Kennedy-Wilson Holdings Inc (KW) CEO Bill McMorrow on Q2 2014 Results - Earnings Call Transcript

Aug. 8.14 | About: Kennedy-Wilson Holdings, (KW)

Kennedy-Wilson Holdings Inc (NYSE:KW)

Q2 2014 Earnings Conference Call

August 7, 2014 10:00 AM ET

Executives

Christina Cha - VP of Corporate Communication

Bill McMorrow - Chairman and CEO

Matt Windisch - EVP

Justin Enbody - CFO

Mary Ricks - President and CEO of Kennedy-Wilson Europe

Analysts

Jason Ursaner - CJS Securities

David Ridley-Lane - Bank of America Merrill Lynch

David Gold - Sidoti

Vincent Chao - Deutsche Bank

Vance Edelson - Morgan Stanley

Mitch Germain - JMP Securities

Operator

Welcome to the Second Quarter 2014 Kennedy-Wilson Earnings Conference Call. My name is Allen and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

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

Christina Cha

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 Web site 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.

Bill McMorrow

Thank you, Christina and welcome everybody. And as is our normal practice, I am going 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 a $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, $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 of 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 2014. At the same time, we have been able to realize significant gains in our existing portfolio through a strategic asset management and selected investment realizations.

On the financial highlights, during the second quarter, the Company and its equity partners sold a 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 recognized an acquisition gain of $66.7 million of which $22.9 million was allocated to non-controlling equity partners.

Shareholder equity increased $207.8 million or 27% to $976.1 million at June 30th 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, totaled 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 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 months period, the adjusted EBITDA in the investment business was a $165.5 million, a 187% increase from $57.6 million for the same period of 2013.

For the same property and multi-family units, same period total revenues increased 7%, net 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 increased 2% to 85%.

So 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 split, the company’s investments year-to-date were directed at 87% to the United Kingdom and Ireland and 13% to the Western U.S.

As of June 30, the company and its partners have an investment portfolio of approximately of $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 totaled $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’ve 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 a $191 million. Additionally, we grew our commercial annual NOI by a $136 million to $211 million on 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 distribution 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 30th 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 to $6.1 million compared to, 700,000 for the same period of 2013. In accordance with U.S. 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 have 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 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; two are line of credit, Bank of America, Deutsche Bank and JP Morgan. 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 of 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 a 90% occupancy.

In Q3, today, we have closed on or have under contract approximately $315 million of deals both in the U.S. and in Europe through KWE. In the U.S. these deals include the 1,212 unit, three property portfolio I have mentioned that we closed in July. Through KWE, we completed the Portmarnock Hotel and Golf Links acquisition and are under contract to buy retail center and loan portfolio secured by 13 assets in Ireland, which together totaled $200 million.

Also in Q3, we have sold or are under refundable contracts to sale three office buildings in the Western United States totaling over 400,000 square feet which will generate approximately $15 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 decreased by 200 to 300 basis points in the past 12 to 18 months. We are actively pursuing the refinancing of approximately $700 million of non-recourse 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’s it for the remarks that I just made and I am happy to open it up now to any questions anybody might have.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Jason Ursaner with CJS Securities. Please go ahead.

Jason Ursaner - CJS Securities

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?

Bill McMorrow

I’m going to let Matt answer that question Jason.

Matt Windisch

Hey, Jason. Yes, so to give you a sense of the process we go through on the fair value on Japan and what we did on the European assets in the first quarter, it’s a detailed analysis and we do mark this as a 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’s actually less than the total distribution we’ve taken over the life of this investment which reduced the basis that we were holding this on our books.

So we feel like it’s 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 distribution. And so if you look through some of the fair values we’ve done in those distributions they basically net out.

So you are still looking at it investment accounts that’s basically held at our cost.

Bill McMorrow

And I think the other footnote I’d add to that Matt is that our investment account quarters we depreciate -- we are running depreciation and on an annual basis now our depreciation is running in excess of 15% a year. So we are depreciating that investment account also every month.

Jason Ursaner - CJS Securities

And for the acquisition pipeline going forward, looking at Europe specifically, obviously there remains a huge opportunity. Understanding that you are 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.

Bill McMorrow

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

We were fortunate and that we really sell that when 2008 came along that that was an opportune time to buy. And so we’ve been active buyers really since 2009 in all of these markets. Those assets that I mentioned in Europe that we are refinancing many of those we bought at 2011. But having said that all, we operate from a philosophy that as 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. Well I would have -- Mary, do you want to add some color to that?

Mary Ricks

Sure. I mean I think just as Bill said, we’ve got -- NAMA still have 9 billion of its remaining 16 billion that they said that they are going to liquidate by the with the end of 2016. Spain’s got a 192 billion of non-core real estate that needs to be sold or restructured and all the UK banks, RBS and Deutsche Banking Group and several others are just now, they are continuing to embark on their deleveraging program. So we’re still seeing a ton of opportunities and the deal that we just did that’s called the Elliott portfolio, that was an off market deal. So a lot of process is 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 looking at 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 set gives us quite an advantage. So we’ve got a very active pipeline still here in Europe.

Bill McMorrow

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’s important for everybody to understand that also.

Mary Ricks

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 have 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 a 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 U.S. style amenities, if you will, to our multi-family assets by business centers and gym and really lots things that these projects that were initially built out 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 across the board we are doing ahead of plan. And then in terms of just the leasing on our office field that’s going very well. We have got over 0.5 million square feet either lease signed or under serious negotiation in all of our PLC assets. In addition to that, in our State Street asset, we have 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 very interesting development that we could do in central Dublin.

So, there are just tons of value-add nuggets throughout our portfolio in Europe and we have got a 15% deep asset management team here in Europe. So, every single day we have got lots of very brave people that have been in the real estate business for 15 and 20 years working on asset management initiatives.

Jason Ursaner - CJS Securities

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?

Bill McMorrow

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 have 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, as we took $15 million of cash out of those office buildings and used $45 million of that to buy these South Seattle apartment units. And in our apartment business, generally speaking, 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 14 to 20 years old where there is a rehab component both to the units and the common areas. And so it can take you as long as a year or year and 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 approached 10% or more in some cases. And once you completed the rehab of those apartment projects, they are not being capital consumers. The office buildings on the other hand because in the U.S. it’s 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 assets have reached stabilization in the office market here in the Western United States, we are selectively pruning those and redeploying that money in the higher yielding assets.

Operator

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

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.

Matt Windisch

Hey David, It’s Matt. So, you are right, we are running 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 distribution. And so if you were to mark those to market, we would expect those assets to be working more than we are hoping 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 today. But I would expect that to say right around 50% overall loan to cost and then on a loan to value you will be substantially below 50%.

Bill McMorrow

Mary, On KWE, comment on the closing of roughly 1 billion sterling of acquisitions that you did, how did you handle that capital wise and what debt now do you have on that portfolio?

Mary Ricks

Since we closed today, the 127 million sterling financing. We now have circa 332 million sterling against the 1 billion plus of assets. So we’ve got it’s roughly 25% actually when you have the cash back in we are 25% LTV. And we actually are in discussions right now on the Fordgate portfolio and we’ve seen a lot of new entrants into the debt financing. And so you’ve got just one of potential banks that, or banks that want to give you loans and put out loan dollars. And pricing once you said earlier Bill in your call, pricings come in significant. We’re seeing margins now sub-200. So there is just a huge number that will be saving when we go ahead and refi some of the assets that we bought a two years ago and a lot of those ones 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.

Bill McMorrow

And then Mary too I think and David, when you think about the leverage in KWE, remember that the Artemis financing that Mary completed today, 127 million sterling all that did was going to cash. And so we’ve seen your cash position as of today in Europe is what Mary?

Mary Ricks

We’ve got 250 million sterling.

Bill McMorrow

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

Mary Ricks

That’s right.

David Ridley-Lane - Bank of America Merrill Lynch

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’ve taken ownership?

Bill McMorrow

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

David Ridley-Lane - Bank of America Merrill Lynch

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

Matt Windisch

The assets under management are, they are about $17.1 billion.

Operator

The next question is from David Gold with Sidoti

David Gold - Sidoti

Just a little bit of follow up here. 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?

Matt Windisch

Yes, no problem. So if you look at -- I’ve got it for the six months here and then I can -- what I can walk you through on a quarterly basis. So for the investment account, give me a one second here. Yes, so for year-to-date we’ve added $427 million in addition and $120 million of distribution year-to-date.

David Gold - Sidoti

Plus $427 million and minus $120 million?

Matt Windisch

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

David Gold - Sidoti

And then 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 there to sort of revert to from say the 87 in ’13, could we be back to that 60-40? And two on the KWE side, I know there was a little bit of commentary in that 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.

Bill McMorrow

It’s always hard to predict how that’s all going to be, David, but I think I said, Matt, I am trying to remember back in 2013, I felt that at the beginning of the year the splits would be I think I have 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 that was going to take is roughly 12 months to deploy that was a second largest real estate related IPO in the 200 year history of the London Exchange. And so we felt that was going to take us around 12 months to deploy that capital but really what ended up happening is that Mary and our team, we are able to execute on the capital spending faster than we thought and that’s obviously what skewed those percentages because we were so front loaded here in the second quarter with Kennedy-Wilson Europe.

But it’s really hard to say to be penned down on a percentage but I think it’s still going to be somewhere in that range for the next 12 months, somewhere between 70% to 80% Europe and 20% to 30% here in the U.S. Even in-spite of the cap rate compression here in the U.S., we continue to see attractive opportunities particularly in the multi-family space. And I think too, David, one other point I want to make here is that and part of the reason I had Mary go through that. So, KWE is now still on a very liquid position and she mentioned earlier she is going to be, she is exploring, financing on the Fordgate portfolio, which we paid all the 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 $315 million of cash, corporate cash and we have increased our line of credit from a $140 million to $300 million. And even though we obviously never have any plans to sell our position at this point in KWE that’s 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 the 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 mentioned to you.

David Gold - Sidoti

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 and say some additional color as to both thoughts there and where you might be more aggressive?

Bill McMorrow

Mary?

Mary Ricks

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

In Italy, it’s very early days there, we are sniffing around a little bit and having some meetings and just accepting 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.

Bill McMorrow

I think too, Mary, that when you think about Europe and you back to 2011, the common characteristics 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 characteristics 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 cost that had asset management opportunities to increase income and so that’s really what we have ended up with throughout our whole portfolio that not only KWE but KW here in the U.S. The quality of our assets is 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 above replacement cost with upside through asset management.

David Gold - Sidoti

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%?

Mary Ricks

Correct

Operator

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

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’ve done the deal here post 2Q. But rough ballpark is that about the right way to think about it?

Bill McMorrow

Yes, I think that’s very close.

Vincent Chao - Deutsche Bank

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 potential dollar investment based on what you see today?

Bill McMorrow

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’ve got it entitled. And the first step really is just to get the entitlement process done and both in Europe and in the U.S., we have people dedicated only to getting a 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. Once it’s entitled, it 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’s 10 acres but only has 400 units on it. We’re entitling that property for another 1,000 units, the entitlement costs are a couple of million dollars.

But once that entitled for another 1,000 units, its worth well in excess of the couple of million dollars that you already own the land. So it’s worth -- it would 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 cost of the 3,000 units is not material really to the overall investment portfolio but the potential gains that you have once you’ve 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.

Vincent Chao - Deutsche Bank

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 U.S. 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?

Matt Windisch

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 on the same-store if you look across the portfolio. Within our portfolio including in the same store are some building 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’d say it’s far in excess and where it’s up closer to where our multi-family numbers are if you look at the entire portfolio.

David Gold - Sidoti

And then just maybe sticking with the multi-family, the growth there in the U.S. was pretty strong on a same-store basis revenue wise. One of the themes here in the U.S. 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?

Matt Windisch

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 area. 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 and so there is substantially less supply coming on. Our rents also on a whole dollar basis are substantially below CBD rent and so we feel like this trend can continue for a while here in the markets we are invested in.

Vincent Chao - Deutsche Bank

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?

Matt Windisch

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

Operator

And the next question comes from Vance Edelson with Morgan Stanley. Please go ahead.

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?

Matt Windisch

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%.

Vance Edelson - Morgan Stanley

Okay, perfect. And then back on the pipeline, I understand it’s still very active in Europe and there are even some opportunities in the U.S., 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?

Matt Windisch

Mary, I will just do one quick comment there and then maybe you can weigh on Europe. But I would say overall, globally our pipeline remains extremely robust, very strong and particularly in Europe which Mary will mention, we are seeing significant deal opportunities and a very healthy pipeline.

Mary Ricks

I would say 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 aftermarket discussions that we are having. So, it’s just a whole kind of gamut of varying negotiations sort of statuses where we are but it’s a 2 billion certainly that we are looking at right now. So the pipeline is big.

Vance Edelson - Morgan Stanley

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?

Bill McMorrow

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 have got to, I don’t know how you describe but somewhat of a social shift too, growing populations in the Western United States and in all the markets that we are in, in the State of Washington, in 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 have got housing prices in all of the markets, purchase prices at or near all-time highs. In the Bay area you have housing prices well above the peak of 2007 and so you have 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 of 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’s 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 are 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’ve got some questions about what’s 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 sub-market individually but in a macro sense the demand and supply are still very favorable the multi-family.

On the office side, again it’s the same, you have to do the same kind of analysis. San Francisco as everybody knows has been red hot last couple of years because of the expansion of the tech industry. But the funny part about that is that we are really benefitting from the Bay area expansion is in Dublin. Because as I’ve said early on earlier call is you’ve got 700 U.S. 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’re benefitting from office rents and apartment rents in Dublin driven in a lot by the success of 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’re not seeing -- the occupancy numbers are good but we’re not seeing the kind of rental growth that you are seeing in Dublin and in San Francisco and in Seattle to a lesser extent.

Operator

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

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?

Matt Windisch

I mean it’s certainly a negotiation with the partners and I think my 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’s a partner by partner discussion and I wouldn’t say it’s easy certainly but it’s something that our partners have been willing to do in exchange for our performance and other factors.

Mitch Germain - JMP Securities

And then I might have missed this earlier, I apologize. Maybe in Europe, Mary, your commentary, I mean 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’d love to get some thoughts on that theme?

Mary Ricks

I mean I’d say no. The banks that were dealing with and then you also have the governmental agencies such as NAMA and Cera, there is still a lot to delever. And I would say is that they are kind of speeding up their deleveraging. And do 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.

Operator

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.

Bill McMorrow

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

Operator

Thank you ladies and gentlemen, this concludes today’s conference. Thank you for participating. You many now disconnect.

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