Kennedy-Wilson Holdings Inc (KW) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Kennedy-Wilson Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Daven Bhavsar, Director of Investor Relations. 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 fourth quarter 2017 earnings release, which is posted on the Investor Relations section of our website.

Statements made during this call may include forward-looking statements. Actual results may materially differ from forward-looking information discussed on this call due to a number of risks, uncertainties and other factors indicated in the 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 thanks for joining us today. The fourth quarter 2017 capped off a tremendous year for Kennedy-Wilson. We successfully closed the acquisition of Kennedy Wilson Europe this past October while producing a record quarter and a record year in earnings per share, adjusted net income and adjusted EBITDA. But most importantly, the accomplishments of the past year position us well to execute on many growth initiatives in all compelling real estate opportunities going forward.

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

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

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

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

We consider our dividend to be an important component of return for our shareholders, and consistent year-over-year growth in recurring cash flow to KW has enabled us to grow the dividend over time. We increased our dividend at the close of the KWE acquisition to $0.19 per share quarterly or $0.76 annually, which equates to a current 4.5% dividend yield as of the close of business yesterday. This was our seventh dividend increase since we started paying a dividend 7 years ago. Over that same period, our dividend has grown from $0.16 annually per share to $0.76 per share, representing a 375% increase. It's also worth noting that our dividend in 2017 was a nontaxable return of capital.

In addition to our dividend, we have repurchased approximately $90 million of KW stock in the past 24 months, bringing the total cash return to KW's shareholders to $225 million over the past 2 years.

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

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

We continue to outperform many of the publicly traded multifamily companies on a same-property basis. The largest multifamily REITs had same-property revenue and NOI growth of approximately 2.5% in Q4. We attribute our outperformance to KW's presence in high-growth markets, including Washington state as well as our unique positioning in those markets. We typically own garden-style, low-density apartments that offer opportunities to implement a value-add asset management plan. This often includes adding amenities such as fitness centers and community clubhouses as well as completing unit interior renovations that drive further value. We can then offer fully amenitized residences at discounts of 40% to 50% compared to CBD market communities -- apartment communities.

Average rents in our global market-rate portfolio were $1,526 as of the end of the year. When you consider the federal elimination of state and local deduction that passed in 2017, living in the state of Washington, and for that matter, other states that we operate in that have low state income tax rates. In the state of Washington's case, with no state income tax, it looks even more affordable on a rent to income basis.

In summary, our key apartment markets, including Seattle, Portland, California, Salt Lake City and Dublin, Ireland are all experiencing significant job growth and population growth that we believe will drive the rental market demand over the next decade.

In addition to our market-rate apartment portfolio, our affordable multifamily platform continues to perform well as a result of area median income growth, particularly in and around Seattle where most of our units are located. An aging population in the U.S. particularly, also bodes well for our senior affordable properties. In fact, across our affordable portfolio, we are now running at 95% occupancy with same-property rents up 4% and same-property NOI up 6% on the year. In addition, we are currently developing or entitling an additional 2,150 affordable units, which will bring our total affordable portfolio to almost 8,000 units by 2020.

Moving on to our office portfolio. This segment comprises 1/3 of our total NOI and consists of high-quality assets primarily concentrated in the U.K. and Ireland. The U.K. and Ireland office portfolio produces $93 million in NOI. Our assets and income in these markets are supported by high-quality tenant -- a high-quality tenant base, and attractive long-term leases with terms ranging from 10 to 25 years in duration. It is also worth noting that we are one of the largest commercial property owners in all of Ireland.

Our U.S. office portfolio totals $37 million in NOI to KW and is driven by a handful of great assets. Southern California is our biggest region with $20 million of NOI. In the Pacific Northwest, we own 90 East located in greater Bellevue. We acquired this Class A 573,000 square-foot building in June 2017 for $153 million at a cap rate of 8.5%. The property is fully leased to Microsoft and Costco. 4 months after the closing, we extended Costco's lease an additional 7 years through 2027. We financed this asset with a 50% loan for 10 years at a 3.85% fixed interest rate. As a result, 90 East generates a 14% cash-on-cash return to KW.

Turning to our investment activity. We have now -- together with our partners, we have acquired real estate assets approaching $21 billion at cost since going public in 2009. In 2017, we and our partners completed $1.3 billion of acquisitions and $1.9 billion of dispositions. Our share of 2017 acquisitions was $763 million, and our share of dispositions was $814 million, which included another $152 million in nonincome-producing asset sales.

Despite being a net seller for the year, we added $6 million of incremental annual NOI, with further upside as we complete value-creating asset management initiatives across our new properties. Selling mature assets and recycling capital into newer high-quality assets with great growth opportunities is a key part of our long-term investment strategy. For example, during the quarter, we sold Summer House, a 615-unit multifamily property just outside of San Francisco in Alameda, California. The sale price was $231 million, which represented the largest single-asset multifamily transaction in the entire United States in 2017. During our 7-year-hold period, we increased NOI by 109%. And the sale resulted in a 61% IRR and a 7x equity multiple to Kennedy-Wilson. We took the proceeds from the sale and invested on a tax-deferred basis into 3 multifamily properties totaling 786 units, 2 in Portland and 1 in Greater Seattle that on average were 40 years newer than Summer House.

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

In purchasing KWE at the time, we took advantage of a historically low sterling and bought assets we know well at a discount to their net asset value. A key part of this thesis has already started to play out, and while it's only been 4 months since the closing, we've seen a significant reversal in the pound and the euro to the dollar. The pound has now strengthened by 10% from $1.28 when we announced the acquisition to $1.40 today. We've also seen the euro strengthen by 14% during the same period. The increases in both currencies are positive for us, given that half our global portfolio was now in the U.K. and Ireland.

After the increase in both currencies in early 2018, we have now locked in a majority of our currency exposure through basic currency hedging. Also, strong asset sales at KWE have further proven out the value and the strength of the underlying real estate market and our assets. We're now able to wholly own a fantastic European portfolio with great growth potential. And without integration risk, we were able to hit the ground running in 2018.

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

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

Great. Thanks, Bill. Estimated annual NOI for the total European portfolio stood at $234 million at year-end or roughly 53% of Kennedy-Wilson in-place estimated annual NOI.

I'd like to focus on 4 areas for Europe: first, deploying our value-add asset management initiatives to grow our NOI, where we expect to add over $16 million from assets we are currently stabilizing over the next 2 years; secondly, executing on our refurbishment and development program, where we are targeting an additional $14 million of estimated annual NOI over the next 2 years and delivering an exciting pipeline of future development opportunities; thirdly, selling non-core assets and recycling capital into our value-add asset management initiatives. We continue to generate attractive returns and demand for our assets remain strong across all sectors. Lastly, growing our business, particularly across multifamily, where our ambition is to double our units, to size-out the units. And we're achieving this primarily through built-to-rent, for example, at Capital Dock and Clancy Quay, with larger plex (inaudible) to come, and acquisitions where you've seen us acquire Northbank in our Liffey Trust scheme, giving us over 200 units combined in the North Docks, an exciting market for us.

I'd like to separately highlight our European office portfolio, which represents the largest sector accounting for 46% of the total European portfolio. The office market in Europe is structurally very different than in the U.S. U.K. and Irish leases are similar to triple net leases, with minimal leakage from property-level expenses. Office leases in the U.K. and Ireland also tend to be longer term, with upward-only rent reviews every 5 years in the U.K. For example, the lease we recently signed with Indeed at Capital Dock was for 20 years with a break at year 13. And this is really only one example of the active leasing year we've had, with 159 lease transactions in the U.K. alone. This was across 1.8 million square feet, and it rents 13% above previous passing.

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

In total, our European office portfolio has a weighted average unexpired lease term of over 6 years to break and 8.6 years to expiry. And 95% of our U.K. and Irish leases are full repairing and insuring, FRI, as we call it, or triple net equivalent. And needless to say, these assets make leasing office space and lease markets very number friendly.

Over 2017, we've been a large net seller in Europe, with $85 million in acquisitions versus $393 million of dispositions. The dispositions have crystallized value, and we continue to recycle capital, particularly reinvesting across our own portfolio, deploying accretive CapEx across our development and refurbishment programs and with the new compelling opportunities. And our largest development Capital Dock, in December, we fully leased the remaining 2 office buildings totaling 216,000 square feet to Indeed, the world's #1 job site and a subsidiary of the multibillion dollar company Recruit out of Japan.

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

Clancy Quay Phase 2, which delivered 163 new apartments in the second quarter, was 78% leased as of the end of the year. And we have secured planning permission for Phase 3 now of Clancy Quay, which will consist of another 259 units, putting us on track to complete all phases by 2020. When it's finished, Clancy Quay will be the largest multifamily apartment community in Ireland at 845 high-quality units and unrivaled amenities. We anticipate stabilized NOI to KW of $15 million across Capital Dock and Phases 2 and 3 of Clancy.

Earlier this month, we also completed a 53,000 square-foot lease with a blue-chip tenant at The Chase in Dublin, improving the building's occupancy from 70% as of year-end to 100%, generating $5 million of annualized NOI. And this lease increases our Dublin office portfolio occupancy to 98%. So as you can see, we're making great progress with these investments.

And with that, I'll hand it back to Bill

Thanks, Mary. So now let me spend a few minutes to talk about our near-term strategic initiatives and how we will grow the business over time.

For our wholly owned assets, we continue to focus on maximizing cash flow growth while being opportunistic in selling mature assets and redeploying the cash into higher growth opportunities.

Within our balance sheet portfolio, we're also focused on completing our unstabilized and development initiatives, many of which Mary just went through, that will add another $35 million of estimated annual NOI by the end of 2019 and more looking out to 2022.

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

And lastly, we're continuing to ramp up the sales of our noncore and smaller, lower-yielding assets. Over the next 12 months, we plan to generate over $500 million of net cash to KW from these sales that we will invest in our development pipeline to fund our co-investment platform and to look for new value-add investment opportunities.

During the quarter, the fourth quarter of 2017, we sold our services business in Austin and our loan servicing platform in Spain. We're currently looking at strategic options for our research and technology division as we continue to manage overhead and maximize earnings.

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

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

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

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

(Operator Instructions) The first question comes from Craig Bibb with CJS Securities.

Talk about the cap rate spread a little bit. It's clear you're recycling gains from value-added properties into better-located newer properties.

Yes.

Is that going to keep your cap rate spread negative for the remainder of the cycle?

Well, I think the best way to look at that and not to look at it in isolation, when you look at like the Summer House sale and what we did is really to look, Craig, at -- last year, we sold a property called Rock Creek. And when you look at the major gains that we generated last year, they were generated out of Rock Creek and the sale of Summer House. The proceeds from those 2 sales, roughly, was $200 million that we were able to exchange on a tax-deferred or tax-free basis, however you want to look at, which obviously has some real benefits. The 2 properties that we sold along with the third property called Woodstone, the combined NOIs of those properties was roughly $19 million. When you look at the properties that we bought, which were, as I said earlier, between 35 and 40 years newer, we exchanged those into 90 East, the 3 apartment buildings that I mentioned. And the NOI that we gave up was $19 million -- and the NOI that we gained was $28 million. And so what we're doing -- and also remember too that, like the Issaquah property that we exchanged into, we bought it at an attractive price, but it had lease-up attached to it. And so when we bought Issaquah, when we exchanged into that, it wasn't at a stabilized cap rate. The occupancy was right around the 80%. And so by the end of the second quarter of this year, we're going to be right around 95%.

In terms of Europe, I think making a strict comparison between the cap rates on acquisition versus disposal is not really accounting for the strategic rationale, for example, on the 3 assets that we bought in Europe, Hanover Quay, which is just behind our Capital Dock development, sort of a bolt-on strategic rationale to do that; and the Northbank, one of the other 2 assets that we bought, that was bought from a receiver of a multifamily or PRS project in Dublin, and it was 75% occupied, purposefully left vacant. And so when you think about the acquisitions versus dispositions, I think when you look at it in Europe, it's really just the yield spread in terms of the yield on cost to what we sold. And that's giving us a positive spread of almost 2% when we bought the asset to when we sold it, and it makes sense in terms of strategic rationale.

In the U.S., what percentage of the acquisitions were actually 10/31 exchanges?

Sorry that again -- say that again.

All the acquisition you did in either Q4 for the full year, just is it like 100% 10/31, or could you ballpark that?

Yes, it was probably about 2/3 10/31, particularly on the assets that were wholly owned, the majority of those were 10/31 exchanges. And then, obviously, what we bought in our funds into our partnerships were not 10/31s.

And I can tell you that it's like a 2 Salt Lake City ones that we bought here in the first quarter that we've already announced. Those are the typical value-add deals. The biggest one sits on 20-plus acres of land. It's a low density property, highly -- it needs capital. And we'll spend probably roughly $8 million there, I would call, fixing that property up. But that property will end up stabilizing at somewhere around a 6.5% cap rate. It will take us about 18 months to get there, but it will stabilize around 6.5%. And I think the other interesting thing that has happened is to remember, we all know what's happened with interest rates here recently. But at the property level, particularly in Europe, the interest rates at property level still remain very low compared to the United States. And the second part that, I would say a little bit surprising to me anyway, was that when we went to finance those 2 Salt Lake City properties, the interest rate that we ended up paying, which was like 3.85%, I think, right around in there, 3.85% or 3.90%, even with the increase in rates, it was almost the same rate that we were paying a year ago, because what lenders are now doing is they're gravitating to the higher quality companies like Kennedy-Wilson. And so even though rates -- the tenure has gone up, the spreads have come tighter. And so in almost all cases, Craig, what we do is we are obviously looking for the most competitive interest rate. So the spreads are still good. But what I did say at the end of my prepared remarks is that, look, we're being very careful about where we're deploying capital, given what's currently going on in the market.

Okay. And just 2 related questions, and then I'll jump back in the queue. So your stock price is frustrating, I'm sure, to you guys. And that's kind of been frustrating for your larger holders. If you were convinced that -- and management comp seems to be part of the issue, right? So if you were convinced that a bonus pool based on percentage of EBITDA was responsible for the discount, would that be enough to get rid of that?

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

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

Well, I mean, what I said this year is that the $1,700,000,000 that we sold last year, the actual -- that number is actually probably going to decrease this year. But what we are selling are assets that we have bigger ownership interest in. And so when I mention that $500 million of cash is going to get generated out of asset sales here in the United States and in Europe, the high -- very high percentage of that are assets that we own 100% or post 100% of so that the aggregate dollars of sales this year is probably going to go down, but the amount of cash that we're generating out of these sales will go up.

The next question comes from Vincent Chao with Deutsche Bank.

Just wanted to go back just to some of the fundamentals here. You guys have been experiencing some deceleration in the multifamily side down to, seems, to revenue growth for a couple quarters now. And in this quarter, it really had a nice turnaround. I was just curious if there was anything specific in the quarter that would explain that jump? and if you think that is sustainable going forward?

Hey, Vin, it's Matt. So I think one key component to that is the makeup of the same-store pool. So we did sell some assets in '17 that were primarily in California. And we've redeployed that capital more to the Pacific Northwest. And what we've seen in terms of the trends is that the Pacific Northwest rent growth has been, certainly in the last year or so, more robust than Northern California and Southern California. So I think you're seeing the impact of some of those trades we've made by shrinking a bit the portfolio in California on the multifamily side and growing the portfolio in the Pacific Northwest. And then the second part of that is the assets that we bought 3 years or 4 years ago, you're really seeing the benefit of the value-add that we put into those assets, the unit turns we've done, the clubhouses we've built, the amenities that we've produced for the tenants. And so you're seeing that come through as well. So I think those are the 2 key factors that have driven that increase.

I think, Matt is really making 2 very, very good points then. The -- as we've talked about on these calls before, the income-to-rent ratio here in California is high. In some areas, it can be as high as 50% to 60%. And that's difficult for people. In the areas that we are deployed -- and then, remember, like I said, in the state of Washington, there's no state income tax. And so you've got basically the same, or in some cases, higher salary levels there with rent-to-income levels that are in the 20s, low-20s, mid-20s. And the second thing you've got to remember when you buy these garden-style apartment buildings on these big properties, 300, 400 units at a time, it takes you really the better part of a couple years to, I would say, improve your tenant base and to complete the CapEx programs that you're doing. You have a lower turnover here in the Ireland and the United Kingdom than you do here. But generally, you're turning over about half your tenant base every year. So it just takes time when you buy these older communities, like these 2 we just bought in Salt Lake City, to implement the value-add program and improve your tenant or client base. But I do think, to answer your question specifically, that in the Portland, Seattle, Salt Lake City, Dublin -- see, I think the one thing that's lost when people talk about Europe is Dublin have the -- Ireland had the fastest growing economy in Europe last year and they've got a positive population growth. And the office space is benefiting greatly from the uncertainty surrounding Brexit. And so you have the -- and you've got the no ability to create fast a lot of housing product. And so in all our markets, we feel very, very comfortable that the long-term outlook for, like I said, job growth and population growth coupled with very good university systems that are producing younger people that are going into these labor forces is really the key to sustaining rent growth.

And Vin, just to add to that, I mean Ireland really has a housing shortage. So it's a problem for Ireland, but it's an opportunity that we see. So we need to be -- I would say, 35,000 units per annum need to be built. And in 2017, only 11,000 units were built and about 15,000 are estimated for 2018. So there's really a major -- there's a structural shortage in what's being provided in terms of housing. And then the other kind of difference, I think, in Ireland, there's only 16% of city dwellers live in apartments versus 60%, in -- which is the international norm -- so we really see a big opportunity in Ireland. And we're very focused on the [payroll] sector there and growing that business.

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

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

But I think the most important thing when you think about Kennedy-Wilson, Vin, is -- and everybody, is that at the corp level, we have roughly 550 total employees. At the property level, which are off of our income statements, there's obviously thousands more there. But of the 550, better than half of that are in our service business. And the point I was trying to make to you earlier is that we sold our service business in Austin, but that occurred at the end of the year. But we eliminated roughly $4 million worth of overhead and salaries out of that event. And while that's not the primary concern, as I said in my prepared remarks, we're looking at monetizing part or all of the research business that we have. And that business has almost 125 people in it. And so there's a payroll attached to that, but it's roughly $12 million a year. And so we're looking at those situations, and that's really what I was trying to point out in my prepared remarks.

The next question comes from Mitch Germain with JMP Securities.

When you kind of think of the noncore sales you want to do, I think you talked about maybe generating $500 million of net cash.

Yes.

How much of the portfolio do you consider noncore and maybe in the percentage? And then how should we think of the breakdown of that with regards to the U.S. versus Europe?

Well, roughly -- the way we're set up now, roughly -- our portfolio is roughly 50-50 U.S. and Europe. And again, when we talk about Europe is -- in totality, the majority of it's in the United Kingdom and Ireland. But when you talk about these noncore asset sales, you really have to look at kind of in numbers. We have ownership interest in roughly 395-odd properties. We did 2 large portfolio acquisitions in Europe called Gatsby and Jupiter. When -- in those portfolios came a lot of smaller assets along with some very high-quality bigger assets. And so my guess is that over the next 2 years, you'll see the number of properties that we have ownership interest in shrink by almost 1/3 in terms of numbers. But we, also remember, have roughly $2 billion-plus of unencumbered properties. And the majority of those unencumbered properties are in Europe. And so like I said before, as we continue to sell these smaller assets or these assets that aren't core assets for us, it's going to be a smaller number this year in terms of the total dollar value, but the cash that's coming out of them will be greater than last year.

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

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

No, it's exactly the opposite.

Yes. So I think this one is interesting. As you know, we previously consolidated KWE. So that 76% that we didn't own was already on our books at about $1.1 billion, which was lower than what you might expect, because we had to take the cumulative effects of depreciation and currency through our financial statements that -- related to that 70% -- 76% we didn't own. So as a result, even though we paid a premium, which was still, as Bill mentioned, $260 million below the IPO price, our equity only increased by $322 million. So as we liquidate some of these assets, over time, you're going to see bigger gains, because we were not able to market them at fair value.

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

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

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

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

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

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

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

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

Correct.

And just to be clear, Clancy 3 is not included in that $35 million. That's more than 2 years out. So that's on top of the $35 million.

Yes. So -- and I just want to make sure that I get this. The $35 million includes Capital Dock, Clancy. It also includes Vintage. Or does it include some of the investments you're making in operating assets? How do I think about kind of the different pockets?

Yes, it's 2 pockets. It's the unstabilized assets, which should be like Clancy Phase 2. Pioneer Point in the U.K. would be in the unstabilized bucket. We also have the Vintage assets.

The Chase.

The Chase also in Ireland. And then the other is the development bucket, which would be the Vintage assets and Capital Dock. So we've laid out some pretty good detail in our supplement that runs through all of the unstabilized assets and the development assets and the timing under which we expect them to become finished or stabilized.

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

No, not at all. I mean, you have to remember that most of the development that's going on in Seattle is what I'll call in the Central Business District. We own -- basically we own 2 high-quality properties there, one called Radius and the other one is called Equinox. But the majority of our assets are not in the Central Business District. And I would have to tell you that too, when you look at the office absorption in Seattle, since 2014, they've delivered 8 million square feet of new office space to the market and it's 100% leased. There's another 8 million square feet that's being delivered in the next, I'd say, 3 years. And already, 80% of that is leased. But beyond that, there's hardly anything in the development pipeline on the office side. And I think, very similar to Dublin, in my view, Seattle over time, assuming the jobs continue to grow and the great companies that are there continue to grow, they're very much in a housing shortage. I mean, in the central business district, it won't really affect us, because the biggest property we have is the South Lake Union. But there may be some, I'd call it, lengthening of lease-up periods. But basically, there's a great -- just a very great need for housing there.

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

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

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

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

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

The next question comes from [Colin Trovato] of [Ranger] Global.

So I appreciate the additional disclosures that you were providing on the NOI bridge. Just a quick one just so -- on compensation again, I know there's been a lot of questions there. But when I'm trying to think about the increase in quarterly compensation and how that ties to gains, can you help me think about how -- when large gains are recognized, how that impacts the comp recognized in the quarter?

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

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

Sure. Yes, yes, yes, absolutely.

I think that would be really helpful.

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

The next question comes from Jason Ursaner with Bumbershoot Holdings.

There's a fair amount of uncertainty with regards to interest rates and what that might potentially mean in terms of widening the spread on cap rates that would impact real estate values. And you can kind of make the case, the stocks may be slightly above adjusted fair value if you some pretty harsh assumptions, more likely a bit below for a value, given the embedded gains that you seem to have in certain parts of the portfolio. But overall, probably in the right ZIP Code so my question, just a little bit similar to Craig's, and I appreciate you might not be able to answer it. But just given all the work you do to source deals to lease up, construct, refinance properties and eventually recycle value through dispositions, how frustrating has it been to essentially still be trading below liquidation value, especially in KW Europe's case and not really getting any credit for the franchise value despite what most people would argue is a pretty good track record of creating value and just given that other capital allocators out there tend to trade at a meaningful premium or even multiple of adjusted book value?

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

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

Look, I mean, I went on the road for a week in January, and met with 40 either prospective or other investors. We're talking to people all the time. I don't think there's any question that the management team remains the largest single shareholder. There is no question in my mind, and I'm not trying to make any excuses for this, but there was a lot of trading around the merger from hedge funds and so on and so forth. And so you saw a lot of that. And the volumes in our stock in the fourth quarter were very, very, very high in relationship to historical standards. We obviously want the stock to perform at a higher level. And so whether it's through meeting with people, simplifying our story, holding shareholder days. And I think -- I really do think we have one shareholder that is now starting to take a larger position in our stock that spent 2 days going to our properties here in L.A. and Seattle. And I think it's very, very difficult for any shareholder or any analyst who's following us that doesn't go see the properties. It would be like me saying that I can manage the business without going to any of the properties, which is not what I do or Mary does. And so I would really encourage you all, we're going to do a Shareholder Day in Dublin, and we're going to do one in Seattle later this year, to come and see firsthand. And I think you would be incredibly impressed at what we've been able to do over the last 8 years. So we are obviously mindful of what's gone on. We're obviously very mindful of what's happened with interest rates. That was why I tried to point out to you that our debt maturities that we have over the next several years is really fairly small. I would also tell you, though, that we are continually looking at the debt structures at the property level to lock in longer-term fixed-rate financings on properties that we intend to keep long term. So I think that's really pretty much the summary.

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

I actually tried to take myself out of the queue, but I'll ask it anyway since it's quick. If you take compensation and G&A, add those 2 together, you basically have $220 million. And it's not fair -- we want to take services out of there. So can you just ballpark?

I don't want to just ballpark it, Craig, I would want to go back and actually get you correct numbers.

The next question comes from Will Allen with KBW.

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

Yes. Look, very, very good question, and it's obviously something that's on our radar screen. When KWE was a public company, we did $130 million buyback there. As I said earlier, we did $90 million in the last 2 years here. And in addition to that, in Europe, over the last couple of years, we've probably paid $150 million worth of dividends. And so it's clearly a topic that is part of the investment analysis that we're looking at. So when you combine the $130 million, obviously, $90 million we've done -- between the 2 companies, we did over $200 million. But we look at that investment opportunity against other investment opportunities, and it's something that we're clearly focused on.

So I guess, then taking it one step further, you understand your property values better than anybody in the world. You've done a great job in improving disclosure over the last, well, 6 months in particular. I think it is clearer to us, but it's still complicated, carrying properties at depreciated cost. It's hard for us to exactly work out what they were. You had some very rich shareholders, very well-known and have good partners. Why not -- and you've done it before, why not just take this company private?

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

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

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

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