Kennedy-Wilson Holdings Inc.

Good day, and welcome to the Kennedy-Wilson second quarter 2023 earnings call and webcast. All participants will be in a listen-only mode. And should you need any assistance during the call, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. And to withdraw a question, please press star, then two. Please also note that this event is being recorded today. I would now like to turn the conference over to Devin Bobsar, Vice President of Investor Relations. Please go ahead, sir.

Thank you, and good morning. This is Devin Bobsar, and joining us today from Kennedy Wilson are Bill McMorrow, Chairman and CEO, Mary Ricks, President, Matt Windisch, Executive Vice President, and Justin Enbody, CFO. Today's call will be webcast live and will be archived for replay. The replay will be available by phone for one week and by webcast for three months. Please see the Investor Relations website for more information. On this call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA and adjusted net income. You can find a description of these items along with the reconciliation of the most directly comparable GAAP financial measure and our second quarter 2023 earnings release, which is posted on the Investor Relations section of our website. Statements made during this call may include forward-looking statements. Actual results may materially differ from forward-looking information discussed on this call. due to a number of risks, uncertainties, and other factors indicated in reports and filings with the Securities and Exchange Commission. I would now like to turn the call over to our Chairman and CEO, Bill McMorrin.

Bill McMorrin Kevin, thank you, and thank you, everybody, for joining our call. Yesterday, we reported our Q2 results, and I'm pleased with the continued progress we are making on our key growth initiatives. During the quarter, we completed the largest single transaction in our company's history, driving our assets under management to a record $25 billion, which has grown by 39% since the end of 2020. Estimated annual NOI grew to $499 million, and fee-bearing capital grew by 32% in the quarter to $7.9 billion, both at record levels for the company. Key-bearing capital has now doubled from the beginning of 2021. I'd like to start with a few highlights from the quarter, and then Justin will discuss our financial results in greater detail. As we've discussed on our recent calls, one of our core strengths has always been uncovering opportunities and finding unique ways to grow our company during periods of dislocation. This has been a recurring theme throughout our history, entering Japan in 1994, expanding outside of California, which began 20 years ago, and during the Great Recession with our initial entry into Ireland and the United Kingdom in 2011. In Q2, as multiple regional banks began to lose deposits, we were able to acquire off-market a very high-quality construction loan portfolio totaling $4.1 billion. which is purchased on a discounted basis from Pacific Western Bank. This transaction was one of the first significant loan transactions in this cycle and was sourced, underwritten, and closed in a very short period of time. Alongside the portfolio, we welcome the highly experienced PacWest construction lending team of 40 people at KW. In addition to these, team members significantly enhancing our credit capabilities, adding construction expertise to our existing specialties of bridge and mezzanine lending. Matt Windus will discuss this transaction in greater detail in just a moment. We also made substantial progress across all our developments, as several of them are now reaching completion. Our development and lease-up portfolio is expected to produce $99 million in NOI to KW, with the majority stabilizing by the end of next year. Also, Mary Ricks will also discuss these developments in more detail in just a moment. Looking ahead, our key priorities are centered around growing our assets under management, our net operating income, and our fees in three asset classes. First will be to expand our global credit business. We think there will be many opportunities on the credit side of the business, stemming from the pressure on the global banking system to reduce their balance sheet sizes and the pullback from nontraditional lenders and mortgage rates. Our expanded credit team of 50 people is ready to react to any opportunities that may arise in the United States, and in Europe, primarily in the United Kingdom and Ireland. Secondly, we anticipate that our multifamily portfolio will continue to drive cash flow growth. Our largely suburban garden-style U.S. communities continue to offer a high-quality lifestyle at an affordable price point, with additional cash flow expected from the 4,800 units in our development and lease-up pipelines. which will then grow our stabilized multifamily portfolio to over 37,000 units versus less than 30,000 units at the end of 2019. And third, we are focused on growing our cash flow in our 111 asset, 11 million square foot logistics portfolio. In-place rents are still significantly under market, paving a runway for future growth. Fundamentals remain strong within the logistics sector as we look to expand our platform with our partner over the next few years. With that, I'd like to turn the call over to our CFO, Justin Enbody, to discuss our financial results.

Thanks, Bill. I'd like to start by covering some of the key drivers of our Q2 financial results, which were a big improvement from last year. Our consolidated revenue grew in the quarter by 8%. from Q2 of last year, driven by higher levels of hotel revenue and loan income. In our consolidated portfolio, values were largely stable overall as we saw modest movements in the quarter. Realized gains increased by $78 million in the quarter from our Q2 dispositions. And finally, other income increased by $21 million, driven by the increases in the value that companies' interest rate hedging instruments in Q2. These results produced gap EPS of $0.28 per share, versus a loss of $0.07 in Q2 of last year. Adjusted EBITDA totaled $195 million in Q2 versus $118 million in last year. Adjusted net income totaled $86 million or approximately $0.62 per share versus $41 million last year. Looking at our balance sheet and debt profile, during the quarter we strengthened our balance sheet through the issuance of $200 million of perpetual preferred equity at a fixed rate of 6%. along with seven-year warrants that have an initial strike price of $16.21. Proceeds from the preferred stock were used in part to reduce our line of credit balance, which was paid down by approximately $100 million. At quarter end, we had $387 million of consolidated cash and $149 million drawn on our $500 million line of credit. We made the decision back in 2021 to increase our interest rate hedges to manage our exposure to rising interest rates As of June 30, we have hedges covering $2.3 billion of notional, which were valued at $92 million. Our interest rate hedges have a weighted average maturity of 1.7 years and a weighted average strike of 2.4%, well below where index rates are today. Our effective interest rate is 4.3% today, which reflects a 60 basis point savings over our contractual rate due to the impact of our interest rate hedging strategies. Overall, our debt is 99% fixed or hedged and has a weighted average maturity of 5.5 years. Our near-term debt maturities are limited, with only 2% of our debt maturing by year-end. And with that, I'd now like to turn the call over to Matt Windisch to discuss our multifamily portfolio.

Thanks, Justin. Our multifamily portfolio represents 53% of our global stabilized portfolio and produces $458 million of NOI. of which our share is 262 million, or approximately 57%. Our portfolio totals over 37,000 units, including 4,800 units in lease up or development, which are expected to add 44 million in estimated annual NOI to KW. We also have future projects that we are still evaluating that could add over 1,000 units to our development pipeline if completed. Globally, same property revenue grew by 4% and NOI by approximately 3% in Q2. In the U.S., blended leasing spreads totaled 5% in Q2, and our in-place rents were 7% under market at the end of the quarter. Looking at this regionally, the strongest performance once again came out of our two largest apartment regions, the Mountain West and the Pacific Northwest. which generated same property NOI growth of 7 and 6 percent respectively. These two regions account for 74 percent of our U.S. market rate same property NOI. In the Mountain West, our best results were from our portfolio in New Mexico and Nevada, each which saw same property NOI growth of a robust 14 percent. Our Nevada portfolio results were driven by increasing rents and same property occupancy growing by 2.6 percent. Our two largest Mountain West states, Idaho and Utah, collectively saw rents and NOI increase by 4%. In the Pacific Northwest, our second largest region, same property revenue and NOI grew by 6%. While occupancy declined slightly, we continue to capture the loss to lease, which narrowed from 13% to 6%. The Seattle region continues to see steady improvements in foot traffic from return to work mandates, which we believe will continue to positively impact renter demand. In California, we continue to see the ending of eviction moratoriums and governmental rental assistance impact our same property results due to higher delinquencies and operating expenses as well as lower occupancy. In Q2 of last year, we received a total of 1.3 million in rent relief payments versus $68,000 in Q2 of this year. Over the next few quarters, we anticipate making solid progress on recapturing units from non-paying tenants, which will be favorable and will allow us to mark-to-market these units and improve our overall occupancy. Excluding California, U.S. market rate same-store NOI would have been 6 percent versus the reported 2 percent figure. We also made great progress on our renovation program, completing another 440 units at an average cost of $12,400 resulting in a 23% increase in rents. We have over 5,800 units that are remaining to be renovated in the U.S., with 80% of those units located in the Mountain West or Pacific Northwest. In Dublin, apartment market fundamentals continue to be very robust. Our portfolio is 98% occupied, with waiting lists at many of our properties, as we continue to see a critical undersupply of housing. We anticipate strong demand for our new developments, as Bill mentioned, which we'll start delivering in Q3. And at our vintage housing affordable portfolio, we saw very strong NOI growth of 7 percent. Occupancy levels remained robust at an impressive 96.5 percent. Our assets experienced significant revenue growth of 9.3 percent, supported by the rise in area median incomes. Increases in operating expenses were primarily due to higher labor, utility, and insurance costs during the quarter. We view most of these increases as temporary, as we have now brought staffing back to appropriate levels and utility costs have begun to level out. Looking ahead, the completion of 2,200 units in our development pipeline will grow our total vintage housing portfolio to almost 12,000 units. As we continue to explore new prospects, we are dedicated to seeking additional growth opportunities within this venture. Now shifting our focus to our U.S. credit business. In Q2, our debt business grew by an impressive 86% and currently totals $6.5 billion in loans, including $1.9 billion in future fundings. This growth was driven by the $4.1 billion discounted loan portfolio transaction with Pacific Western Bank. This portfolio includes 65 loans secured by high-quality assets, 80% of which are backed by either multifamily or student housing properties, and expands our footprint into new markets across the U.S. In a few short weeks, we were able to physically see and underwrite each asset, and this acquisition demonstrated the strength of the entire KW team across our various business lines. Their collective efforts, commitment, and collaboration played a pivotal role in quickly evaluating and successfully closing on this opportunity. The addition of the Pacific Western team allows us a deeper bench, skill set, and regional knowledge across our credit investment team, where we think there will be plenty of opportunity in the near term. As traditional lenders pull back and borrowers are in need of credit solutions, we believe KW is well positioned to continue growing this business. We are already seeing a substantial pipeline of new opportunities that we are currently evaluating. Our platform has additional capacity of approximately $2 billion, which we look to grow over time. So with that, I'd like to turn the call over to our President, Mary Ricks, to discuss our European credit business in further detail.

Thanks, Matt. As Bill mentioned earlier, one of our strategic initiatives is to expand our credit business in Europe. Our European track record of investing in real estate credit dates back to the Great Recession, during which we were an active investor. Since our inception in Europe in 2011, we have successfully completed over $5 billion of debt investments, and currently have over $200 million in European originations outstanding. Similar to the US, we anticipate there will be solid opportunities to either originate or acquire high-quality loans resulting in attractive risk-adjusted returns for KW. We have a large global investor as our partner and look forward to growing the private credit space in Europe and capitalizing on this opportunity in the coming quarters. In total, our investment management platform has an incremental $5 billion of commitments and future funding, which we will look to deploy across all of our announced debt and logistics platforms. This will add significantly to our existing $7.9 billion of fee-bearing capital, which grew by 32% in the quarter. Turning to our industrial platform, fundamentals remain strong within our global industrial portfolio, which totals 111 assets, and 11 million square feet and is 99% occupied. Approximately 75% of our stock is comprised of an institutional quality last mile logistic assets strategically positioned throughout the UK and continue to exhibit outstanding performance. The UK's logistics sector is experiencing sustained growth primarily fueled by two key factors. The rapid expansion of e-commerce, and a growing emphasis on supply chain resiliency among occupiers. These factors have led to a sustained and growing demand for last mile logistics properties across the UK. Institutional investors and developers are keenly focused on capitalizing on this opportunity by investing in and expanding logistics infrastructure to meet the increasing demands of the dynamic market. Throughout the quarter, we successfully completed leasing transactions covering an impressive total of 500,000 square feet in the UK with an average lease term of five and a half years. We have achieved a remarkable 54% increase in rental income, demonstrating the strong demand for our logistics spaces and inherent growth embedded within our portfolio. Year to date, we have completed over 1.1 million square feet of leasing, with incredible rental income growth of 52%. These results highlight the continued success of our strategic approach and the growing appeal of our logistics properties in the UK market. Our high-quality portfolios in place rents remain 26% under market, setting us up with ample opportunity for future NOI growth. We continue to have high conviction in the European logistics sector. Our joint venture has over $1 billion in AUM capacity, and we have a number of opportunities that we are currently evaluating as we look to further expand our footprint. U.S. industrial fundamentals remain robust with historically low average vacancy rates, creating a favorable environment for our portfolio. We have a total of 1.4 million square feet in five markets. Since acquiring these assets, we have completed 530,000 square feet of leasing, at a 68.6% average increase over in-place rents. In 2023 alone, we have achieved remarkable leasing success, completing transactions totaling 266,000 square feet, and in one of our industrial assets acquired last year, we have already achieved a 42% increase in rents, illustrating the strong rent growth potential across our U.S. portfolio. Building on this success, we have an active pipeline that aligns with our strategic vision. These acquisitions will further bolster our portfolio and enhance our tenant base, supporting our long-term growth strategy in the sector. Turning to our office portfolio, our core portfolio is comprised of 3.8 million square feet of consolidated assets and is largely comprised of well-located, high-quality suburban and low-rise office buildings with leading tenant amenities and strong ESG credentials. These core properties are in markets such as Beverly Hills, London, and Dublin. They've been carefully selected to align with our investment strategy, ensuring they possess strong fundamentals and solid long-term cash flow. Additionally, approximately 62% of our total office portfolio is owned through our co-investment portfolio, of which we have an approximate 20% ownership interest in. Globally, we have completed 675,000 square feet of office leasing this year, and our overall office occupancy stands at 93.2% as of June 30th. For the first six months of the year, we completed 2.6 million square feet of leasing across our global commercial portfolio, which is more than double what we completed the first half of 2022. Moving on to our development and lease-up portfolio. As Bill mentioned earlier, we have achieved significant milestones across our global developments, with approximately $1 billion in developments completing in the second half of the year. On July 1st, we welcomed our first guest at Kona Village, a rosewood resort comprised of 150 stand-alone guest halles across over 80 acres on the Big Island of Hawaii. This remarkable redevelopment is the first Hawaiian hotel to receive the prestigious LEED V4 Gold certification, solidifying its commitment to sustainability. The early response has been incredibly encouraging with strong initial demand and positive feedback from guests. Given the ongoing strength in travel demand, we anticipate the Kona Village will soon establish itself as one of the most extraordinary travel destinations globally. In Dublin, we are on track to deliver over 750 apartment units in Q3. In the U.S., we expect to complete 172 units in Santa Rosa, California in Q4, and have started leasing the initial phases of our two Mountain West developments, totaling 508 units. In 2024, we will complete our largest US multifamily development in Camarillo, California, totaling 310 market rate units and 170 affordable units. Almost all of our developments that are currently under construction are expected to be completed by the end of next year. In total, our development and lease-up portfolio is expected to produce $99 million in annual NOI to KW. And with that, I'd like to pass it back to Bill.

Thank you, Mary. Throughout our 35-year history of investing in real estate, we have established a long history of sound investment opportunities during periods like we find ourselves in today. These transactions are often sourced off-market through our extensive global network of relationships. In fact, in our history, over 70% of our acquisitions have been completed through off-market transactions, with a significant portion originating from financial institutions. I believe that our outstanding investment team, combined with long-term relationships with large institutional capital partners, puts us in a great position to take advantage of the opportunities in the current market conditions. With that, Devin, I'd like to open it up to any questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star, then 2. At this time, we will take our first question, which will come from Anthony Pallone with J.P. Morgan. Please go ahead.

Great, thank you. First question is, with the PacWest deal, it expanded your geographic footprint in the U.S. a bit. Can you talk about just the plans there and whether you think that just expands the footprint for debt investments, or do you see yourselves making equity investments in the properties as well?

Matt, you want to take that?

Sure. Yeah, thanks, Tony, for the question. Look, I think for now, we're very comfortable owning these loans that are, you know, 50 to 55 percent loan to cost, primarily with, you know, apartment assets and student housing assets in these markets. And we're going to take our time. We're going to study these markets, learn what we can from our team and from the assets that we own through the debt platform. And, you know, time will tell. I think I know in talking to our multifamily team, They have interest in some of these markets. They want to study these markets. But like I said, we're going to take our time and continue to evaluate. I think if we do enter these markets, the most likely product type would be multifamily. But again, it'll be a learning process and it will take time, so we're not in a huge rush to dive in.

Okay. And then, Matt, you mentioned $2 billion of capacity, I think, in the debt platform. I just want to understand, is that Is that just from your partners, or just what was that number, I guess?

Correct. So we have $2 billion in commitments beyond the future funding obligations we have on our loans. So in addition to the roughly billion and a half of future funding on the PacWest portfolio, we have an additional $2 billion from existing partners ready to make future investments. Beyond that, you know, we do have plans to expand that over time and grow that number. But that's the existing commitment right now.

Okay. And then in terms of, you know, KW's capital, you guys issued the prep and the warrants as part of the PacWest deal for your piece of it. If you do, in fact, get access to some of this pipeline, it sounds like it's pretty big. Like, how do you think about just funding, you know, the KW side of things on a go-forward basis?

Well, Tony, this is Bill. Yeah, thank you for the question. I mean, our plans are to fund our portion of any existing growth in the credit business out of our own asset base. And so we're, you know, we're looking, I think when you think about it, and I think Matt would, you know, agree with this, that over the next, I'd say, 18 months, the The majority of the opportunities to deploy capital are going to be in the credit space. And most of the capital that's going to go into that is going to come from third-party capital providers.

Okay. And then this last one, if I can sneak in. On the development side, the expected yields are about 6%. And can you maybe just put a little context around where you think that sits relative to market cap rates these days?

Yeah, I think that, you know, historically when we've underwritten these, we always tend to exceed whatever underwriting cap rates we had. And some of the things that we've done in the Boise market have been very, very good examples of that where we've actually stabilized capital some of the development properties in the sevens. I mean, the great news, I think, on all of this and the two debt maturities that we have next year is we've got very, very low loan to cost or loan to values. And so we've got a lot of room in terms of refinancing any of these projects. But I think that in the markets that we're in, which are mostly these suburban markets that Matt and Mary have mentioned, we're probably going to do better than the cap rates that you've mentioned.

Okay, thank you.

And our next question will come from Connor Peeks with Deutsche Bank. Please go ahead.

Hi, thank you. I got Sticking on the development front, the NOI rent increased to $99 million this quarter. Could you walk us through any updates to the 2023 and 2024 NOI coming online? And then maybe on the office side, provide an update on the Cooper's Cross office development and the demand you're seeing there.

Yeah, I mean, I think, Connor, yeah, thank you for the question. The big developments that are coming online this quarter are There's three in Dublin. One is the Grange. The second one is the Resi at Cooper's Cross. Cooper's Cross, as I think most of you know, was a mixed-use project with 400,000 square feet of office and about 500 apartment units. Then there's a smaller project in Dublin that's an addition to an existing project we have called Sanford Lodge. In all three of those, we're 50-50 partners with AXA. We're grand opening all three of those projects actually next week and into the mid part of August. Then the other two that are coming online that we're already leasing out because they're separate buildings. at each project. There's one in Boise, Idaho called Dovetail, which is adjacent to an existing roughly 250-unit project we already have. And the other is in Bozeman, Montana, a project called Oxbow, which is about the same size. My guess is that at the 100% level, the NOI that comes online, it's a guess, Justin, but It's probably in the range of $20 million-ish, plus or minus. And then, Mary, as far as the Cooper's Cross commercial?

Yeah, I mean, I would say Cooper's Cross commercial, which is, The first smart building in Dublin, you know, highly amenitized with the park and then the mixed-use nature with the multifamily units across from it. We have actually very good demand in that building. And I would say in Dublin, the vacancy rate for Class A LEED Platinum buildings is only 2%. So it's a really tight market. And historically, just like happened at Capital Dock, you really need to have the building done before you can lease space there. It's not a big pre-lease market. So we're feeling really confident and very good about our pipeline and our demand there.

I think, Mary, you would also agree that the users, people are coming back to the office. and the Dublin market is actually a vibrant market right now but they're gravitating to these newer highly amenitized highly technologically highly sustainable buildings and so it's not just new tenants coming into the market it's people that have leases expiring that are in older buildings and in some cases in The Dublin market, you might have buildings that are 50, 60, 70 years old. And so you're going to see a shift in these markets, particularly in Dublin, where people are coming out of these older buildings, but they want to go into buildings that are more amenitized, more technologically advanced.

Yeah, it's a really, really good point, Bill. That's exactly right. And I think our Killed Air project is a great example of that. We're in legals with two leases right now that would take us to 96% let at record rental levels. And every single one of those tenants is coming from an older building. So, Bill, you're spot on.

Sorry, Justin. I toured the Kildare Street building in May with one of our tenants that took two floors. And in Europe, what's different than the United States is the tenant pays for all the tenant improvement work. But the fellow that runs their real estate business was telling me, and the space is incredibly beautiful. And this is a first-class building technology-wise and amenity-wise, but he said that we felt we had to over-improve the space in order to create an environment for people wanting to come back to work. And so it's almost impossible to pull that off in an older vintage building.

Yeah, the only thing, Justin, I would just add also, we're now a handful of office and large developments that we've completed in that Dublin market. And our reputation and track record will definitely benefit as we get into lease up on this. We've built some great assets that our tenants love, and I think we will benefit from that momentum as well.

Got it. Thank you very much. And looking into the hotel segment, it looks like annual NOI improved versus the first quarter. driven by the Shelburne location in Dublin. Could you provide us an update on what demand you're seeing there and what really drove this improved outlook? Mary?

Sure. Yeah, the Shelburne continues to outperform the competitive set, and really what the driver is there is the ADR, so the improvement in our average daily rate. In the quarter, our results outperformed the competitive set by 32%. And what we've been able to do is really through group bookings, and if you sort of look forward into the next six months, the hotel is roughly 50% sold out through groups, which enables us to build the leisure segment, which enables us to really push those ADRs, which drops straight down to the bottom line. So we're excited about the next six months and I think the Shelburne will continue to outperform.

I think, too, Mary, it was a very, very good example of the, I would say, the skill set of our people globally as to how you can add value to an asset. And so, you know, we completed a $40 million renovation plan of that hotel thoughtfully. you know, rooms, common areas, and so on and so forth. And so, in addition to, it's probably the best location in all of Dublin, sitting on St. Stephen's Green, but we also did some tremendous value-add work to enhance the guest experience, which allowed us to, you know, drive room rates and occupancy And when you think about it, the NOI on that hotel from the time we bought it to the time today has gone from $8 million to over $20 million in that period of time.

Thank you. And maybe one last one here. I think most of the remaining development costs are primarily self-funded from cash on hand and non-core asset sales. So my question is, What is the size of or maybe what remains within that non-core portfolio? Thanks.

You know, I would counter-answer that in two ways. I think one of the great things to think about now is that virtually all of our equity is funded into the projects we're doing. So when you look at the two that I mentioned in the mountain states, in Bozeman and Boise, all of our equity is funded. The big one that we talked about in Camarillo, all of our equity is in there right now. Santa Rosa, all of our equity is in. Sanford Lodge, we're down to small amounts of equity that have to go in there. Both the Grange and Cooper's Cross are almost fully funded. And as you know, in the existing vintage projects, they really don't require any equity. And so the good news is that this, I would call it, eight-year journey of completing construction and all the capital necessary to do this $3 billion pipeline is almost fully funded now. And so the... You're correct. We continue to eliminate non-core assets that we don't want to keep long-term. But the capital doesn't really need to be reallocated now into these construction projects that we've been doing. And that was, in a way, what I was alluding to with the credit business, where we really see – great growth opportunities here over the next 18 months. And when you think about that business, we're typically a 2.5% to 5% investor in the total capital stack of these loans. So that's really where our capital is going to get redirected over the next 18 months from these non-core asset sales.

Thank you. Again, if you have a question or a follow-up, you may press star then 1 to join the queue. Our next question here will come from Josh Dennerlein with Bank of America. Please go ahead.

Yeah, hey, guys. Appreciate the time. I understand the development pipeline and the NOI coming online, but maybe what's left to fund, and if there's anything left to fund, just what are your plans to fund it with, or how are you planning to fund it?

Josh, in a little bit of what I was just saying to Connor's question, we're down to small amounts of money. You're probably talking in total $35 to $40 million on all of these developments. But when you think about the magnitude of what we completed, it'll be almost $3 billion. And so we're down to the tail ends. I think that's the exciting part of the story is that now 750 units, the vintage units, the things that we are doing in the mountain states, the things that we're doing here in California and Santa Rosa and Camarillo, they're getting to a place now where we've funded our capital and in many cases where we can now start turning it into an income-producing asset.

Okay. All right. Thanks for clarifying that. Then maybe just the leverage and the balance sheet. I know it's higher than a lot of other names in the concept. Just kind of curious how comfortable you are with that. And then just maybe where it will kind of drift to as that NYF and development pipeline comes online.

Sorry, I'm not sure I understood the question.

Oh, I just wanted to ask about leverage. I think it elevated versus maybe peers, just how comfortable are you with it today? And then where do you expect it to kind of drift down to as the development comes online?

Well, I think the comment that Justin made in his presentation is really the thing you have to look at, first of all. We made a decision two or three years ago to really lock down these interest rates. And so to think that our average interest rate with duration here is now just slightly over 4% in the market that we're in today, I think is a really remarkable achievement. We paid down our unsecured line of credit by $100 million worth during the quarter. And of course, our plan over time is to get that to zero. The projects that we're finishing Because you're adding value. Typically, those had 40% to 50% loan-to-cost construction loans on them. And so when they're finished and leased, the projects that we're finishing have really very low leverage on them.

Well, thanks for the time.

And our next question will come from Alan Parsa with Elkhorn Partners. Please go ahead.

Hi, Bill. How are you? Good, Alan. How are you? Good. With regard to the team of people you've acquired from PacWest, are they going to be located at headquarters or in other locations?

It's a combination, but, Matt, do you want to answer that? Sure.

Sure. Yeah, hi, Alan. About a third of the team is going to be located in our headquarters in L.A. About a third of the team is going to be in the eastern U.S., so there's a team in New York, D.C., to name a few locations, and then a few other team members that are spread across our existing markets, like Denver and Phoenix. So it's a combination, and I think it's also great now that we've got this local expertise And these markets, as we touched on, and as Tony asked about, it's going to give us some real insight into digging deeper and understanding these markets more as potential places to deploy equity at some point in the future.

But I think, Matt, the other thing I would add, too, is that the people here in Los Angeles, they've already moved in with us. And because of the way we run our company, you know, it's a very flat organization with Matt. and everybody has really been working hard to do is to integrate all of these pieces and information and people so that we're sharing information in not only the markets we're already in, but the markets that we might be thinking about coming in too. So the amount of information, because we can now We can play in any part of the real estate capital stack, whether it's a construction loan or a term loan or a MES loan or on the equity side. It gives us not only a great view into what other people are doing, but it gives us information, cost information, cap rate information, market information. you just really can't underestimate the importance of bringing these very seasoned people from PacWest into our company, many of which we've known for decades. And so I think that was the other part of this transaction that was so meaningful to us is that we knew the people for a long period of time These were the people that originated all the loans. We did all our own due diligence. To do this transaction, we had almost 100 people internally and externally evaluating the real estate, evaluating our construction divisions, evaluating the construction management contracts, the legal parts of this. It was a tremendous exercise to go through in a very, very short period of time. And I think there's going to be others that come along like this, but I don't know for sure if I'm accurate in saying this. I think we're the only ones so far that have been able to do a transaction like this. And now we have the experience of deploying a lot of people in the company and externally to do one. So we're hopeful we're going to see some more.

It would be great.

And this concludes our question and answer session. I'd like to turn the conference back over to Bill McMorrow for any closing remarks.

Well, I would just say thank you again to everybody for joining the call. And as I always say, any follow-up questions, any of us are always available to talk to. So thank you.

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