team that has been working together for decades. We do, however, remain cautious and careful about how we allocate our capital to generate the best risk adjusted returns for our shareholders.

Also, to increase our communication with our investor base, we have visited with many shareholders already this year and we plan to host shareholder property days in the coming months. Mary and the Irish management team will host the first event in Dublin on April 17, 2018, and we would encourage you to come and meet our management team and see the great assets for yourself.

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

[Operator]

[Operator Instructions] At this time, we will pause momentarily to assemble our roster. The first question comes from Craig Bibb with CJS Securities. Please go ahead.

[Craig Bibb, CJS Securities]

Hey guys. Talk about the cap rate spread a little bit. It's clear you're recycling a gain from value added properties into better located newer properties. Is that going to keep your cap rate spread negative for the remainder of this cycle?

[Bill McMorrow, Chairman and CEO]

Well, I think that the best way to look at that, and not to look it in isolation, when you look at like the Summer House sale and what we did is really to look, Craig at -- last year we sold a property called Rock Creek. And when you look at the major gains that we generated last year, they were generated out of Rock Creek and the sale of Summer House. The proceeds from those two sales roughly was $200 million, that we were able to exchange on a tax deferred or tax free basis, however you want to look out, which obviously has some real benefits.

The two properties that we sold along with the third property called Woodstone, the combined NOIs of those properties was roughly $19 million. When you look at the properties that we bought, which were, as I said earlier, between 35 and 40 years newer, we exchanged those into 90 East, the three apartment buildings that I mentioned and the NOI that we gave up was $19 million and the NOI that we gained was $28 million. And so what we're doing -- and also remember too, like the Issaquah property that we exchanged into, we bought it at an attractive price, but it had lease up attached to it. And so when we bought Issaquah when we exchanged into that it wasn't at a stabilized cap rate. The occupancy was right around 80%. And so by the end of the second quarter of this year, we're going to be right around 95%.

[Craig Bibb, CJS Securities]

Sorry, go ahead.

[Mary Ricks, President and CEO, Kennedy-Wilson Europe]

In terms of Europe, I think making a strict comparison between the cap rates on acquisition, versus disposable, it's not really accounting for the strategic rationale. For example, on the three assets that we bought in Europe, Hanover Quay which is just behind her capital development, sort of a bolt-on strategic rationale to do that. And then North Bank one of the other two assets that we bought, that was bought from a receiver that the multi multifamily our PRS project in Dublin and it was 75% occupied, purposefully left vacant. And so when you think about the acquisitions versus dispositions, I think when we look at it in Europe is really just the yield spread in terms of the yield on cost to what we sold and that's giving us a positive, spread that's almost 2% on when we bought the assets to when we sold it, and it's makes sense, in terms of the strategic rationale,

[Craig Bibb, CJS Securities]

In the US, what percentage of the acquisitions were actually 1031 exchanges.

[Bill McMorrow, Chairman and CEO]

Sorry, that again. Say that again?

[Craig Bibb, CJS Securities]

So all of the acquisitions you did in either Q4 for the full year, is there like a 10% 1031 or could you ballpark that?

[Justin Enbody, CFO]

It was probably about two-thirds, 1031 particularly on the assets that were wholly owned, the majority of those were through 1031 exchanges. And then obviously what we bought in our funds and through our partnerships, were not 1031.

[Bill McMorrow, Chairman and CEO]

I can say that, it's like the two Salt Lake City, ones that we bought here in the first quarter that we've already announced. Those are the typical value add deals, so they one that the biggest one sits on 20 plus acres of land. It's a low density property, highly, it needs capital. And you know, we'll spend, you know, probably roughly $8 million there, I would call fixing that property up, but that property will end up stabilizing at somewhere around a 6.5% cap rate.

It'll take us about 18 months to get there. But it'll stabilize around 6.5%. And I think the other interesting thing that has happened is to remember, you know, we all know what's happened with interest rates here recently, but at the property level, particularly in Europe, the interest rates at property level still remain very low compared to the United States.

And the second part that was, I would say a little bit surprising to me in a way was that when we went to finance those two Salt Lake City properties, the interest rate, we ended up paying, which was like 3.85, I think quite around in there 3.85 or 3.90, even with the increase in rates, it was almost the same rate that we're paying a year ago because what lenders are now doing is they're gravitating to the higher quality companies like Kennedy-Wilson.

And so even though rates have gotten -- you know the tenure has gone up, the spreads have come tighter. And so in almost all cases, you know, Craig, what we do is we are obviously looking for the most competitive interest rate. And so the spreads are still good. But what I did say at the end of my prepared remarks is that, look, we're being very careful about where we're deploying capital given what's currently going on in the market.

[Craig Bibb, CJS Securities]

Okay, and just, two related questions and I'll jump back in the queue. So, your stock price is frustrating, I'm sure to you guys and it's kind of been frustrating for your larger holders. If you were convinced that -- and management comp seems to be part of the issue, right. So if you were convinced that a bonus pool based on percentage of EBITDA was responsible for the discount, would that be enough to get rid of that?

[Matt Windisch, EVP]

Yeah, Greg, this is Matt. So what I would tell you, is if you look at the overall comp levels for '17 versus '16, they were down, and that's with the backdrop of our adjusted EBITDA up 30%, record levels of adjusted net income and GAAP net income. I think you've also seen, what we've done with our stock plan to introduce the TSR component and we are evaluating the cash bonus plan, and there'll be an update on that in our proxy, when that comes out in April.

[Craig Bibb, CJS Securities]

Okay. And then the second part of it is you guys were a net seller, you bought in stock in Q4 and thus far, this year and that's I'm sure, very heartening to a lot of investors. The stock is still cheap and you are still likely to be a net seller, is this going to continue for a while, the repurchase?

[Bill McMorrow, Chairman and CEO]

Well, I mean what I said this year is the roughly $700 million, that we sold last year, that the actual, that that number is actually probably going to decrease this year, but what we are selling our assets that we have bigger ownership interests in. And so when I mentioned that, $500 million of cash that's going to get generated out of asset sales here in the United States and in Europe, the very high percentage of that are assets that we own 100% of, close to 100% up, so that the aggregate dollars of sales this year is probably going to go down, but the amount of cash that we're generating out of these sales will go up.

[Craig Bibb, CJS Securities]

Okay, great. I've been too long. Thanks again guys.

[Bill McMorrow, Chairman and CEO]

Thank you.

[Operator]

The next question comes from Vincent Chao with Deutsche Bank. Please go ahead.

[Vincent Chao, Deutsche Bank]

Hey guys, good morning, I just want to go back just to some of the fundamentals here. You guys have been experiencing some deceleration in the multifamily side on the same store revenue growth for a couple quarters now. And then this quarter really had a nice turnaround. I was just curious if there was anything specific in the quarter that you would explain that, jump. And if you think that's sustainable going forward. Yeah.

[Matt Windisch, EVP]

Yeah, hey, Vin, it's Matt. So I think one key component to that is the makeup of the same store pool. So we did sell some assets in '17 that were primarily in California. And we've redeployed that capital more to the Pacific Northwest. And what we've seen in terms of the trends is that the Pacific Northwest rent growth has been -- certainly the last year or so, more robust than Northern California and Southern California. So I think you're seeing the impact of some of those trades we've made by shrinking a bit the portfolio in California on the multifamily side and growing the portfolio in the Pacific Northwest.

And then a second part of that is the assets that we bought three or four years ago, you're really seeing the benefit of the value add that we've put into those assets. The unit turns, we've done, the club houses we built, the amenities that we've produced for the tenants. And so you're seeing that come through as well. So I think those are the two key factors that have driven that increase.

[Bill McMorrow, Chairman and CEO]

Yeah, I'd say I think Matt is really making two very, very good points. As we've talked about on these calls before, the income to rent ratio here in California is high than some areas. It can be as high as 50% to 60% and that -- that's difficult for people. In the areas that we are deployed in, and remember like I said, the State of Washington, there's no state income tax. And so you've got basically the same or in some cases, higher salary levels there with rent income levels that are in the low-20s, mid-20s.

And the second thing you've got to remember when you buy these garden style apartment buildings on these big properties, 300, 400 units at a time, it takes you really the better part of a couple of years to I would say improve your tenant base and to complete the CapEx programs that you're doing. You have a lower turnover here in the -- in Ireland and the United Kingdom then do here, but generally you're turning over about half your tenant base every year.

So it just, it just takes time when you buy these older communities like these too. We just bought in Salt Lake City to implement the value add program and improve your tenant or client base. But I do think to answer your question specifically that in the Portland, Seattle, Salt Lake City, Dublin, I think, the one thing that's lost when people talk about Europe is Dublin has or Ireland had the fastest growing economy in Europe last year. And they've got a positive population growth. And the office spaces, it's benefiting greatly from the uncertainty surrounding Brexit. So you have -- and you've gotten the no ability to create fast a lot of housing product.

And so in all our markets, we feel very comfortable that the long term outlook for, like I said, job growth and population growth, coupled with very good university systems that are producing younger people that are going into these labor forces is really the key to sustaining rent growth.

[Mary Ricks, President and CEO, Kennedy-Wilson Europe]

And just to add to that. I haven’t really had a housing shortage, so it's a problem for Ireland, but it's an opportunity that we see. So we need to be, I would say 35,000 units per annum need to be built. And in 2017, only 11,000 units were built and about 15,000 are estimated for 2018. So there's really a major -- there's a structural shortage in what's been provided in terms of housing. And then the other kind of difference, I think, in Ireland there's only 16% of city dwellers live in an apartment versus 60% in -- which is the international norm. So we really see a big opportunity in Ireland and we're very focused on the peer effect [ph] there in growing that business.

[Vincent Chao, Deutsche Bank]

Okay. Thank you for that. That's helpful. I was also just wondering, I mean just the follow up maybe on the comp question. I know you said that the -- there's maybe some updates coming in the proxy. But at the quarter it did seem like the comp expense did jump a quite a bit higher than it's been in the last couple of quarters. Was there something specific in that? Is it sort of year-end a true-up type stuff or what's driving that?

[Matt Windisch, EVP]

No, it's just related to the income produced in that particular quarter. It was the largest quarter we'd ever had from an EBITDA and net income perspective.

[Bill McMorrow, Chairman and CEO]

But I think, the most important thing when you think about Kennedy-Wilson Vin, is -- and everybody is that, at the corp level we have roughly 550 total employees. At the property level, which are off of our income statement there obviously thousands more there. But of the 550, better than half of that are in our service business. And the point I was trying to make to you earlier is that, we sold our service business in Austin, but that occurred at the end of the year, but we eliminated roughly $4 million worth of overhead and salaries out of that event.

And while it's not the primary concern, as I said in my prepared remarks, we're looking at monetizing part or all of the research business that we have. And that business has almost 125 people in it. And so there's a payroll attached to that, that is roughly $12 million a year. And so we're looking at those situations. And that's really what I was trying to point out in my prepared remarks.

[Vincent Chao, Deutsche Bank]

Okay. Thanks. I think that's all I have.

[Operator]

The next question comes from Mitch Germain with JMP Securities. Please go ahead.

[Mitch Germain, JMP Securities]

Good morning. When you kind of think of the non-core sales you want to do, I think you talked about maybe generating $500 million of net cash. How much of the portfolio do you consider non-core and maybe in the percentage. And then how should we think of the breakdown of that with regards to the U.S. versus Europe?

[Bill McMorrow, Chairman and CEO]

Yeah. Well, roughly the way we're set up now, roughly 50 -- our portfolio is roughly 50-50 U.S. and Europe. And again, when we talk about Europe as in totality, the majority of it's in the United Kingdom and Ireland. But when you talk about these non-core assets sales, you really have to look at kind of in numbers. We have ownership interests in roughly 395 odd properties.

We did two large portfolio acquisitions in Europe called Gatsby and Jupiter. In those portfolios came a lot of smaller assets along with some very high quality, bigger assets. And so my guess is that over the next two years you'll see the number of properties that we have ownership interests in shrink by almost a third in terms of numbers. But we also remember how roughly $2 billion plus of unencumbered properties and the majority of those unencumbered properties are in Europe. And so like I said before, as we continue to sell these smaller assets and these assets that aren't core assets for us, it's going to be a smaller number this year in terms of the total dollar value. But the cash that's coming out of them will be greater than last year.

[Justin Enbody, CFO]

Hey Mitch, it's Justin. I also think it's worth noting, you'll see as we start to kind of give you more property level information on our consolidated portfolio, if you look at our top-20 assets, that represents slightly, just under 40% of our total NOI, of the 439. So you'll see too as well as, you know, as Bill was mentioning kind of, there are a lot of assets kind of at the bottom that we're going to get rid of. But we're going to start to give you better disclosure and more information on some of these top 20 to 50 assets that really represent the majority of the NOI in the company.

[Mitch Germain, JMP Securities]

At the time of the merger you wrote those assets up to market. So there shouldn't be much in terms of gains. Is that the way to think about it?

[Bill McMorrow, Chairman and CEO]

No. It’s exactly the opposite.

[Justin Enbody, CFO]

Yeah. So I think this one's interesting. As you know, what we previously consolidated KWE. So that 76% that we didn't own was already on our books at about $1.1 billion, which was lower than what you might expect, because we had to take the cumulative effects of depreciation and currency through our financial statements that related to that 76% we didn't own. So as a result, even though we paid a premium, which was still, as Bill mentioned, $260 million below the IPO price, our equity only increased by $322 million.

So as we liquidate some of these assets overtime, you're going to see bigger gains, because we were not able to mark them to fair value.

[Bill McMorrow, Chairman and CEO]

They're not curated fair value. They're curated at depreciated costs.

[Mitch Germain, JMP Securities]

Understood. So that means more EBITDA. Does that just -- should we just stay on the theme that may mean more comp going forward?

[Bill McMorrow, Chairman and CEO]

No, it has nothing to do with comp. That wasn't the point I was making. It has to do with the gains. You’ve asked me about the gains being lowered. And what I'm telling you is that they did not come on at fair value, they came on at depreciated cost. And so that the gains -- we will realize the gains because of that.

[Mitch Germain, JMP Securities]

Right, so how should I think about the cadence of the $35 million in the development? How do we think about that coming online over the course of the next few years?

[Bill McMorrow, Chairman and CEO]

You should think about most of that coming online next year, because the two big drivers of that are Clancy and Capital Dock. And so as Mary pointed out, the Indeed lease, we're not finishing Capital Dock until December of this year. And on top of finishing it, we're also going to be in a rent up phase as far as the roughly 200 apartment units that we're building. They will be finished at the same time. And so most of the income related to that number comes on through the Capital Dock rent up and through the rent up at Clancy, which should be on Phase 2. And then, of course, as we pointed out, we're just starting Phase 3 in April. And so that Phase 3 will take two years to complete and another 9 to 12 months after that to get to full rent up.

[Mitch Germain, JMP Securities]

Okay. So some of the Clancy -- Please go ahead, Mary.

[Mary Ricks, President and CEO, Kennedy-Wilson Europe]

Yeah. So the Clancy 2 is now 89% occupied. I talked about it being 78% at year-end. So we're now almost 90% occupied on Clancy 2. And in Clancy 3, as I said, we just got planning permission there. And we're costing out the numbers in terms of starting the development and that should be done in 2020.

[Mitch Germain, JMP Securities]

Great. So Clancy 2 will contribute some for this year. And then Clancy 3 -- I'm sorry, more or less Capital Dock is really more of a 2019.

[Bill McMorrow, Chairman and CEO]

Correct.

[Justin Enbody, CFO]

And just to be clear Mitch that Clancy 3 is not included in that $35 million. That's more than two years out. So that's, that's on top of the $35 million.

[Mitch Germain, JMP Securities]

Yeah. So, and I just want to make I get this, the $35 million includes Capital Dock, Clancy. It also includes Vintage or does it include some of the investment you're making in operating assets? How do I think about the different pockets?

[Bill McMorrow, Chairman and CEO]

Yeah, it's two pockets. It's the unstabilized assets which would be like Clancy Phase 2 Pioneer Point in the UK would be in the unstabilized bucket. We'd also have the Vintage assets, Chase also in Ireland. And then the other is the development bucket, which would be the Vintage assets and Capital Dock.

[Mitch Germain, JMP Securities]

And how do we -- please go ahead.

[Bill McMorrow, Chairman and CEO]

So we've laid out some pretty good detail in our supplement that runs through all of the unstabilized assets and the development assets and the timing under which we expect them to become finished or stabilize.

[Vincent Chao, Deutsche Bank]

Got You. And then last question for me, I know there's been a pickup in development in Seattle, it does -- on the multifamily side, it does seem like you guys are positioned well given the price point of your product and the most of that is more on -- not garden style. But I just curious in terms of are you seeing any kind of pressure from some of that activity?

[Bill McMorrow, Chairman and CEO]

No, not at all. I mean, you have to remember that most of the development that's going on in Seattle is what I'll call calling the Central Business District. We own basically, we own two high quality properties there, one called Radius and the other one is called Equinox. But the majority of our assets are not in the Central Business District. And I would have to tell you the two, when you look at the office absorption in Seattle. Since 2014, they have delivered 8 million square feet of new office space to the market and it's a hundred percent leased. There's another 8 million square feet that's being delivered in the next, I'd say three years and already 80% of that is leased. But beyond that, there's hardly anything in the development pipeline on the office side.

And I think, very similar to Dublin and my view, Seattle overtime, assuming the jobs continue to grow and the great companies that are there continue to grow, they're very much in a housing shortage. In the central business district it won't really affect us because the biggest property we have is the South Lake Union. But there may be some, I'd call what lengthening of lease up periods, but basically there's a great -- just a very great need for housing there.

[Mitch Germain, JMP Securities]

Thank you.

[Operator]

The next question comes from David Ridley-Lane with Bank of America Merrill Lynch. Please go ahead.

[David Ridley-Lane, Bank of America Merrill Lynch]

Sure. Glad to hear you'll be actually raising third party capital this year. In terms of the mix of the vehicle types and so forth, what would you expect your co-investment fee relative to that $1 billion target?

[Bill McMorrow, Chairman and CEO]

It will depend on the platform, David. But in our -- what I'll call our U.S. fund management business, generally our investment shares is roughly 10%. We are getting into advanced stages of a couple other platforms, where the capital component could be between 25% to 50% in Europe. And as Mary mentioned, I'm not really at the point where I can get into a lot of details yet, but we're looking at how to capitalize the PRS platform going forward. Because as she mentioned to you, the goal over there is to double -- increase the number of units that we own over the next several years to 5,000. And so we're well along in some discussions right now, that will hopefully materialize over the next couple months.

[David Ridley-Lane, Bank of America Merrill Lynch]

Great. And in your total capital expenditures for 2018, should we think about 2017 as being a pretty fair run rate for next year?

[Matt Windisch, EVP]

Hey David, it's Matt. I think it will be somewhere around that range again in 2018. As we finish up a lot of these developments we've discussed as well as continuing to implement our value add programs. So I think that number is a pretty good run rate for '18.

[David Ridley-Lane, Bank of America Merrill Lynch]

All right. Thank you very much.

[Operator]

The next question comes from Colin Trovato with Ranger Global. Please go ahead.

[Colin Trovato, Ranger Global]

Hey guys, can you hear me?

[Bill McMorrow, Chairman and CEO]

Yes, I can. Thanks.

[Colin Trovato, Ranger Global]

Okay. Hey, so good quarter. And I appreciate the additional disclosures that you provided on the NOI bridge. Just a quick one, just so on compensation again, as I know there's been a lot of questions there, but when I'm trying to think about, the increase in quarterly compensations and how that ties to gains, can you help me think about how when the large gains are recognized how that impacts the comp recognized in the quarter?

[Bill McMorrow, Chairman and CEO]

It really doesn't. I mean it's not tied to the gains. I mean we just, we don't look at it that way. What I was trying to really point out to you, was that have roughly half of our payroll is attached to the service businesses that we're in. And I'm trying to really draw a very clear line in terms of how we're handling that and looking at that. But the comp is not directly tied to the amount of gains in any way, shape or form.

[Colin Trovato, Ranger Global]

Okay. So, do you think that potentially in the future there'd be any way to maybe separate out a little more clearly the compensation or like the G&A that's potentially attributed to services business and that is attributable to say, let's call your operating REIT businesses?

[Bill McMorrow, Chairman and CEO]

Yeah, absolutely.

[Colin Trovato, Ranger Global]

I think that would be really helpful.

[Bill McMorrow, Chairman and CEO]

Sure. And obviously the investment part of our business is the higher, way higher margin part of our business.

[Colin Trovato, Ranger Global]

Okay. Thank you.

[Operator]

The next question comes from Jason Ursaner with Bumbershoot Holdings. Please go ahead.

[Jason Ursaner, Bumbershoot Holdings]

Good morning. Thanks for taking my question. There is a fair amount of uncertainty with regards to interest rates and what that might potentially mean in terms of widening the spread and cap rates. It would impact real estate values, and you can kind of make the case the stock's maybe slightly above adjusted for value, if you use some pretty harsh assumptions more likely a bit below fair value given the embedded gains that you seem to have in certain parts of the portfolio. But overall probably, in the right zip code.

So my question just a little bit similar to Craig's and I appreciate you might not be able to answer it. But just given all the work you do to source deals, to lease up, construct, refinance properties and eventually recycled value through dispositions, how frustrating has it been to essentially still be trading below liquidation value, especially in KW Europe's case, and not really getting any credit for the franchise value, despite what most people would argue is a pretty good track record of creating value and just giving that other capital allocators out there tend to trade at a meaningful premium or even multiple of adjusted book value?

[Bill McMorrow, Chairman and CEO]

Are you asking me on a scale of 1 to 10?

[Jason Ursaner, Bumbershoot Holdings]

No. Just, is there anything else, I guess because obviously you pay out a healthy yield, you buy back stock. And I know some of you are personally buying shares. Is there any other avenues you could take as a company to try to help the investment community, I guess understand the franchise value you've been creating?

[Bill McMorrow, Chairman and CEO]

Look, I went on the road for a week in January. I met with 40 either perspective or other investors. We're talking to people all the time. I don't think there's any question that the management team remains the largest single shareholder. There is no question in my mind, and I'm not trying to make any excuses for this. But there was a lot of trading around the merger from hedge funds and so on and so forth. And so you saw a lot of that. And the volumes and our stock in the fourth quarter, were very high in relationship to historical standards. We obviously want the stock to perform at a higher level. And so whether it's through meeting with people, simplifying our story, holding shareholder days.

And I think, I really do think and we have one shareholder that is now starting to take a larger position in our stock that spent two days going to our properties here in LA and Seattle. I think it's very, very difficult for any shareholder or any analysts who is following us that doesn't go see the properties. It'd be like me saying that I can manage the business without going to any of the properties, which is not what I do or Mary does.

And so I would really encourage you all. We're going to do a Shareholder Day in Dublin and we're going to do one in Seattle later this year to come and see first-hand. And I think you would be incredibly impressed at what we've been able to do over the last eight years. So we are obviously mindful of what's gone on. We're obviously very mindful of what's happened with interest rates. That was why I tried to point out to you that our debt maturities we have over the next several years is really fairly small.

I would also tell you though that we are continually looking at the debt structures at the property level have to lock in longer term, fixed rate financings on properties that we intend to keep long term. So, I think that's really pretty much the summary.

[Jason Ursaner, Bumbershoot Holdings]

Okay, great. Appreciate it. Thanks.

[Operator]

The next question is a follow-up from Craig Bibb with CJS Securities. Please go ahead.

[Craig Bibb, CJS Securities]

Actually I tried take myself out of the queue, but I'll ask it anyway since it's quick. If you take compensation and G&A, those two together you are basically at 220. And it's not fair, we want to take services out of there. So just -- can you just ballpark what's like --

[Bill McMorrow, Chairman and CEO]

No, I don't want to just ballpark it Craig, I would want to go back and ask you, get you correct numbers.

[Craig Bibb, CJS Securities]

Okay. All right, great. Well thank you guys.

[Bill McMorrow, Chairman and CEO]

Thanks Craig.

[Operator]

The next question comes from Will Aaron [ph] with KBW. Please go ahead.

[Unidentified Analyst]

Yeah, good morning guys, and thank you very much for your time. Another great set of results. And I guess my question is following on from a lot of the other questions, but with the $500 million of capital that you're going to be releasing over the next couple of years, why you're not talking more about doing buybacks? As I look at your valuation, it seems to imply a sort of about 6.3%, 6.4% implied cap rate. So why not buy what you already know.

[Bill McMorrow, Chairman and CEO]

Yeah, Look very, very good question. And, it's obviously something that's on our radar screen. When KWE was a public company, we did a $130 million buy back there. As I said earlier, we did $90 million in the last two years here. And in addition to that, in Europe over the last couple of years, we probably paid a $150 million worth of dividends. And so it's clearly a topic that is part of the investment analysis that we're looking at. So it -- when you combine the 130, obviously in 90 we've done between the two companies, so we did over $200 million. But we look at that investment opportunity against other investment opportunities. And it's something that we're clearly focused on.

[Unidentified Analyst]

So I guess then taking it one step further, you understand your property values better than anybody. You've done a great job in improving disclosure over the last six months in particular. I think it is clear to us, but it's still complicated, carrying properties at depreciated cost. It's hard for us to exactly work out what there were? You have some very rich shareholders, very well-known and good -- have good partners. Why not? You've done it before. Why not just take this company private?

[Bill McMorrow, Chairman and CEO]

Yeah. Well, again I mean, I think that's just, that's probably not a topic I can talk about on a conference call. But I'm trying to be clear that the allocation of our capital and the use of our capital, as it relates to buying back stock is clearly something that's on our radar screen. But I can't really comment about taking the company private or not.

[Operator]

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

[Bill McMorrow, Chairman and CEO]

All right. So that wraps it up. As I said a couple of times, I would encourage you to come to our Shareholder Days. As I always say, we're always available to discuss anything. And we appreciate your support and you taking the time to be on this call today. So thanks very much.

[Operator]

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