Kennedy-Wilson Holdings Inc (KW) 2017 Q3 法說會逐字稿

Good morning, everyone, and welcome to Kennedy-Wilson's Third Quarter 2017 Earnings Call and Webcast. (Operator Instructions) Please also note that today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. Daven Bhavsar, Director of Investor Relations. Sir, please go ahead.

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 1 week and by webcast for 3 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 measure and our third 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.

Thanks, Daven. Good morning everybody, and thank you for joining us today. So this is our first call since closing our merger with Kennedy Wilson Europe Real Estate Plc, which is truly a historic moment for us. Given that the merger officially closed after the quarter-end on October 20, this earnings release is a bit unique.

I will first review our financial results for the third quarter, which includes our 23.8% ownership of KWE as of September 30. I'll then focus the remainder of the call discussing the merger, reviewing the combined portfolio, and focusing in on our strategy on a go-forward basis, which includes growing our recurring property cash flow and our investment management and fee business and continuing to sell our non-core assets.

So, starting with our reported financial results in the third quarter. We reported a GAAP net loss of $0.08 per diluted share, which is after non-cash charges for depreciation and amortization of $0.30 per share compared to a loss of $0.03 in 2016. Adjusted EBITDA was $76 million for the quarter compared to $88 million in 2016 and adjusted net income was $35 million in the period, compared to $45 million in 2016.

Our financial results were driven by both recurring income in our portfolio and gains on transactions, which can fluctuate during any particular quarter. In Q3, our share of property NOI increased by $7 million to $69 million, an increase of 11%. This was offset by a decrease in gains of $19 million from the third quarter of last year, due to lower quarterly transactional volume. For the year, our adjusted EBITDA is up 9% to $255 million and adjusted net income was up 2% to $129 million.

Looking forward, based on expected Q4 gains as well as the additional recurring cash flow that we will pick up as a result of the merger, we expect to close out 2017 with record adjusted EBITDA and adjusted net income.

Turning to our operating performance for the quarter, I'd like to start by highlighting our multifamily portfolio. For the quarter, our share of multifamily revenues increased by 5% and NOI increased by 6% on a same-property basis. Once again, we continue to outperform many of our peers in this area, a trend that we have now seen for many quarters.

Our outperformance compares with average same-property revenue and NOI growth of 2.5% for the major U.S. apartment REITs. These results can be attributed primarily to; 1, our current weighting in the State of Washington, which led our overall markets with same property NOI growth of 10% in the quarter; 2, the relative affordability of our portfolio; and 3, the value-add initiatives that are underway at many of our properties.

As mentioned earlier, we had a relatively light quarter on the transactional side, where we and our partners completed a total of $470 million in acquisitions and dispositions. In Q3, our share of acquisitions was $138 million, of which 90% were income producing investments in the Western U.S., expected to generate $7 million of annual NOI to KW. Our share of dispositions was $72 million, of which 84% were non-income producing. In total, the assets we sold produced less than $1 million of annual NOI to KW.

For the year, we and our partners have now completed over $2 billion of investment transactions. And while we have been a net seller, the net result of these transactions is still expected to generate an additional $12 million of annual NOI to KW. This reflects our strategy of selling non-income producing and low-yielding assets and recycling the proceeds into higher quality assets with great cash flow and upside potential. We are expecting, as I mentioned earlier, a very active Q4 on the transactional slide to closeout 2017.

On October 20, we closed our merger with Kennedy Wilson Europe Real Estate Plc, which created a premier global real estate platform. The merger results in a simplified corporate structure, an estimated $100 million of additional annual recurring cash flow to KW, an enlarged equity base, and a much-improved balance sheet.

S&P, Standard & Poor's has recognized this and recently upgraded our corporate credit rating by 2 notches to BB plus. Also, as a result of the expected increase in cash flow, we announced a 12% increase in our quarterly dividend to $0.19 per share or $0.76 annually, which currently equates to almost a 4% dividend yield. We have now increased our dividend by 375% since 2011.

This merger is also unique because our senior management team and our operations globally will not change, eliminating any integration risk and enabling us to hit the ground running on executing our top strategic priorities.

From a financial perspective, we expect the transaction to be accretive on a per share basis for both GAAP net income and adjusted net income. On a pro forma basis, assuming the merger had closed on July 1, our GAAP net income would have been higher by $10 million for the quarter and EPS higher by $0.08 per share.

Adjusted net income on a pro forma basis would have been $66 million, higher by $31 million, which on an adjusted per share basis would have taken adjusted net income per share higher by 43%. In the third quarter, on a pro forma basis, our Q3 adjusted EBITDA would have been $122 million or roughly $46 million higher than reported.

I'd like to take a minute now and review the mix of the combined real estate portfolio. First is our income producing portfolio which stands at $434 million in estimated annual NOI to KW. 83% of this NOI comes from wholly-owned assets. The 2 largest components of this portfolio are multifamily and office, which accounts for almost 3/4 of our recurring NOI.

Our multifamily portfolio, which represents 39% of our total income producing portfolio with $170 million in annual NOI to KW is comprised of over 26,000 units, including 2,100 units under development. We have an average ownership of 61% across our multifamily assets.

This portfolio is concentrated in the coastal markets of the Western U.S., with the Pacific Northwest, Northern California and Southern California accounting for 77% of the portfolio NOI. Our largest single market remains the State of Washington focused in and around the Seattle area, where we have 10,000 units producing almost $57 million in annual NOI to KW, with an additional 1,100 units under construction.

Our office portfolio comprises 34% of our in-place annual NOI and consists of high-quality assets concentrated in U.K., Ireland and the Western U.S. We have an average ownership of 80% across our global office portfolio. Our strategy in each of these markets has been the same, acquire well located assets where we can drive growth, through implementing our value add asset management strategy.

I'd like to highlight some of the top assets in each of these regions to provide a bit more color on this portfolio and illustrate our investment approach. In the U.K., the largest single assets we own is 111 Buckingham Palace Road, which earlier this year, we completed a successful transformation of the reception and sky lobby and delivered strong rental growth of 20% over in-place rents through completing a rent review with Telegraph Media, the property's largest tenant.

Leasing market of 111 remains robust. Just last month, we executed a 10-year lease with iRobot, a $2 billion NASDAQ-listed company across 8,400 square feet at GBP 67 per square foot, adding an additional incremental $1.1 million in annual NOI. KWE acquired 111 Buckingham Palace Road in 2014 with in-place rents averaging approximately GBP 45 per square foot.

In Dublin, Ireland; we now wholly- own Baggot Plaza. KWE acquired this building in 2014. We then completely redeveloped the assets using the existing frame and extending the floor plates, adding almost 38,000 square feet to the existing 92,000 square foot building. We leased the entire building to the Bank of Ireland, who signed a 25 year lease, resulting in a stabilized yield on cost of 8.6%.

In the Western U.S., our office portfolio is primarily focused around Greater Los Angeles and Seattle. For example, in Beverly Hills, we own 150 South El Camino. We acquired the property when it was fully vacant. In 2013 completed a full redevelopment and now the 60,000 square foot Class A office is fully occupied. Most recently, we acquired in June 90 East in Greater Bellevue Washington. This property is 573,000 square feet of office campus built in 1999 that is fully leased; 2/3 to Microsoft and 1/3 to Costco.

As I mentioned, we bought 90 East in June of this year. The acquisition was primarily funded from the net proceeds of the sale of Rock Creek, an apartment community in the greater Seattle area built in 1988 that we sold for a $108.5 million. Rock Creek at the time of sale was producing $5.3 million of annual NOI, which equates to 4.8% cap rate.

Our net proceeds for the sale of $73 million were used as the equity to purchase 90 East for a $153 million. At the time of purchase, 90 East produced an annual NOI of $13.1 million, equating to an 8.6% cap rate. At the closing in June, Costco's lease ramped through January of 2020. However, just this week, our asset management team was able to extend Costco's lease to January 2025, with a 2-year extension option that would take them to January 2027. A tremendous outcome by our team after only having owned the asset for 4 months.

And so, as I look back to when we went public in 2009 and had only 1 single wholly-owned asset generating $2 million of NOI, it is great to be here discussing a global portfolio producing $433 million of NOI of which 83% or $362 million is coming from wholly-owned assets.

The second part of our portfolio which I'd like to highlight is our development initiatives, which we expect significant growth in NOI in the near-term. The first wave of our development is anticipated to add $20 million plus in NOI by the end of next year alone with significantly more NOI to come by 2021.

The largest of these developments is Capital Dock, which remains on track to be completed next year. It is one of the largest single phase developments to ever be carried out in Ireland. The project will deliver approximately 690,000 gross square feet, including 345,000 square feet of office, 25,000 square feet of retail and 190 multifamily units housed in a 23-storey high-rise. It will be Dublin's tallest building once it's finished.

Last quarter, we sold 1 of the 3 commercial office buildings totaling 130,000 square feet to JPMorgan. The leasing market there is also very strong as we've had significant interest in the remaining 2 office buildings totaling 240,000 commercial square feet. Additionally, at Clancy Quay, we recently announced the completion of Phase II which added 163 new apartments to the existing 423 unit complex. Phase I is currently 95% occupied and we expect Phase II to be stabilized by the end of Q1 2018.

We recently refinanced Phase II of the project with the same lender that we had on Phase I, with a 7-year EUR 45 million loan at a fixed interest rate of 2.03%, locking in double-digit cash on cash returns between Phase I and Phase II. Also, we have secured planning commission for Phase III of Clancy Quay, which will consist of another 259 units, putting us on track to complete all phases by 2020. When it's completed, Clancy Quay will be the largest apartment community in all of Ireland at 845 very high-quality units.

Turning to our pro forma liquidity. We recently closed a new $700 million unsecured multi-currency credit facility, which is comprised of a $200 million term loan and a $500 million revolving line of credit, of which $200 million is currently outstanding. This facility replaces our former $475 million KW line of credit and the GBP 225 million KWE line of credit.

Post transaction, including our new credit facility, we currently have pro forma liquidity of approximately $800 million. We intend to substantially pay down our line of credit by year-end through asset sales and excess liquidity. Also in October, we announced our election to redeem at par all $55 million in aggregate principle amount of our 7.75% senior notes due 2042. The redemption date will be December 1, 2017. And so, looking ahead, I feel confident about our ability to maintain adequate levels of liquidity for any opportunities that may arise.

Now, I'd like to spend a few minutes to talk about the future and clearly lay out our strategy as a combined company. The 3 major areas of focus will be; #1, balance sheet investments in growing our recurring property cash flow; #2, growing our investment management and fee businesses; and 3, continuing our non-core assets and capital recycling program with the focus on selling non-income and low -yielding assets.

Starting with the balance sheet investments and recurring property cash flow, we will continue to use our balance sheet to hold longer term assets with a focus on maximizing property cash flow. We will also selectively recycle capital into higher quality and higher growth investments on an opportunistic basis.

Over the next 5 years, we are focused on strategically growing our multifamily business. In the U.S., the growth will come through our market rate portfolio and our vintage housing affordable and senior platform. In Europe, we have a focus on Ireland and the U.K. where we hope to more than double our current presence. We also expect organic growth in our office portfolio through the completion and lease up of $425 million of assets at cost that are currently under development.

We will add to this portfolio when we see attractive opportunities as we did earlier this year with the 90 East acquisition. Our investment management and fee platform is complementary to our balance sheet assets. This platform enables us to leverage our 20-plus year track record of value creation by attracting third-party capital providers, allowing us to take advantage of short to medium term investment opportunities.

By using third-party capital, we can create recurring management fees and performance fees which enhance our investment returns. For the past few years, out investment management business has solely been focused on the Western U.S., but with the closing of the merger, we will expand our footprint into Europe. And as a reminder, since going public in 2009, we have raised $12 billion of private and public third-party equity to fund the acquisition of approximately $20 billion of real estate assets at cost.

And finally, we will continue to dispose of non-core assets as we have been doing for some time now. In particular, we plan to focus our efforts on non-income producing assets and smaller assets that we acquired as part of larger portfolios, particularly in Europe. We expect that the net proceeds of approximately $400 million from these non-core asset sales will be recycled into our 2 key platforms; our balance sheet and our investment management business.

To summarize, we are excited about the opportunities that lie ahead and we are collectively focused on executing our strategy. We have created a fantastic global organization now all under one brand with an executive management team that has been working together for decades. We believe in the long-term prospects of our target markets across the U.S., the U.K., and Ireland. And finally, we will continue to leverage our local investment teams and our exclusive network of relationships to source and acquire real estate opportunities. Our ultimate goal is to generate attractive risk-adjusted returns for our shareholders.

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

Operator Instructions) Our first question today comes from Craig Bibb from CJS Securities.

First, congratulations on completing the merger, raising the dividend and realizing a $100-plus-million gain on 2 assets sales, so fantastic. Can you talk -- I mean, you did -- Bill you talked about your opportunities post deal, but I think the U.K. and Ireland cycle are in a different place than the U.S. cycle and maybe talk about where the better opportunities are that relative to the opportunities?

Well I'll let Mary, Craig, to talk about her views about the United Kingdom and Ireland in terms of the opportunities there, and then I'll come back to the U.S.

Hi, Craig, thanks for the question. We're super-focused right now, as Bill said, in his discussion on the multifamily PRS sector, and we're growing quite a bit of just our own organic growth through our development assets. So, I would say our focus right now remains in Ireland, which is an underserved residential community. We've got quite a lot under development. We just got planning permission for Clancy III, which as Bill said, will be the largest Irish multifamily asset in the whole country and it's super high-quality. So we continue to grow our PRS portfolio in Ireland. We're focused now on looking at opportunities in the U.K. on the PRS sector as well. There is quite a lot of capital looking at that sector. So we feel like with our -- really with our U.S. style, with the amenities and the different things that we brought to the table to Ireland, we're going to do the same thing in the U.K. So we're pretty focused on that sector and there is a bunch of other value-add opportunities that we're looking at as well in both Ireland and the U.K.

Yes, I think, Craig, I'm going to talk about the U.S. here in a second in the Western U.S., but in virtually every market that we are in, there is a housing shortage relative to the population growth. And for example, in Ireland, these are public numbers, they have -- the government has stated that they need to be producing 25,000 homes a year to keep up with the demand, but there is a fraction of that actually being produced right now. And interestingly, that same dynamic exists in literally almost every market that we're in. And so then when you think about the Western U.S. what we've been doing, Rock Creek is somewhat of an example, but we're selling another asset right now that was built in the '60s and we're taking the proceeds of that and redeploying that into 4 new assets that have an average age of 2007. And 2 of those assets -- actually 3 of them are in Portland and 1 is in the greater Seattle market. And so, one of the markets that we like very much in the Western U.S. right now in addition to Seattle was the Portland market. And that market is starting to take on many of the characteristics that you've seen develop over -- up in Seattle. And remember too, we're not any newcomer to the Pacific Northwest. We made our first investment in the Seattle market well before it became in favor and I think that our first investment that we made up there was roughly in 2008, 2007. And so, we really liked the Portland market and we continue to like the Seattle market. Also, I was, earlier this week, in San Francisco, where we own 2 of the larger communities in the East Bay. One is called Bella Vista, which is a 1,000 unit property and the other is in Pittsburgh, California, it's a 500-plus unit property. And the rent growth that we are continuing to experience is well above some of those numbers that I quoted to you that other multifamily REITs are experiencing. So there continue to be growth opportunities in the Western United States. And then the last thing I would mention to you, of course, is this Vintage platform. And Vintage which we own 62% of, has just been a terrific investment for us. And it really -- it feeds in to what's happening demographically to the population. So Vintages is geared toward senior housing, that's people that are 55 and older and to what I call the affordable market. But when you talk about affordable and you're doing it in areas where there's a high median income, it allows you actually to build what would look like almost a market rate building. And so, we have plenty of opportunities to deploy capital into the platform that Mary was talking about and also into the Western U.S.

Actually in the supplemental, it look like the Vintage pipeline is growing. Could you give us some color around that?

Yes, I'm going to let Matt talk to that Craig.

Hey Craig. Yes, so we've had a real focus on trying to grow that Vintage platform, given some of the dynamics Bill was just mentioning. So we've been fortunate enough to tie up another 4 or 5 sites in the past 3 to 6 months that were in many cases have fully entitled and we're starting the building process and in some cases, we're still working through the entitlements. And that's going to yield an additional 1,000 units beyond what we had a couple quarters ago. And it's a combination of senior and also the affordable, both of which we think are very important demographic groups to focus on.

I think too Matt, the other thing, Craig, about the Vintage business that, to me, I think is important from what we understand is that the principles that are running that business has been, we're the founders and had been running that business now for close to 17 years and their ability to construct and build on time in these markets is good as anybody I've ever seen. And so we've got a great ability to execute on the strategy and everything that we own in that Vintage portfolio that's finished right now is something that they built ground up.

Okay. And then just maybe go to the top of mind question for a lot of your shareholders and you guys too, I think everyone's frustrated with the gap between your share price and NAV and maybe you could talk about what's the game plan for reducing that gap and what isn't on the table or what is on the table?

Well, I think the game plan is to continue obviously -- look, I think I'm self-congratulating us, but I think we've accomplished a lot in the last 6 or 7 years in terms of growing the business. I do believe, without getting into all the details that the merger caused many technical issues in both stocks as the hedge funds came into KWE and shorted KW. So we have -- I think as you've seen here over the last week-and-a-half or so since that merger was completed that the volumes -- the daily volumes have been large including, I think, the day before the transaction closed. The volume on a combined basis in both of our stocks was over 20 million shares. And so, our view and you would all know better, but we've got to kind of let this kind of play though here over the next couple of weeks. And then you know I think as everybody gets to a clearer understanding of the, what I would call the obvious benefits of having financial benefits of completing this merger and we're going to do everything we can here between now and the end of the year to talk to as many people as we can one-on-one so that we can explain to them what the new company looks like today and going forward.

Just to add to that, I'd say we're going to really focus on investor outreach, we're going to be at NAREIT next week. We're going to be on the road really out there telling the story, meeting with new shareholders and trying to drive value that way as well.

And if it gets into 2018, the gap is still there, would a share buyback be on the table at that point?

Well, look, I think that's something we need to discuss with our Board and we still have some gas in the tank from what we put in place last year, but that's clear. We have a lot of flexibility now allocating capital and so that's just another part of the investment decision that we will make, is it better to deploy your capital into an income producing asset or is it better to put it into the stock buyback and so on and so forth? And so, it clearly is part of the investment decision, but the great saying that we have now going forward, as I said, when you look at it is, we've got a much stronger balance sheet, we've got, starting January 1, a high quality diversely located asset base that is producing substantial recurring income that we can now make these investment decisions out of. And as I've said a couple of times in my presentation, we're going to be generating significant cash proceeds from the sale of these non-core assets. And obviously we're going to be -- given the levels of liquidity that we have, we're going to be having to figure out where to put that [dull].

And Craig, this is Justin. Lastly I would, as you saw in Bill's script, as a net seller, we were still able to generate an additional $12 million of NOI. So I really think, as we continue to work through our non-income producing portfolio and adding NOI, ultimately we believe the shareholders are just going to see that value and hopefully that will have a huge positive impact as well.

Our next question comes from Vincent Chao from Deutsche Bank.

Good morning, everyone. And Bill, appreciate your comments on the strategy going forward here. It does sound similar to sort of what we've been hearing over the last several years, but I was just curious, post-merger at the ground level, is there really anything that's different in how the business is being run pre and post and maybe its priorities or something like that, that they have shifted a bit?

Well, no priorities are shifted. And as I said, the very unique thing about this transaction is, I think everybody knows KWE was an externally managed vehicle that all the employees that were managing that entity were KW people. And so unlike many acquisitions that are done, there was no people integration that needed to happen. Everybody is still doing exactly the same thing that they were doing before and we were able to merge, if you will, into a company that Mary has been running since inception that we know every asset [code] and so there was no [Billy] to be surprised either on the people side or on the asset side. And so then I think you just simply look at the markets. Well I would say 2 things Vin; you have to look at our historical track record, in my opinion, which in Mary and my case, this is over 25 years here at this company and so -- and I think by any measure if you look at what's happened over the last 7 or 8 years, the management team has done a fantastic job of growing this business in a prudent way. And so, there are no management changes. There are no priority changes. We're just going to continue to grow the business and make sound, to the best of our abilities, sound risk-adjusted investment decisions for the long-term; not for 1 quarter or 2 quarters, but for the long-term. And I think that is really what you have to look at is how are these people running the business for the long- term, not for 1 quarter or 2 quarters.

Just on the non-core asset monetization, [that] $400 million of proceeds that you're expecting from that pool, how quickly you think you'd be able to achieve that level of proceeds?

It's just a constant process. I mean, this quarter alone, by numbers, we're probably going to sell about 15 to 20 of those. And remember that -- and Mary can talk about this more if you want, but when we brought these 2 larger portfolios in Europe starting in 2014, 1 of them was $800 million of value. With that came probably close to 50 to 75 assets that were valued at -- we bought it from an insurance company that came with 50 to 75 assets that were valued between GBP 5 million and GBP 10 million. And as we've said on prior calls, there is a very, very liquid market for those assets, but you've got to make sure you've got your arms around them before you sell them. And so there's a lag time, but you don't just buy the portfolio and then turn around and start selling these assets, you got to make sure you know what you've got. And so, it's just -- it's a process. I would say that within the next 24 months, 2 years, we will have liquidated most of the non-core assets.

And then, just in terms of opportunities in the cycle and some of questions that we talked about here, clearly in the U.S. the apartment cycle is slowing, you guys are still outperforming in general, but I was just curious, I mean the real shortage in the U.S., and I'm not quite sure about in Europe, but the real shortage seems to be on the affordable side from a supply perspective and you obviously have a business in that that fits that bill. I was curious, going forward, do you think that's a bigger opportunity?

I think that's clearly a major opportunity. We're very fortunate to have that management team and the skill sets that they have and again, they are almost all in the -- their assets are all in the Western United States, in basically the same markets that we do market rate purchases in. And so, the other great thing that's happened is that the, there is a very, sure I love the word, but there is a very synergistic complementary working relationship that our market rate people led by Kurt Zech and Mike Gancar and Ryan Patterson in the Vintage portfolio. They're working together every week sourcing opportunities both in the affordable and the senior and in the market rate. And then also using, as I said earlier, their long 17-year history of building things on time, on budget to look at things that we might also do. So I don't think there is any shortage of opportunities either in all the 3 of those categories. And also remember too that we're buying an apartment building right now in downtown Portland. But it's a very high quality, surprisingly, recently constructed building built in the last 10-plus years, but there is actually a value-add component to it. We feel that there are some things that need to be done to the leasing office, the fitness center, that the units themselves that are going to produce above market growth rates and income in that property. You might say to yourself well gee, that's a building that's already been standing there, somebody have been running and so on and so forth. But we look at that asset very differently than the state it's in today. So I don't think over the years now -- like I've said, the 25 plus years that Mary and I've been here at Kennedy-Wilson that there's ever been a shortage of investment opportunities. It generally has been that we've been more capital constrained during that period of time. So this merger and the things that we're doing on the third-party capital raising put us in a very different position than we were before the merger.

Our next question comes from Alan Parsow from Elkhorn Partners.

We were talking about the acquisition, the completion of it. You haven't talked at all about the synergies that might occur through this, either through an accounting or otherwise. Can you just touch on them for a minute?

Yes, thanks Alan. I'll let Matt answer that question.

Sure. So, Alan, there are some synergies that we had mentioned during the kind of the merger road show, but in particular, obviously having 1 public company as opposed to 2, there's a lot of public company costs we're going to -- that we'll be able to eliminate. We'll have 1 listing. So all the LSE costs will go away as well we're going to have -- obviously we have 1 line of credit now as opposed to 2. So there will be unused fees, origination fees that we'll save. And then there will be some technology savings as well between the 2 companies as we really merge all the systems. So there will be some level of synergies. But for us, the key is really the increase in cash flow of $100 million per year we're getting. So, to give you a sense, the synergy level is probably somewhere around $10 million is our guess on an annual basis.

(Operator Instructions) Our next question comes from Tanya Kovacheva from Bank of America.

So I was wondering, going forward, how are you going to be financing yourself? So for example, if you need to issue debt, would you prefer to issue it from Kennedy-Wilson Europe, because it's still investment grade? Or would you be financing it through the U.S. entity?

Sure. This is Matt. So I think we have certainly, flexibility to issue debt both secured and unsecured debt in the U.S. and Europe, and that was really another key to the merger, is having that flexibility to source our capital in the most efficient way possible. And so I think it's great to have the investment grade rating of KWE maintained, have that as a possibility. We also, obviously just announced the financing on Clancy, where we locked in 7-year fixed rate financing at just over 2%. And in the U.S., we're paying off our most expensive debt here in December, and so, we feel like we have great flexibility, a stronger balance sheet and really the ability to allocate our financing dollars where we see best.

Yes, I think Matt, to amplify it slightly here. If you think back to our first bond offering that we did in 2011, the interest rate on that was almost 9% and obviously -- and we've been able -- over this whole period of time, we've continued to reduce our cost of debt and kind of the last vestige of this is that piece of preferred, the $55 million of preferred which carries a 7.75% rate that we're paying off here in December. And so we've been very, very meaningfully reducing our cost of capital over the last, particularly the last 3 years, as the credit quality of the company continues to improve.

So just to clarify, if on the Kennedy Wilson U.S. level you need some debt for some investment, you would consider issuing it from Kennedy-Wilson Europe because it would be cheaper and then upstreaming the cash?

Well, I don't think we're making any statement like that at all. All we're -- I'm saying is, is that we obviously look at every option that's available to us, but we're not making at blanket statement that if we need debt we're going to issue it in Europe. I'm not sure that's what you're asking. But we look at every alternatives. And I think that the Clancy financing is a good example. That Clancy financing was done by a U.S.-based insurance company. And so, to me but that was -- but we did it in Ireland. And so the great thing about the platform that we have right now is that we can look at all of these global opportunities that we've got. And obviously if you look at our line of credit, which was led by Bank of America and JPMorgan and Deutsche Bank and U.S. bank, we've got a banking system setup that gives us a good view and all possible credit opportunities.

And just lastly, Tanya, we're seeing -- on the secured mortgage debt, we're seeing margins come in quite a lot. So we're looking at all kinds of opportunities to refi and lock in double-digit cash and cash returns like we've done on Clancy. So to Matt's point and Bill's point, the flexibility remains not only on where we're issuing but also on secured versus unsecured.

Right and I think Mary is making another very good point to make sure everybody understands and that's the -- our strategy has been, even though the short-term interest rates present a better opportunity for borrowing costs today than the longer rates, we are always attempting to lock in our spreads, and so, when you look at our existing debt that we have in the company, both unsecured and secured, probably 75% to 80% of that is either fixed or hedged. And so that will always be our strategy that we don't want to take -- wield any meaningful amounts of interest rate risk in our portfolio. And even though we do have a view that short-term interest rates are going to stay low for quite a extended period of time, we're actually managing the business in the opposite way.

And to give you some exact stats; we've got 80% of our debt is either fixed or hedged against increases in long-term interest rates. And the average duration on our debt is just about 6.5 years; on average across the portfolio. And the average cost of borrowing currently is 3.8%, but that's going to go down once we pay off the 7.75% paper.

Okay, and just the last thing if I may. For Kennedy-Wilson Europe, before there was a guidance of LTV being up to like 45% to 50%, is it going to stay?

I mean, I think we're comfortable. We're not big leverage users, so I think we're comfortable with where our leverage is today, but obviously we're looking at things now as a combined company. But I would say, where our leverage points are now, it's where we feel pretty comfortable in that range.

And ladies and gentlemen, we've reached the end of today's question-and-answer session. At this time, I'll be turning the conference call back over to Bill McMorrow for any closing remarks.

Okay. Well, I would just thank everybody, as I hope I always do, for your support and we will be talking to anybody that wants to talk to us going forward here about what the merger and it's benefits look like and so we look forward to talking to you in the future. Thank you very much.

Ladies and gentlemen, that does conclude today's conference call. We thank you for attending today's presentation. You may now disconnect your lines.