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Edited Transcript of KW earnings conference call or presentation 28-Feb-19 3:00pm GMT

Q4 2018 Kennedy-Wilson Holdings Inc Earnings Call

Beverly Hills Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Kennedy-Wilson Holdings Inc earnings conference call or presentation Thursday, February 28, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daven Bhavsar

Kennedy-Wilson Holdings, Inc. - VP of IR

* Mary L. Ricks

Kennedy-Wilson Holdings, Inc. - President & Director

* Matt Windisch

Kennedy-Wilson Holdings, Inc. - EVP

* William J. McMorrow

Kennedy-Wilson Holdings, Inc. - Chairman & CEO

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Conference Call Participants

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* Anthony Paolone

* Michael K. Hagan

CJS Securities, Inc. - Director of Institutional Equity Sales

* Mitchell Bradley Germain

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Tom Hennessy

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Presentation

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Operator [1]

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Good day and welcome to the Kennedy Wilson Fourth Quarter 2018 Earnings Call and Webcast. Today's conference is being recorded. (Operator Instructions)

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

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Daven Bhavsar, Kennedy-Wilson Holdings, Inc. - VP of IR [2]

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Thank you and good morning. This is Daven Bhavsar and joining us today are Bill McMorrow, Chairman and CEO of Kennedy Wilson; Mary Ricks, President of Kennedy Wilson; Matt Windisch, Executive Vice President of Kennedy Wilson; and Justin Enbody, Chief Financial Officer of Kennedy Wilson. Today's call is being webcast live and will be archived for replay. The replay will be available by phone for 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 fourth quarter [2000] 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.

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William J. McMorrow, Kennedy-Wilson Holdings, Inc. - Chairman & CEO [3]

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Daven, thanks. Good morning everyone and thank you for joining us today. We are pleased to report to another solid quarter capping off a record year of financial results for Kennedy Wilson. I'd like to start by reviewing our financial and property operating results and then focus on our key growth initiatives including growing our property NOI as well as our third-party fee-bearing capital before opening it up to questions. So starting with the financial results.

For the quarter GAAP EPS was $0.21 per share, compared with $0.69 a year ago. For the year GAAP EPS totaled a record $1.04, a 25% increase from $0.83 for 2017. For the year we produced a record annual adjusted EBITDA of $713 million which is 56% higher than the $456 million we produced in 2017.

Adjusted net income totaled a record $397 million in 2018 compared to $243 million last year, an increase of 63%.

Turning to our portfolio, as of year-end our stabilized assets had an estimated annual NOI of $407 million with 48% coming from the Western U.S. and 52% from Europe, primarily in Ireland and the United Kingdom.

We had another solid quarter of property operations with same property revenue growing by 4% and NOI growing by 7% across our global same property portfolio. For the year our same property revenue and NOI grew by 5%.

Our market rate multifamily portfolio saw robust growth in the quarter and same property revenue is up 5% and NOI growth of 6%. These results continued to compare favorably against other public real estate companies who produced an average 2.5% NOI growth for the quarter. Our multifamily portfolio continues to benefit from being located in growing markets and from the successful execution of our value-add strategy by our asset management teams. In particular our multifamily assets in the mountain states, which includes our properties in Salt Lake City, Boise, and Reno continue to experience robust growth. Once again, the mountain state portfolio was a top performing region with same property revenue and NOI growth of over 7% each.

We now own 20 properties and 5,700 units in the mountain state region making it our second largest multifamily region on an NOI basis behind the Pacific Northwest. Boise, which benefits from a low cost of living, continues to draw an influx of young professionals with an estimated 67% of people moving to Boise being under the age of 40, many of them migrating from high-cost cities like San Francisco. Rents in Boise grew last year at one of the highest rates in the nation and yet remained attractive and relatively affordable.

In Salt Lake City, global tech companies such Adobe, Intel, Facebook, and Microsoft continue to feel the city's economic growth. Utah's Provo, Orem submarket which is home to BYU, was ranked by the Milken Institute as a top performing city in the country for a second year in a row. This study evaluated the 200 largest metros in the U.S. across that a number of metrics including job creation and wage gains.

Average rents at our mountain state portfolio properties are 40% below the rents in our California portfolio, so we think the region's affordability coupled with continued population growth and a dynamic tech sector creates a very attractive investment market.

Turning to our global commercial portfolio of which office assets represent the largest component, we had a good quarter with 2% revenue growth and NOI growth on a same property basis of the same amount. In total, our stabilized commercial portfolio sits at 94% leased. In the U.S., our results were largely driven by strong asset management and leasing activity with occupancy increasing 3% in the quarter on same property basis. Our asset management team completed office leases across 210,000 square feet in the quarter bringing our year-to-date total to 34 office lease transactions across almost 800,000 rentable square feet with a 6% increase in rents.

Similarly in Europe we saw a strong leasing momentum at our properties. During the quarter we completed 65 lease transactions across 1 million rentable square feet resulting in a 17% increase in rents. For the year in Europe we completed 195 commercial leasing transactions across 3.1 million square feet, adding $13 million of annual rent which represents a 12% increase on previous rents.

Now I'd like to discuss our progress on the 3 key strategic global initiatives that we have laid out on previous calls and which continue to be our primary emphasis in 2019 and beyond.

Number 1, growing our property NOI. Number 2, growing our investment management in fee business. And number 3, executing our capital recycling and asset sale program where we are producing outsized returns on our investments and recycling that capital into other strategic opportunities.

So starting with number 1, there are 2 key ways in which we grow our property NOI. First, we're growing the income on a stabilized portfolio and second through the completion and lease of our development pipeline.

Within our stabilized portfolio, we are focused on growing NOI organically through our value-add asset management program. In the U.S. we continue to make great progress at strategic value-add CapEx projects. For example, in the quarter we completed a new leasing center and fitness center at Savier in Portland and also completed common area upgrades of both Whitewater Park in Boise and [Balar] in Greater Seattle. We completed approximately 1,000 unit interior renovations in 2018 and our goal is to renovate another 1,500 to 2,500 units over the next 3 years. We typically spend $10,000 to $15,000 per unit renovation, and we typically see 20% to 30% returns on cost.

Similarly in Europe we have many ongoing asset management initiatives that look to grow our in-place NOI. In the U.K., the office markets had a very strong quarter and year. 2018 absorption in Central London office totaled 14 million square feet, surpassing 2016 and 2017 levels and well above 10-year averages. London maintained its position as the top city for global real estate investment in 2018 according to [JOL]. At our property known as Friars Bridge Court in London's South Bank, during the quarter we signed a 15-year lease with WeWork, which was the largest lease transaction in the South Bank submarket in 2018.

WeWork will ultimately take over all 8 floors at this 98,000 square foot asset in 2021 following a comprehensive refurbishment of the building. Once stabilized, we expect this asset to generate a yield on cost to KW of over 7%.

The second way for us to add recurring NOI is through completing our lease up initiatives and development projects which include over 4,100 market rate and affordable multifamily units; 2.9 million square feet of commercial property; and a 150-room hotel at the 81-acre Kona Village Resort in Hawaii. Based on current market conditions, we expect these assets in total will add $100 million to KW's estimated annual NOI by the end of 2023, a third of which we expect to add by the end of 2020.

In the U.S., the bulk of our income-producing developments are in 2 key ventures. First we have almost 2,600 units under development through our Vintage Housing joint venture, which is engaged in the management and development of senior and affordable housing. When complete, these projects will bring KW an expected $25 million of cash from developer fees and the sale of tax credits and $8 million in annual NOI with no equity investment.

Taking a step back, in 2015, we originally acquired a majority interest in Vintage Housing, which included an existing 5,500 unit portfolio for $78 million using the proceeds from the sale of our Japanese apartment business. Today, the portfolio has grown by 25% to 6,900 units while our cash basis has been reduced through distributions to $2 million. We remain on track to grow joint venture up to 10,000 units located in the Western United States over the next few years with minimal cash required from KW.

Second, we continue to make progress at the Kona Village Resort. During the quarter, we appointed Rosewood as the hotel operator, this iconic location. Rosewood is one of the top luxury hotel groups in the world and currently manages 24 one of a kind resorts. The Kona Village Resort is currently expected to open in 2022 and is in a 50-50 joint venture with a family office.

The remainder of our development pipeline is heavily weighted toward Dublin, Ireland which represents 60% of the development NOI that we expect to generate by 2023. The major projects underway in Dublin include both office and multifamily such as Capital Dock, Clancy Quay, Hanover Quay, Kildare, The Grange and City Block 3. Total cost of these projects is approximately $1.3 billion.

I'd like to hand the call over now to Mary Ricks, the President of Kennedy-Wilson.

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Mary L. Ricks, Kennedy-Wilson Holdings, Inc. - President & Director [4]

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Great. Thanks Bill. In Europe, we continued to make excellent progress in stabilizing assets and completing development projects. During the quarter, we stabilized the final portion of the Capital Dock office space. We have now successfully completed construction on time at this project which represents one of the largest developments in Ireland. Two of the office buildings are now fully occupied by Indeed for 20 years and the final building is occupied by J.P. Morgan who bought the building from us in 2017 and took occupancy in the quarter.

Currently we're in the midst of leasing up the 190 premium multifamily units and making great progress on leasing the 26,000 square feet of retail space, which we expect open for business this summer. Once fully occupied, we expect the asset to stabilize at an 8% yield on cost.

Separately, we're pleased to announce that we have started construction at Hanover Quay, our 69,000 square feet office asset adjacent to Capital Dock. In Q3, we will start construction at Kildare Street, which is our 64,000 square foot office project next to the Shelbourne Hotel. We remain on track to complete both of these assets by 2021.

In the U.K., we completed the largest lease transaction in the southeast submarket last quarter at our Leavesden Park asset with the 200,000 square foot lease to global online fashion retailer ASOS for 15-year term certain, which will add $7 million to our estimated annual NOI in the second half of this year. This asset will stabilize at an 8% cap rate to KW. Altogether, Europe is on target to deliver approximately $65 million out of our $100 million globally of additional estimated NOI by 2023 including $24 million by the end of 2020.

We are typically seeing stabilized yields on cost of 6% to 7% or roughly 250 basis points to 300 basis points higher than where similar assets are currently transacting. We continue to reshape our portfolio in Europe as we execute on our business plans and dispose of non-core assets many of which were acquired in 2 large portfolios from 2 financial institutions in 2014 and '15. Over the last 3 years, we've sold over 120 assets in the U.K. with significant gains and continue to focus on our core sectors of office and multifamily. As a result, Ireland now represents 44% of our European NOI with the U.K. accounting for 46%.

Our second key global initiative is raising fee-bearing capital and growing our investment management platform. In total, we currently have $2.2 billion of fee-bearing capital of which 39% is invested through our [comingled] discretionary funds and the remainder through our separate account business. Given our 30-year track record, we have a long history of successfully raising third-party capital and in fact have raised in excess of $10 billion over the past decade.

Our partners in these platforms include major institutional investors including insurance companies, family offices, public and private pensions and private equity clients located in North America, Europe, the Middle East and Asia. In the U.S., in January we closed 2 more separate account investments totaling approximately $200 million with a major insurance company as our partner. We now have invested a total of almost $300 million in this new unlevered core platform where KW has a 5% economic interest in the portfolio and will manage the properties while earning customary fees.

In Europe, we continue to make great progress on our 50-50 Irish multifamily joint venture with AXA IM - Real Assets, which is the real estate investment arm of the $1.6 trillion multi-national French insurance company AXA Group. Following our acquisition of The Grange in the quarter in the growing Sandyford submarket of Dublin, our platform with AXA now totals 1,600 built units across 8 properties with approximately 1,000 units at various stages of development.

In total, our European multifamily portfolio currently stands at over 4,000 units that are either built or at various stages of development. The Irish economy continues to perform strongly with estimated GDP growth of almost 9% for 2018 and another robust forecast of 4.5% for 2019.

Over the last 3 years, Ireland has averaged 6.1% GDP growth, the highest in the EU and almost triple the eurozone average of 2.1%. This strong economic performance is supporting sustained job creation with the unemployment rate now sitting at just 5.3%. Ireland also continues to be ranked number 1 in the world for high-value foreign direct investment and we expect to see continued strong flows of FDI occurring in 2019. 2018 was a record year for the Dublin office market with take-up in the capital reaching 3.9 million square feet.

The demand was driven primarily by the expansion of large technology companies such Google, Facebook, Microsoft, Amazon, Indeed and LinkedIn, so continue to feel growth in the Silicon Docks. Financial services firms such as J.P. Morgan, Bank of America, Citi and State Street are also playing a large role, driven in particular by the expansion of custody and fund services businesses.

Ireland is one of the world's large fund centers with approximately $2.5 trillions of funds domiciled there. Given the extraordinary education system in Ireland, we continue to see both young, well-educated Irish-born nationals and immigration driving labor force growth, in turn creating more demand for both office and multifamily. The multifamily leasing market in Ireland continues to perform very strongly driven by high demand and significant undersupply.

Dublin city alone is estimated to require 13,000 units per annum between 2019 and 2022. We aim to continue playing our part in delivering much needed new housing in Dublin and remain firmly on track to hit our near to medium term goal of growing our multifamily portfolio to 5,000 units. Looking ahead, we're confident that we will raise significant new fee-bearing capital in 2019, which we're executing without any meaningful changes in overhead, resulting in high margin growth.

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

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William J. McMorrow, Kennedy-Wilson Holdings, Inc. - Chairman & CEO [5]

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Thanks Mary. The third area of focus is our asset sale program and the recycling of capital. During the quarter, we sold $313 million of assets of which our share was $264 million. Europe accounted for 86% of our asset sales including the largest sale in the quarter of 2 office building project in Dublin totaling 82,000 square feet which we sold to Google. In total, our share of the gains from the sale of real estate for the quarter was $88 million.

In the quarter, our asset sales generated $169 million of cash to KW, and year-to-date have generated $634 million of cash to KW. We allocated our investment capital in 2018 as follows; 27% went to our stock repurchase plan; 22% to property level CapEx; and 51% to new acquisitions. In 2018, we also returned a record $290 million of capital back to our shareholders in the form of KW dividends and share repurchases, which equates to approximately $2 per share.

Since our initial dividend in 2011, we have increased our dividend per share by 425% to $0.84 per share. Since the beginning of 2016, we have repurchased a total 14 million shares at an average price of $18.41 or a total of $255 million in repurchases. Lastly, we develop -- we divested of our Meyers research business in the fourth quarter. Originally acquired back in 2012, we grew that division from 12 employees to nearly 150 employees.

In 2018, Meyers contributed $15 million to our revenues against operating expenses of $17 million. During our ownership, Meyers Research launched Zonda, its flagship platform that provides housing market insights backed by real time data. As a result of the sale of Meyers we recorded a gain of $40 million in Q4. Also due to the sale of Kennedy Wilson started 2019 with our lowest payroll -- base payroll in 5 years. We also continued to keep elevated levels of liquidity with approximately $1 billion between cash and a $500 million un-drawn revolving credit facility. In 2019, we will continue to focus our asset sale program on selling smaller assets as well as non-core assets or assets where we've completed our value-add business plan. For example, in January we sold the Ritz-Carlton, Lake Tahoe, for $120 million. We and our 50% partner acquired the asset in 2012 for $74 million, which came with a 170 rooms and 23 unsold penthouse condos.

During our ownership, we sold the condos for $50 million, developed a lake club amenity, and grew the revenue per available room by 100%. Over the life of the investment, KW earned a cash profit of $37 million including $13 million which was to be recognized in Q1 2019. In total, assuming market conditions remain stable, we expect to generate between $400 million to $500 million of cash to KW from asset sales in 2019 which will be utilized in part to fund our CapEx and development initiatives totaling $250 million to $300 million over the next 12 months to 18 months. The remainder of the cash will be used for paying off debt in new investments.

So once again, I'm very pleased with the results for 2018 and how our business is positioned for 2019 and beyond. So with that I'd like to open it up to any questions.

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Questions and Answers

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Operator [1]

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We will now begin the question-and-answer session. (Operator Instructions) We'll take our first question from Mitch Germain with JMP Group.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [2]

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I know in London (inaudible) that the mayor is pushing for some rent controls in the local family side. Is that going to have any implications on your business there or the way that you structure strategy?

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Mary L. Ricks, Kennedy-Wilson Holdings, Inc. - President & Director [3]

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We actually just own one asset in London on the multifamily side, called Pioneer Point. We bought that -- it was actually a piece of debt that we bought from the lender, took title, did our whole amenity and refurbed the unit. And now we're in the high 90%s in terms of let. So no, I don't expect that to have any real impact on that particular asset. And I mean I think multifamily is a sector in London that is now up and coming. There's a lot of capital that's gone into the sector, very much like Dublin obviously where we own quite a lot of projects there. But in both those places the multifamily market is completely under supplied. And so we're pretty excited about our project in Dublin that we're doing with AXA in our 50-50 JV. But in London now, it's not going to impact at this point.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [4]

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Could there be any implication of some sort of drafting from other regions adopting similar protocol?

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William J. McMorrow, Kennedy-Wilson Holdings, Inc. - Chairman & CEO [5]

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You mean globally?

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [6]

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Or like in Ireland maybe them issuing something similar to that or you think it's just a specific case to U.K.?

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William J. McMorrow, Kennedy-Wilson Holdings, Inc. - Chairman & CEO [7]

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Well, I think generally -- I mean for example here in California, in Los Angeles, there is rent control. But when you think about the apartment business, you generally have 50% to 60% turnover in your units every year. And so like for example here in Los Angeles, you're allowed once those units turnover to bring those units that have turned over to market. So while there is rent control, it doesn't tend to have a big impact because of the amount of turnover that you have every year.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [8]

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And then last one from me, seems like a fairly similar level of sales this year. Obviously a lot of it will be depending on how much your share of certain assets are, but what is the target of the assets that -- the profile of the assets that are going to be sold?

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William J. McMorrow, Kennedy-Wilson Holdings, Inc. - Chairman & CEO [9]

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Well, like I said in the script, we continue to sell these non-core assets that when we bought the 2 portfolios from the financial institution, they came with a large number of assets. And so we're continuing to work through those. And then some of the assets that we don't want to keep necessarily long term, but have reached their full value in our opinion. And we have a sense that there is a tremendous amount of global capital that is coming into the real estate business today. And so we believe that this year of 2019 will be another year of really excellent sales opportunities. And so we want to continue to avail ourselves of this good market. Generally speaking you've got interest rates even though they've creeped up somewhat, you've got the tenure here at still historical lows, and in the 2 big markets to rent and Europe, you've got tenure rates at historic lows. So we think there's a very, very good market for selling and like I said, we plan to generate to us net cash of somewhere between $400 million to $500 million for the year.

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Operator [10]

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We'll take our next question from Anthony Paolone with JP Morgan.

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Anthony Paolone, [11]

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I'll start with where Mitch just left off and the -- in the fourth quarter your net sellers used some of the excess cash to pay down debt, so is it -- to think about the $400 million to $500 million in 2019, does that end up reducing leverage overall or do you think that just gets redeployed at similar type of leverage levels and stays pretty constant?

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William J. McMorrow, Kennedy-Wilson Holdings, Inc. - Chairman & CEO [12]

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Yes, I mean the first thing I would talk about, [Mitch], is that, we still we have from the KWE acquisition was closed in October of 2017, we had a $200 million 4-year term loan and we paid that down from $200 million to $75 million, so that's an unsecured term loan that we plan to pay off this year. We also have some other asset level debt pay downs that we plan to do in Europe this year, so I don't think you're not going to see leverage points in the company increasing. We only -- and when you think about this year too as far as debt maturities, we really only have 2 debt maturities in the entire company. One is on the Capital Dock project that Mary spoke about and that one is roughly $100 million, $125 million. We're already in the process of refinancing that now and we expect to close that in the next 30 days to 45 days. And then we have one other loan of similar size that matures in December that we're also in the process of taking care of now. So we don't really have any debt maturities to speak of at all this year. And I think also too as we talk the debt side the other important point to remember is that our average debt cost are running us right around 4% and we have average maturities left of just slightly under 6 years. And when you think about our debt too, we've always along the way elected to generally speaking not be floating rate debt users and so 90%-plus of our debt is either fixed or hedged. And the only place that we generally are using floating rate debt is in our discretionary fund management platform where the lives of those assets as far us keeping them generally is somewhere around 3 years or 4 years and we want the flexibility in those situations to be able to sell those assets without any prepayment penalty.

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Anthony Paolone, [13]

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And if I could shift over to the core, department same-store growth was very strong in '18 and it sounds like you have continued to have unit renovations and things like that that generates strong returns. Just curious if you think that level of core growth is sustainable until '19 or if that moderates, how much you think is set to come from kind of the work you're doing at the asset level versus what you need to happen in the market in general?

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William J. McMorrow, Kennedy-Wilson Holdings, Inc. - Chairman & CEO [14]

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Matt, you want to?

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Matt Windisch, Kennedy-Wilson Holdings, Inc. - EVP [15]

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Sure. So I think our goal on these things is to always outperform the market and to find both locations and assets where we think we can add value over time and to go into markets when they're undiscovered from an institutional capital perspective, get in there and try to grow rents by adding value to the assets. And so we're continuing to turn units as you mentioned in these markets and we're trying to find markets where they're relatively affordable and where there's an ability to grow rents over time. So to answer your question, our goal is to really continue to outperform the market by a couple of 100 basis points and so assuming the market growth remains roughly 2% we're hoping we can get it -- be at 4% revenue growth.

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William J. McMorrow, Kennedy-Wilson Holdings, Inc. - Chairman & CEO [16]

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I would say too, to add on to Matt's comments with the -- we've had a 30 year history finding markets before other people get there. And so we have -- if you think about Seattle, we started in Seattle almost 15 years ago. And so we're a big player in the Seattle market, and when we went to Salt Lake City, now probably 5 years or 6 years ago, there really weren't institutional players in that market. So we tend to try and get into these markets just like we've done in those 2 that I mentioned, the East Bay of San Francisco, what we've done in Ireland, we get into these markets before they're really on everybody's radar screen. And then -- and that allows us to build our infrastructure and our management teams, and to get decent size positions in those markets before everybody else piles in.

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Anthony Paolone, [17]

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And then just last question on Dublin with that being a large piece of the future development pipeline, in the economy they're doing very well, is cost inflation factors you're trying to get development returns to work out? How do you think of that as a risk as you place deals into the pipeline there?

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William J. McMorrow, Kennedy-Wilson Holdings, Inc. - Chairman & CEO [18]

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I'll let Mary answer that, but before -- I think the one thing that we have discovered in Ireland is you can actually be very precise on your timing and your budgeting in terms of building there. So you have real good cost certainty when you start the projects there. But Mary, I will turn it to you.

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Mary L. Ricks, Kennedy-Wilson Holdings, Inc. - President & Director [19]

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Yes, I mean, just to add to that, they're helping escalating construction costs obviously with all the building that's going on. But our live projects now, we have fixed price contracts with our contractors. We also have I guess the proprietary sort of template that provides the contractor with a high degree of early design certainty. So that allows us to mitigate the risk of cost overruns. And then I guess the last point I would make is the fact that we have been such big builders in Dublin, we have very deep relationships with all the subs and the contractors. So it's really helpful in terms of keeping our costs down.

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William J. McMorrow, Kennedy-Wilson Holdings, Inc. - Chairman & CEO [20]

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And Mary, too -- the other thing I would add to that is that both it in Europe, based in Dublin, and here in the United States, we have our own construction management teams. And so between those 2 jurisdictions we probably have close to 25 people that are in those groups. And so like a lot of what we've done at KW over the years is really manage internally all these processes, whether it's asset management, or the construction management, and that really allows us to keep very, very, very good control of costs and deadlines.

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Operator [21]

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(Operator Instructions) We'll take our next question from Tom Hennessy with Deutsche Bank.

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Tom Hennessy, [22]

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I just wanted to follow up on the international side, and really just on the TI side. I know it's not a big deal over in Europe, but could you classify how free rent has been trending, I mean maybe perhaps versus the U.S. markets?

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Daven Bhavsar, Kennedy-Wilson Holdings, Inc. - VP of IR [23]

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He's asking about free rents in Europe, how it's --

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William J. McMorrow, Kennedy-Wilson Holdings, Inc. - Chairman & CEO [24]

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Oh, free rents. Yes, go ahead.

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Mary L. Ricks, Kennedy-Wilson Holdings, Inc. - President & Director [25]

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Yes, I mean I think -- look the take-up in London and in Dublin have exceeded 10-year averages significantly. So I think when you look at our leasing that we've done, the 195 leases, in the U.K. we did 140 leases, which resulted in $40 million of rent. So our team was very, very active on the leasing side. You're also seeing [vaults] that are very long. So the terms of the leases, the first break were 8.5 years on all the deals that we did. So I would say on the deals that we've done, we haven't seen a whole lot of additional free rent than what's the average in the market. And London's held up very, very well despite what's going on with the Brexit noise. So thus far we haven't seen a whole lot of softening. And just to remind you in terms of our U.K. office portfolio, we have no financial institution exposure. We've got long vaults and what we've seen is really our tenants wanting to lock down their space and have certainty in their occupancy costs. And so our asset management team has done an unbelievable job from the time the sort of referendum was announced to today and going and being proactive with our tenants and making deals in terms of regears on our vacant space, cleaning up that vacant space and getting that re-let. And so we're doing deals in the U.K. for example at well ahead of passing rents, 14% ahead of passing rents. So we're feeling really good about our portfolio and thus far fundamentally, no issues.

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William J. McMorrow, Kennedy-Wilson Holdings, Inc. - Chairman & CEO [26]

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And too, Mary, to add to your comments, I mean if you think about the Indeed lease that's a 20-year lease and the ASOS lease was 15 years, and so what we've said on these calls for years I think is that you get very attractive lease terms in Europe. And I say Europe, we're really focusing in the United Kingdom and Ireland. And here in the United States, generally speaking your lease terms are somewhere between 5 years to 10 years. And so -- and more skewed in recent years to 5 years to 7 years. And so that in part is what makes the office market extremely attractive in those 2 markets that we're in. And the other part of it too that we're seeing is that it had -- like the growth in Ireland really has just very, very, very little to do with what's going on with Brexit. You've got these major financial institutions like JP Morgan seeing the benefits of being in these markets because of the highly educated population in Ireland where you can basically go from grade school to the university for very minimal cost as compared to here in the United States. So it's a very, very attractive market for office leasing.

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Tom Hennessy, [27]

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That's actually great color. And then just a follow-up to -- I mean on the whole Brexit impact, is there an impact on demand or whatnot? I mean have you seen any changes of attitude from existing tenants -- new or existing tenants? I know you did mention that you don't have financial institutions but...

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Mary L. Ricks, Kennedy-Wilson Holdings, Inc. - President & Director [28]

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No, I mean, we haven't. Again, I think they're just looking for certainty in things that they can control, so occupancy cost being one of those big things for them. So we've just been really proactive. As I said, the team has done a great job.

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William J. McMorrow, Kennedy-Wilson Holdings, Inc. - Chairman & CEO [29]

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Well, and to the contrary, Mary, I mean we've been actually doing leases well above the previous rents. The occupancies are high and I think that's the other misnomer that there was an article I think in the Wall Street Journal here a week or so ago that there's roughly 500,000 financial services jobs in the United Kingdom and at the beginning of the whole Brexit discussion a couple of years ago, there was -- everybody was very concerned that you were going to see like a meltdown in that sector as far as employment. But it hasn't proven to be the case at all. And when you look at really developed capital markets around the world, the United Kingdom, Brexit or no Brexit or whatever ends up happening, which nobody can forecast at this point, is still going to be one of the places in the world where people are willing and want to invest their capital.

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Mary L. Ricks, Kennedy-Wilson Holdings, Inc. - President & Director [30]

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Absolutely. And yes, shown by the record investment volume last year of $64 billion.

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Operator [31]

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We'll take our next question from Craig Bibb with CJS Securities.

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Michael K. Hagan, CJS Securities, Inc. - Director of Institutional Equity Sales [32]

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It's actually Mike Hagan on Craig's behalf. And thank you for the color both on the (inaudible) demographics, but also like the cost control side of it. I guess my question would be, what do you think is possible in terms of cap rate spreads there? And also what would cap rate spreads be for potentially including promotes?

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William J. McMorrow, Kennedy-Wilson Holdings, Inc. - Chairman & CEO [33]

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Yes, I mean the really attractive part about Kennedy Wilson if you're looking at it from like I'm saying from my point of view is that we have the ability to play -- in the Western United States and Ireland and the United Kingdom you've got different debt cost starting -- that's the starting point. And so in the United States the tenure 265-270, in Ireland the tenure less than 100 basis points. And so you're seeing the ability to -- a good loan here in the United States for 10 years today is somewhere between 4% and 4.5% depending on the asset and where it's located. And in Ireland for example, we're working on a pretty long-term piece of debt financing that's going to end up being around 2%. And so as we said in the script, you've got several of these assets that are stabilizing between 7% and 8% cap rates. And so your spreads there are very, very high. And we can make those decisions about where we want to allocate capital. And like I said we have the luxury of being in markets that have strong job growth and strong university systems which is the key to really all of the real estate investing that happens around the world because you've got to have job growth and population growth to sustain occupancies and rents.

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Michael K. Hagan, CJS Securities, Inc. - Director of Institutional Equity Sales [34]

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And then I guess also another question about pretty attractive financing and returns, can you just provide a little more color on the Vintage Housing developments that you discussed?

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William J. McMorrow, Kennedy-Wilson Holdings, Inc. - Chairman & CEO [35]

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Matt?

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Matt Windisch, Kennedy-Wilson Holdings, Inc. - EVP [36]

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Sure. Yes, so I think as a starting point, our thesis is that there is just a lack of affordable and senior housing on the West Coast and there's obviously a need for that type of housing. And so in this venture we have with our partners in Vintage Housing, we're able to provide high-quality senior and affordable housing primarily in -- the Seattle market is our largest market as well as Reno and here in California as well. And through the tax credit program we're able to either buy existing properties or build new properties for little to no equity from us and our partner, utilizing tax-exempt bond financing and tax credits to do so. And so we have several thousand units that are in the pipeline that we expect to finish in the next couple of years that will produce not only some upfront fees to us, but also recurring cash flow over the long term. And so that's an area that we want to continue to focus on and try to grow smartly over the next few years with the goal of getting up to 10,000 units in the next year or 2 with 9,000 that are already either built or in the pipeline.

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Michael K. Hagan, CJS Securities, Inc. - Director of Institutional Equity Sales [37]

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And if you could just allow me one more here, should we expect kind of continued sales of multifamily in Northern California and the reinvesting in those 3 kind of areas that you were talking about also favorable demographics, the Boise's and Salt Lake City et cetera?

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Matt Windisch, Kennedy-Wilson Holdings, Inc. - EVP [38]

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Yes, I don't think -- we don't have anything specific of size in the Bay Area that we're focused on selling this year. We have sold down the Bay Area portfolio a bit, but we're very pleased with the assets we have specifically in the Bay Area. But there are a couple of multifamily assets that we do have planned for sale that we would look to redeploy into what we would view as higher return opportunities.

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Operator [39]

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There are no further questions at this time. I would like to turn the conference back to Bill, CEO, for any closing remarks.

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William J. McMorrow, Kennedy-Wilson Holdings, Inc. - Chairman & CEO [40]

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Okay. As I say to everyone, thank you for being on this call and thank you, we always appreciate the continued support of what we're trying to do here at KW. So thanks very much.

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Operator [41]

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This conference has now concluded. Thank you for attending today's presentation.