Kennedy-Wilson Holdings Inc (KW) 2014 Q2 法說會逐字稿

Welcome to the second-quarter 2014 Kennedy Wilson earnings conference call. My name is Ellen and I will be your operator for today's call. (Operator Instructions). Please note that this conference is being recorded.

I will now turn the call over to Ms. Christina Cha, Vice President of Corporate Communications for Kennedy Wilson. You may begin.

Thank you. Good morning, everyone. Joining us today are Bill McMorrow, Chairman and CEO of Kennedy Wilson; Matt Windisch, Executive Vice President of Kennedy Wilson; Justin Enbody, Chief Financial Officer of Kennedy Wilson; and Mary Ricks, President and CEO of Kennedy Wilson Europe calling in from London today.

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 one year. Please see the Investor Relations section of Kennedy Wilson's website for more information.

Statements made during this conference call may be 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 will now turn the call over to Bill McMorrow.

Thank you, Christina, and welcome, everybody, and, as is our normal practice, I'm going to walk through the earnings release and then we will open it up for questions after that.

But for the three months ended June 30, 2014, our adjusted EBITDA was $122.2 million which is up 237% from $36.3 million for the same period in 2013. Our GAAP net income to common shareholders was $36.3 million or $0.39 per basic share and $0.38 per share fully diluted compared to a loss of $2.5 million or $0.03 per basic and diluted share for the same time period in 2013.

For the six months ended June 30 the adjusted EBITDA was $191.5 million, a 182% increase from $68 million in the same period in 2013. Our adjusted net income was $98.5 million or $1.11 per basic share compared to $26.7 million or $0.40 per basic share for the same period in 2013.

GAAP net income to the common shareholders for the six-month period was $46.8 million or $0.51 per basic and $0.50 per diluted share compared to a loss of $6.1 million or a $0.09 loss per basic and diluted share for the same period in 2013.

As I mentioned in the release, we had a very active first half of the year with approximately $2.2 billion in new acquisitions, including substantially investing all of the proceeds from the $1.7 billion IPO of Kennedy Wilson Europe, which we completed in the latter part of February of 2014. At the same time we have been able to realize significant gains in our existing portfolio through strategic asset management and selected investment realizations.

On the financial highlights, during the second quarter the Company and its equity partners sold the portfolio of commercial properties located in Dublin, Ireland, to Kennedy Wilson Europe. As a result of the sale the Company collected fees totaling $26.2 million in addition to a profit of $26.6 million on its 25% interest in the investment. This transaction was approved by the independent shareholders of KWE.

During the second quarter, as a result of amending an existing operating agreement with one of our equity partners, the Company gained control of an unconsolidated subsidiary that owns the majority of the Company's investments in Japan. The subsidiary holds 2,400 multi-family units in 50 properties located primarily in Tokyo and its surrounding areas. The Company has an approximate 41% ownership interest in these investments.

As a result of gaining control of this investment, the Company was required to consolidate the assets and liabilities at fair value and recognize an acquisition gain of $66.7 million of which $22.9 million was allocated to non-controlling equity partners.

Shareholders' equity increased $207.8 million or 27% to $976.1 million at June 30 from $768.3 million at December 31, 2013. Since December 30, 2013, our total consolidated assets have increased 198% from $1.8 billion to $5.4 billion at the end of the second quarter.

Turning to each segment, on the investment business for the three months ended June 30, 2014, the Company's investment segment reported the following results: adjusted EBITDA was $97.4 million, a 215% increase from $30.9 million for the same period in 2013.

For same property multi-family units total revenue increased 7%; net income increased 10%; and occupancy remained at 95% at the property level. For the same property commercial real estate total revenue increased 3%; net income increased 2%; and occupancy remained at 85% at the property level from the same period in 2013.

The Company and its equity partners acquired $1.5 billion of real estate-related investments. These acquisitions include $1.3 billion of real estate-related investments acquired by KWE. For the six-month period the adjusted EBITDA in the investment business was $165.5 million, a 187% increase from $57.6 million for the same period of 2013.

For the same property multi-family units, same period, total revenues increased 7%; and operating income increased 10%; and the occupancy remained at 95%. For the same property commercial real estate total revenues increased 4%; net operating income increased 2%; and the occupancy levels increased 2% to 85%.

As I said earlier, the Company and its equity partners acquired approximately $2.2 billion of real estate-related investments during the six-month period in which the Company invested $364.3 million of equity. These acquisitions included the $1.7 billion of real estate-related investments acquired by KWE.

In terms of percentage splits, the Company's investments year to date were directed at 87% to the United Kingdom and Ireland and 13% to the Western US.

As of June 30, the Company and its partners have an investment portfolio of approximately $8.3 billion in assets including $4.4 billion in equity in which we, Kennedy Wilson, have an approximate 34% ownership interest. The investment portfolio now totals 29.6 million rentable square feet and includes 128 commercial properties and 18,333 multi-family units.

Subsequent to June 30, in July we acquired an additional 1,212 multi-family units in South Seattle bringing our global multi-family portfolio to 19,545 units. As I've said on previous calls too, in addition to the 19,545 units we have in the entitlement -- we're in the process of entitling approximately another 3,000 multi-family units in the United States and Europe on land with little or no basis that we own within or adjacent to existing income producing multi-family assets.

To give you a snapshot of the 12-month period from June 30, 2013 to June 30, 2014, we have added 10.3 million rentable square feet of real estate to its investment portfolio including 1,700 multi-family units and 68 commercial properties. And remember, as I said before, the South Seattle portfolio closed in July.

During the same period we've been able to grow our annual multi-family NOI by approximately $30 million to $191 million. Additionally, we grew our commercial annual NOI by $136 million to $211 million on an annual basis.

Finally, our investment account grew by approximately $440 million to $1.5 billion representing a 41% increase over 12 months. The increase of $440 million is after realizing $200 million of distributions to KW. So in other words, $200 million came in, $640 million went out to achieve that 41% increase period to period.

For the three months ended June 30 on our service business 2014, our fees increased by 100% to $39 million from $19.5 million for the same period of 2013. Fees earned from investments that were eliminated in consolidation totaled $6.1 million compared to $700,000 for the same period of 2013. In accordance with US GAAP, these fees were excluded from our total fees of $39 million and $19.5 million respectively.

Adjusted EBITDA for the services business was $32.7 million, a 217% increase from $10.3 million for the same period in 2013.

Turning to the six-month period ending June 30, 2014, our service segment reported fees of $52.1 million which was a 57% increase from $33.1 million for the same period in 2013. Fees earned from investments that were eliminated in consolidation totaled $7.7 million compared to $1.6 million for the same period in 2013.

Adjusted EBITDA for the services group was $38.3 million, a 132% increase from $16.5 million for the same period in 2013.

Kennedy Wilson Europe -- I will give you some brief highlights on here. Just as an aside, they had their initial earnings call in Europe earlier today. Since its launch in February 2014 KWE has acquired 74 direct real estate assets with approximately 5.9 million square feet and two loan portfolios secured by 25 real estate assets. The total purchase price of the combined purchases was $1.7 billion.

Kennedy-Wilson Holdings now owns 13.2% of KWE's total share capital as of June 30 and one of our wholly owned subsidiaries serves as the external manager of KWE in which capacity we receive certain management fees and performance fees.

Reporting on events subsequent to the end of the second quarter, in July 2014 Kennedy Wilson increased its unsecured corporate line of credit from $140 million to $300 million. The line of credit currently has no outstanding balance. We added three new money center banks to our line of credit, Bank of America, Deutsche Bank and JPMorgan.

In July 2014, as I mentioned earlier, the Company acquired a multi-family portfolio comprised of three properties located across southern submarkets of Seattle. The portfolio consists of 1,212 units and was purchased for $127 million. Kennedy Wilson invested 45% of the equity in the transaction and assumed debt of $85 million at a fixed rate of 4.25%.

In August 2014 the Company converted its note secured by the landmark Shelbourne Hotel located in Dublin, Ireland, into a direct 100% ownership interest in the property. The hotel, currently on an annual basis, is generating $40 million in revenue and is currently running at 90% occupancy.

In Q3 to date we have closed on or have under contract approximately $350 million of deals both in the US and in Europe through KWE. In the US these deals include the 1,212 unit three property portfolio I've mentioned that we closed in July. Through KWE we completed the Portmarnock Hotel and Golf Links acquisition and are under contract to buy a retail center and one portfolio secured by 13 assets in Ireland which together total $200 million.

Also in Q3 we have sold or are under nonrefundable contracts to sell three office buildings in the Western United States totaling over 400,000 square feet which will generate approximately $50 million of cash to the Company. One of those three office buildings closed last week, another of those office buildings is scheduled to close today.

Finally, subsequent to the end of the quarter, today Kennedy Wilson Europe completed a $215 million debt financing secured by the Tiger and Artemis portfolios in the United Kingdom. We have seen financing spreads in Europe decrease by 200 to 300 basis points in the past 12 to 18 months.

We're actively pursuing the refinancing of approximately $700 million of nonrecourse debt secured by real estate assets that we purchased over the last three years. We believe these refinancings will provide substantial interest savings to the Company and our partners.

So that is it for the remarks that I just made and I am happy to open it up now to any questions anybody might have.

(Operator Instructions). Jason Ursaner, CJS Securities.

Congratulations on reporting a really great quarter.

Thanks, Jason.

Just first I wanted to ask about the gains from consolidation and I know I've asked about it before with the change in control on Ireland. But with Japan, how conservative do you feel like you are being when you are marking some of these to fair value? And just overall when you look at the investment account, do you have a rough percentage at this point on how much has been marked up in some capacity versus being carried at historical book?

I'm going to let Matt answer that question, Jason.

Hey, Jason. Yes, so to give you a sense of the process we go through on the fair values on Japan and what we did on the European assets in the first quarter, it is a detailed analysis and we do mark these to fair value. That being said, we believe our assumptions are certainly on the conservative side of the range.

And if you look at Japan as an example, if you look at the gain that we are taking, it is actually less than the total distribution we have taken over the life of this investment which reduced the basis that we were holding this on our books. So we feel like it is certainly a fair value but there is potential upside beyond this in future years.

In terms of the overall portfolio, as you know, our investment account is reduced as we make distributions. And so, if you look through some of the fair values we've done and those distributions, they basically net out. So you are still looking at an investment account that is basically held at our cost.

Right. And I think the other footnote I would add to that, Matt, is in our investment account of course we depreciate -- we are running depreciation. And on an annual basis now our depreciation is running in excess of $50 million a year. And so, we are depreciating that investment account also every month.

Okay, great. And for the acquisition pipeline going forward, looking at Europe specifically, obviously it still remains a huge opportunity. Understanding that you're not trying to buy everything you see there, when we look at pricing getting a little bit tighter, especially on some of the bigger deals, how much does this matter towards the way that your Company is sourcing deals and finding attractive valuations going forward?

Well, I am going to answer part of that and then I'm going to have Mary weigh in on that question. But to give you historical perspective when you think about the last 4.5 years, we have now -- with the acquisitions that I mentioned that we are closing here in the third quarter we will now have acquired at purchase price $13.5 billion of assets here in the United States and Europe.

We were fortunate in that we really felt that when 2008 came along that that was an opportune time to buy. So we have been active buyers really since 2009 in all of these markets. Those assets that I mentioned in Europe that we're refinancing, many of those we bought in 2011. But having said that all, we operate from a philosophy that unless there is something that actually makes good sense to buy we are not under any pressure to buy anything.

But having said that, particularly in Europe, there remain many opportunities in the markets that we are focused on because the banks still are actively deleveraging their own balance sheet.

But I would have, Mary, you want to add some color to that?

Sure. I mean I think just as Bill said, we have got -- NAMA still has $9 billion of its remaining $16 billion that they say that they are going to liquidate by the end of 2016. Spain has got $192 billion of non-core real estate that needs to be sold or restructured. And all the UK banks, RBS and Lloyds banking group and several others are just now -- they are continuing to embark on their deleveraging program.

So we are still seeing a ton of opportunities and the deal that we just did that is called the Elliott portfolio, that was an off market deal. So while there is a lot of processes going on in Europe, we are still doing quite a few interesting off market or structured deals like the Fordgate deal where we bought the B Note that led us to ownership of the real estate assets.

So there is still so much to do and I think with KW Europe's ability, with our finance team and our real estate team, to access really interesting real estate deals through different parts of the capital stack gives us quite an advantage. So we've got a very active pipeline still here in Europe.

Mary, the one other thing I think is important too to understand is on these assets that you are acquiring too, the asset management process and the asset management possibilities you have with these assets to increase net income, I think it is important for everybody to understand that also.

Sure. And as I said earlier today on KW Europe's earnings call, so we have got several asset management initiatives ongoing at all times. We've got lots of planning initiatives ongoing where we are adding square footage or, for example, at our Clancy multi-family project we are going for approval for about 150 multi-family units. All of our -- I would say on our resi assets, all of those are performing better than planned.

We are adding US style amenities, if you will, to our multi-family assets by business centers and gyms and really lots of things that these projects that were initially built as for sale apartments, they never have. And so the market and the tenants are reacting very, very well to that. And everything that we are doing I would say across the board we are doing ahead of plan.

And then in terms of just the leasing on our office deals, that is going very well. We've got over 0.5 million square feet either leased, signed or under serious negotiation in all of our PLC assets. In addition to that, in our State Street asset we've got the site right next to the State Street asset that we are in discussions on on a very interesting JV that I can't talk about the details of. But that would be a very interesting development that we could do in central Dublin.

So there's just tons of value adds nuggets throughout our portfolio in Europe and we've got a 15 person deep asset management team here in Europe. So every single day we've got lots of very bright people that have been in the real estate business for 15 and 20 years working on Asset Management initiatives.

Okay, great. And just last question for me real quick. The commercial portfolio in the Western US, I know that has sort of had two different stories going on there. You mentioned a few buildings under contract. Just wondering if you could maybe break down what you are seeing on the stabilized properties that you have been managing for growth in terms of either operating performance or cap rate valuations. And then separately how things have been progressing for the properties that have been in lease up mode that were unoccupied?

Yes. Well, the three office buildings that we are selling, two of those are here in Los Angeles and one is in San Francisco. And the three buildings have common characteristics in the sense that they are now pretty much fully stabilized. And in this never ending search for yield around the world there is plenty of buyers today.

And so, what we are doing -- and the simplest way to think about what we have done with those three office buildings, Jason, is we took $50 million of cash out of those office buildings and used that $45 million -- used $45 million of that to buy the South Seattle apartment units.

And in our apartment business, generally speaking, and there is some time lag from the time you buy these because, remember, in the apartment business we are typically buying not older product but it could be 15 to 20 years old where there is a rehab component both to the units and the common areas. So it can take you as long as a year to a year and a half to actually get that all done and stabilized.

But once they are stabilized we are earning cash on cash returns on many of our apartment assets that approach 10% or more in some cases. And once you have completed the rehab of those apartment projects they are not big capital consumers.

The office buildings on the other hand, because of -- in the US it is different than Europe. In Europe the lease terms tend to be longer. In the United States typically the lease terms are five to seven years. And so, you are constantly turning leases that require capital. And so, the simple strategy that we have been on really is to -- where assets have reached stabilization in the office market here in the Western United States we are selectively pruning those and redeploying that money into higher yielding -- current higher-yielding assets.

Okay, great. Appreciate that, Bill. Thanks.

David Ridley-Lane, Bank of America-Merrill Lynch.

So looking at the investment level balance sheet, the loan-to-value is around 48%, maybe 52% depending on how you treat the owned loans. What would you target for investment level leverage? And where should this trend through the balance of the year? And I am guessing most of this will come from additional mortgage debt at KWE, but maybe I am missing some of the nuances there.

David, it is Matt. So you are right, we are running a little under 50% on the investment level balance sheet. And remember that the majority of those assets are held at cost, less depreciation and less distributions. And so, if you were to mark those to market we would expect those assets to be worth more than we are holding them on the investment level balance sheet.

If you look at Kennedy Wilson Europe, we are targeting roughly 50% leverage there. And so, you will see some additional leverage come on like the Tiger and Artemis financing that we did today. But I would expect that to stay right around 50% overall loan to cost. And then on a loan-to-value you will be substantially below 50%.

Mary, on KWE, comment on the closing of the roughly GBP1 billion of acquisitions that you did. How did you handle that capital wise and what debt now do you have on that portfolio?

Well, since we closed today the GBP127 million financing we now have circa GBP332 million against the GBP1 billion plus of assets. So we've got -- it is roughly 25% -- actually when you add the cash back in we are at 25% LTV. And we actually are in discussions right now on the Fordgate portfolio.

And we have seen a lot of new entrants into the debt financing. And so, you have got just a lot of potential banks that -- or banks that want to give you loans and put out loan dollars. And pricing, like you said earlier, Bill, in your call, pricing's come in significantly. We are seeing margins now sub 200.

So there is just a huge, huge number that we will be saving when we go ahead and refi some of the assets that we bought a few years ago. And a lot of those loans that we put on a few years ago were bridge loans and the financing markets were just different. And so now we are actually unlocked and they are fully pre-payable or de minimis prepayment penalties. So we are working on, as we speak, some new financing that will save significant money to the bottom line.

And Mary, too, I think, and David, when you think about the leverage in KWE, remember that the Artemis financing that Mary completed today, the GBP127 million, all that did was go into cash. And so she is --

Right.

-- your cash position as of today in Europe is what, Mary?

We have got GBP250 million.

Right. So obviously the point is here that most of the things that we bought in Europe from February to the end of the quarter we bought all cash.

That is right.

Got it, great. And then on the Shelbourne Hotel, can you remind me, is that 100% ownership to KW? And what will that add in terms of rough dollars in terms of annualized revenue and EBITDA now that you have taken ownership?

Yes, so, the Shelbourne is arguably one of the most iconic properties certainly in Dublin if not Ireland. And it is -- as you point out, it is 100% owned by KW, not KWE but by KW. And I said earlier in the call, that property is running roughly $40 million of revenue and 90% occupancy. And the NOI, plus or minus, is running somewhere around $8 million.

Great. And then just one quick numbers question. Do you have an updated assets under management number?

Yes, the assets under management are -- they are about $17.1 billion.

Okay, thanks very much.

David Gold, Sidoti.

Just a little bit of follow up there. First, Bill or Matt, you gave a little bit on it, but can you walk through a little more closely the goes ins and goes outs of the investment book during the quarter specifically?

Yes, no problem. So if you look at -- I've got it for the six months here and then I can -- off-line I can walk you through on a quarterly basis. So for the investment account give me one second here. Yes, so we had -- for year to date where we have added $427 million in additions and $120 million of distributions year to date.

Plus $427 million and minus $120 million?

Correct. So we went from roughly $1.2 billion to $1.5 billion over that period.

Right, right.

Got you, okay. And then speaking -- thinking more broadly about where the investment attention is now. Obviously the first six months of the year the bias was more heavily than in the past towards Europe as you deployed the KWE cash. But if we think about go forward, two questions.

One, what type of split do you expect that to sort of revert to from say the 87/13, could we back to the 60/40? And two, on the KWE side, I know there was a little bit of commentary in the release about starting to think about Spain and Italy, but sort of -- if you can give some more -- some additional color on that that would be helpful.

Yes. It is always hard to predict how that is all going to be, David. But I think I said -- Matt, I'm trying to remember back in 2013, I felt that the beginning of the year that splits would be I think I said either around 70/30, 70% Europe and 30% here in the United States.

And I also think you need to remember when we were doing the capital raise in Europe we felt it was going to take us roughly 12 months to deploy -- that was the second-largest IPO -- real estate-related IPO in the 200-year history of the London Exchange. And so, we felt it was going to take us around 12 months to deploy that capital.

But really what ended up happening is that Mary and her team were able to execute on the capital spending faster than we thought and that is obviously what skewed those percentages, because we were so frontloaded here in the second quarter with Kennedy Wilson Europe.

But it is hard -- really hard to say to be pinned down on a percentage. But I think it is still going to be somewhere in that range for the next 12 months, so somewhere between 70% to 80% Europe and 20% to 30% here in the US. Even in spite of the cap rate compression here in the US we continue to see attractive opportunities particularly in the multi-family space.

Okay.

And I think too, David, one other point I want to make here is that we -- and part of the reason I had Mary go through that -- so KWE is now still in a very liquid position. As she mentioned earlier, she is going to be -- she is exploring financing on the Fordgate portfolio which we paid all-cash for which will increase the liquidity in that Company.

In addition to that, as you can see at the end of the quarter, Kennedy Wilson here in the United States ended up with the highest cash position that we have ever had in our history, we ended up with almost $350 million of cash, corporate cash. And we've increased our line of credit from $140 million to $300 million.

And even though we obviously never have any plans to sell our position at this point in KWE, that is a publicly held security that we own subject to certain restrictions and so on. But that -- we have an investment now of roughly $220 million. And so, when you look at both of these companies now we are sitting on excellent liquidity and we are just waiting to see what opportunities might be out there.

But one of the hallmarks of the Company over the 25 years I have been here is to have enough flexibility to be able to execute with speed. And so, you can see that in both companies we are well capitalized and in a great position to execute on whatever the opportunity is. And so, I can't predict exactly where the opportunities are going to be, but my guess is that the percentages are going to fall somewhere in the ranges that I've mentioned to you.

Okay, perfect. And then just hitting on that second question about as you think about KWE go forward -- I know Spain and Italy came up, but if you can give -- say some additional color as to both thoughts there and where you might be more aggressive.

Mary.

I mean I would say our focus for the most part is on the UK and Ireland. We are looking at Spain, we evaluated several billion Euros worth of transactions over the past six months. We do have an interest in a servicing company there that has 270 people in it in Spain, we have an office in Madrid. So we have a lot of talented people there and good on the ground knowledge and relationships, etc.

Having said that, we just haven't seen any deals that we like. We have been in final rounds of deals, we have been in serious negotiations on deals, but at the end of the day we just haven't really liked the deals enough to do them and we are not going to do any deal just for the sake of doing a deal.

In Italy it is very early days there, we are sniffing around a little bit and having some meetings and just assessing the opportunity. But I would say it seems interesting. I would go on to say that we don't anticipate that that would be any huge part of our business but it is a market that we are interested in looking at.

Got you.

And I think too, Mary, that when you think about Europe and you go back to 2011, the common characteristic that in all the assets that we bought and all the assets that are currently in KWE that Mary executed on here this year, the common characteristic that we wanted to execute on was to have very high quality assets, well located, bought at significant discounts to original cost and to obviously replacement costs that had asset management opportunities to increase income.

And so, that is really what we have ended up with throughout our whole portfolio that -- not only KWE but KW here in the US. The quality of our assets is really, really good. And we still have been able to execute on that theme that I said at the beginning where we are buying things significantly below replacement cost with upside through asset management.

Perfect, perfect. That is absolutely helpful. Just one last quick one for clarification. So I think, Mary, you said the numbers show KWE levered about 25% and I think just to be clear it sounded like you are comfortable taking that to 50%?

Correct.

Perfect. Thank you all.

Vincent Chao, Deutsche Bank.

I just wanted to take a step back on the liquidity discussions. I know we've talked about it quite a bit here on the call. But if you think about that 50% leverage at KWE relative to what has been purchased so far, it seems like back of the envelope that gets you to sort of $1 billion of potential liquidity as you lever it up. And maybe some of that comes off because you have done the deal here post 2Q. But rough ballpark is that about the right way to think about it?

Yes, that is very close.

Okay, okay. And then just wanted to ask a question going back to the redevelopment value add part of the discussion. I mean have you guys quantified what that looks like in terms of total dollar -- potential dollar investment based on what you see today?

It is hard to -- well, there is two parts to that, what is the cost of getting it entitled and then of course what is the cost to build that asset once you have got it entitled. And the first step really is just to get the entitlement process done. And both in Europe and in the US we have people dedicated only to getting the property entitled. And once you do something like that then you make a decision on what you want to do with that asset.

But I will tell you that the leverage in terms of your upfront cost to get it entitled versus the value you create, that once it is entitled is very big. I mean, for example, we are entitling a property here in California that we already own, has 400 apartment units on it. It is 10 acres, but it only has 400 units on it. We are entitling that property for another 1,000 units, the entitlement costs are a couple million dollars.

But once that is entitled for another 1,000 units it is worth well in excess of the couple million dollars -- you already own the land. And so it's worth your -- basically a zero basis because you bought that apartment building at a cap rate that was attractive without the entitlements.

So the leverage on these things is very big, but the entitlement costs of the 3,000 units is not material really to the overall investment portfolio. But the potential gains that you have once you have got these properties entitled could be significant. But the decision that we're making at this point in time is not whether we are going forward with a building program or not, it's simply focused on getting it entitled for the highest and best use.

Okay, so a little bit early days on that front it sounds like, but some additional potential upside. Okay. Just wanted to go back some of the operating fundamentals here on the commercial side. So same-store pool, obviously the Western US weighed the overall results down a little bit, but clearly this same-store pool is not the total picture for the growth of that business.

I was just curious if you think about the entire pool, not just the same-store, what the NOI growth profile looks like outside of the acquisition impact, but just the organic growth within the non-same-store pool?

Yes, so if you look at some of the assets we bought and, as you mentioned, Vincent, you are correct that the same-store pool for the year is very small relative to the total size of the portfolio. And so, what we are seeing certainly is well in excess of the numbers we are showing in the same-store if you look across the portfolio.

Within our portfolio, included in the same-store, are some buildings that we strategically bought vacant that we are fixing up and are going to lease which will have some significant impact as well. So I would say it is far in excess and it is up closer to where our multi-family numbers are if you look at the entire portfolio.

Okay, okay. And then just maybe sticking with the multi-family, the growth there in the US was pretty strong on a same-store basis revenue wise. One of the themes here in the US apartment REITs that we cover is just supply and the impact of supply on sort of revenue growth trends. You guys seem to be bucking that trend a little bit. Just curious if you had any comments on supply in your markets and how that is impacting fundamentals?

Sure, I mean I think our strategy is certainly different than a lot of the REITs out there. We have been buying I would say more in prime markets but outside of CBD areas. So we are seeing little to no construction in the markets we are buying in.

So as opposed to buying in say downtown San Francisco we are buying in Oakland and East Bay. So there is substantially less supply coming on. Our rents also on a whole dollar basis are substantially below CBD rents and so we feel like this trend can continue for a while here in the markets we are invested in.

Okay, thanks. And just one last one, just on the consolidation of the Japanese portfolio. Just curious as you think about the true economic return on that portfolio, forget about the GAAP accounting and depreciation and that kind of thing, but just the true economic return. What does that look like on your fair value here, both IRR and just gross return?

Yes, I mean we are making -- on our cash basis on the Japanese portfolio we are making a return of approximately 10% on our equity per year. And we are paying very little in tax there because of the depreciation.

Okay. All right, thanks, guys. Appreciate it.

Vance Edelson, Morgan Stanley.

First on Japan, I might have missed it, but could you give us some feel for what the expected EBITDA contribution from the Japanese sub might be going forward say on an annual basis?

Yes, so our share of the EBITDA is not going to change, we still own 41%. And that business is running an EBITDA of just under $20 million of which our share is 41%.

Okay, perfect. And then back on the pipeline, I understand it is still very active in Europe and there are even some opportunities in the US, but from time to time you've mentioned the approximate size of the pipeline. Is there anything you can comment on to help us understand the relative size of what you are looking at now for acquisitions versus past quarters or versus a year ago, for example?

(multiple speakers). Yes, Mary, why don't I -- I will just do one quick comment there and then maybe you can weigh in on Europe.

Sure.

But I would say overall globally our pipeline remains extremely robust, very strong and it's -- particularly in Europe, which Mary will mention, we are seeing significant deal opportunities and a very healthy pipeline.

Yes, I would say we have got -- when I say pipeline, it's varying degrees of analysis. Some is initial analysis, some is we have made an offer and we are negotiating back and forth with the owners. Some are processes that we are in and some are off-market discussions that we are having. So it is just a whole kind of gamut of varying negotiations sort of statuses where we are. But it is a couple billion sterling that we are looking at right now. The pipeline is big.

Okay, that is helpful. And then beyond West Coast asset prices, how do you feel about the fundamental outlook on the demand side when we think about the California recovery, which has been going on for years? You mentioned the supply isn't yet an issue, but if you had to say what inning we are in from a macro sense, for example, any signs of slowing in the growth rate ahead either for your own multi-family properties or for the West Coast in general?

Yes, I mean we are not yet seeing any slowing in the growth -- the demand. And I think we have talked about it on prior calls, you've got a -- I don't know how you would describe it, but somewhat of a social shift too.

You have growing populations in the Western United States in all the markets that we are in, in the state of Washington, the state of California. But you also have a growing population in this 25- to 35-year-old age bracket that is more inclined to be I think a little more mobile where you have got credit standards that still remain very high in terms of qualifying where you've got housing prices in all of the markets, purchase prices at or near all-time highs.

In the Bay Area you have got housing prices well above the peak of 2007. And so, you've got all of these dynamics working in favor of renting versus owning. And so, we don't see really any change in that over the next couple years. So as Matt said earlier, without significant supply coming on in most of the markets that we are in, and with the dynamics on the demand side the way they are, we think that rents are going to continue to grow.

There are pockets of supply where you could argue that the supply that is coming on is a lot. But we are not generally in those markets. And when I think about that I really think about like in downtown LA, there is as many as 10,000 units coming on stream because the entitlement process in downtown Los Angeles is not as tough as it is in other markets. There is plenty of available land. And obviously the lending institutions are now all back in the construction lending business.

So in a market like that you have got some questions about what is going to happen in terms of absorption of all of those units, but we are not -- we don't own anything in downtown LA and don't have any plans to own anything there. So you've got to look at kind of each submarket individually. But in a macro sense the demand and supply are still very favorable for the multi-family.

On the office side, again it is the same -- you have to do the same kind of analysis. San Francisco, as everybody knows, has been red-hot the last couple years because of the expansion of the tech industry. But the funny part about that is that where we are really benefiting from the Bay Area expansion is in Dublin.

Because, as I have said early on earlier calls, you've got 700 US companies that have their European headquarters in Ireland and many, many of the companies that have their European headquarters in Ireland are tech companies that are based here in California. So we are benefiting from office rents and apartment rents in Dublin driven a lot by the success that these California tech companies are having globally.

Here in Los Angeles there are more options in terms of the office users, you've got downtown LA, you've got Century City, you've got Beverly Hills, you've got Santa Monica, you've got Orange County, you've got the Valley. And so, in those markets we are not seeing -- the occupancy numbers are good but we are not seeing the kind of rental growth that you are seeing in Dublin and in San Francisco and in Seattle to a lesser extent.

Okay, that is very helpful. Appreciate all the color. Thank you.

Mitch Germain, JMP Securities.

I know you continue to gain control of some of these partnership subsidiaries. Is there any reluctance from partners to move that route or do you think it is just a process that is going to just continue play out over the next couple years?

I mean, it is certainly a negotiation with the partners and I think our track record over the past few years has been a big help in improving our ability to make all these major decisions. And so, it is a partner-by-partner discussion. And I wouldn't say it is easy certainly. But it is something that our partners have been willing to do in exchange for our performance and other factors.

Great. And then I might have missed this earlier, I apologize. Maybe in Europe, Mary, your commentary, are the banks as aggressive in reducing their liabilities as they have been? It seems like some of the things I am reading things have slowed up a bit. I would love to get some thoughts on that theme.

I mean I would say, no. The banks that we are dealing with and then you have -- you also have the governmental agencies such as NAMA and [SERA], there's still a lot to delever. And what I would say that they are kind of speeding up their deleveraging. And so what we've seen over the past three years, the second half is always a busier half every single year. So we are gearing up to be very, very busy over the next four months.

Thank you.

Ladies and gentlemen, this does end the question-and-answer session for today. I'd like to turn the call back to Bill McMorrow for closing remarks.

Okay, so thank you, everybody, all of our shareholders and everyone else for your support both here in the US and in Europe. So thanks very much.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.