KW-09.30.13-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
  
(Mark One)        
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
Commission file number 001-33824
 
  
Kennedy-Wilson Holdings, Inc.
(Exact name of Registrant as specified in its charter)
 
 
  
Delaware
 
26-0508760
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
9701 Wilshire Blvd., Suite 700
Beverly Hills, CA 90212
(Address of principal executive offices)
Registrant’s telephone number, including area code:
(310) 887-6400
 
   
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
(See definition of “large accelerated filer, accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):
Large Accelerated Filer
o
  
Accelerated Filer
x
 
 
 
 
Non-Accelerated Filer
o
  
Smaller Reporting Company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o  Yes    x  No
The number of shares of common stock outstanding as of November 5, 2013 was 81,965,452.

Table of Contents

Index
 
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 


Table of Contents

FORWARD-LOOKING STATEMENTS
Statements made by us in this report and in other reports and statements released by us that are not historical facts constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are necessarily estimates reflecting the judgment of our senior management based on our current estimates, expectations, forecasts and projections and include comments that express our current opinions about trends and factors that may impact future operating results. Disclosures that use words such as “believe,” “anticipate,” “estimate,” “intend,” “could,” “plan,” “expect,” “project” or the negative of these, as well as similar expressions, are intended to identify forward-looking statements. These statements are not guarantees of future performance, rely on a number of assumptions concerning future events, many of which are outside of our control, and involve known and unknown risks and uncertainties that could cause our actual results, performance or achievement, or industry results, to differ materially from any future results, performance or achievements, expressed or implied by such forward-looking statements. These risks and uncertainties may include the risks and uncertainties described elsewhere in this report and other filings with the Securities and Exchange Commission (the “SEC”), including the Item 1A. “Risk Factors” section of our annual report on Form 10-K for the year ended December 31, 2012. Any such forward-looking statements, whether made in this report or elsewhere, should be considered in the context of the various disclosures made by us about our businesses including, without limitation, the risk factors discussed in our filings with the SEC. Except as required under the federal securities laws and the rules and regulations of the SEC, we do not have any intention or obligation to update publicly any forward-looking statements, whether as a result of new information, future events, changes in assumptions, or otherwise.


i
Table of Contents

PART I
FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited)

Kennedy-Wilson Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
 
 
September 30,
2013
 
December 31,
2012
 
 
 
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
181,371,000

 
$
120,855,000

Short-term investments
 
—

 
10,000,000

Accounts receivable
 
6,051,000

 
3,647,000

Accounts receivable — related parties
 
31,433,000

 
22,393,000

Notes receivable
 
22,444,000

 
136,607,000

Notes receivable — related parties
 
5,785,000

 
—

Real estate, net of accumulated depreciation of $13,032,000 and $7,412,000 at September 30, 2013 and
     December 31, 2012, respectively
 
518,047,000

 
289,449,000

Investments in joint ventures ($74,183,000 and $68,363,000 carried at fair value
     as of September 30, 2013 and December 31, 2012, respectively)
 
742,221,000

 
543,193,000

Investments in loan pool participations
 
58,774,000

 
95,601,000

Other assets
 
51,103,000

 
38,079,000

Goodwill
 
23,965,000

 
23,965,000

Total assets
 
$
1,641,194,000

 
$
1,283,789,000

 
 
 
 
 
Liabilities and equity
 
 
 
 
Liabilities
 
 
 
 
Accounts payable
 
$
1,735,000

 
$
1,762,000

Accrued expenses and other liabilities
 
37,220,000

 
29,417,000

Accrued salaries and benefits
 
20,081,000

 
24,981,000

Deferred tax liability
 
16,937,000

 
22,671,000

Senior notes payable
 
409,196,000

 
409,640,000

Mortgage loans payable
 
340,366,000

 
236,538,000

Junior subordinated debentures
 
40,000,000

 
40,000,000

Total liabilities
 
865,535,000

 
765,009,000

 
 
 
 
 
Equity
 
 
 
 
Cumulative preferred stock, $0.0001 par value: 1,000,000 shares authorized
     $1,000 per share liquidation preference:
 
 
 
 
6.00% Series A, 100,000 shares issued and outstanding as of September 30, 2013 and      
     December 31, 2012, mandatorily convertible on May 19, 2015
 
—

 
—

6.45% Series B, 32,550 shares issued and outstanding as of September 30, 2013 and
     December 31, 2012, mandatorily convertible on November 3, 2018
 
—

 
—

Common stock, $0.0001 par value, 125,000,000 shares authorized,
     81,389,879 and 64,789,646 shares issued and 81,389,879 and 63,772,598 shares
     outstanding as of September 30, 2013 and December 31, 2012, respectively
 
8,000

 
6,000

  Additional paid-in capital
 
792,449,000

 
512,835,000

  Accumulated deficit
 
(32,049,000
)
 
(5,910,000
)
  Accumulated other comprehensive income
 
5,553,000

 
12,569,000

Common stock held in treasury, at cost, $0.0001 par value, 1,017,048 shares
     held at December 31, 2012
 
—

 
(9,856,000
)
Total Kennedy-Wilson Holdings, Inc. shareholders' equity
 
765,961,000

 
509,644,000

Noncontrolling interests
 
9,698,000

 
9,136,000

Total equity
 
775,659,000

 
518,780,000

Total liabilities and equity
 
$
1,641,194,000

 
$
1,283,789,000

See accompanying notes to consolidated financial statements.

1
Table of Contents

Kennedy-Wilson Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Revenue
 
 
 
 
 
 
 
 
Management and leasing fees
 
$
4,462,000

 
$
4,015,000

 
$
13,925,000

 
$
11,272,000

Management and leasing fees — related party
 
10,649,000

 
6,320,000

 
27,962,000


18,036,000

Commissions
 
836,000

 
1,477,000

 
2,296,000

 
3,513,000

Commissions — related party
 
5,025,000

 
668,000

 
9,865,000


2,652,000

Sale of real estate
 
1,546,000

 
1,275,000

 
10,060,000

 
1,275,000

Rental and other income
 
10,690,000

 
1,485,000

 
27,452,000

 
4,432,000

Total revenue
 
33,208,000

 
15,240,000

 
91,560,000

 
41,180,000

Operating expenses
 
 
 
 
 
 
 
 
Commission and marketing expenses
 
1,011,000

 
1,371,000

 
2,845,000

 
3,676,000

Compensation and related expenses
 
20,956,000

 
11,364,000

 
52,840,000

 
30,658,000

Cost of real estate sold
 
883,000

 
1,275,000

 
7,885,000

 
1,275,000

General and administrative
 
5,760,000

 
5,014,000

 
17,574,000

 
13,571,000

Depreciation and amortization
 
4,531,000

 
989,000

 
12,003,000

 
2,903,000

Rental operating expenses
 
4,167,000

 
847,000

 
11,852,000

 
2,638,000

Total operating expenses
 
37,308,000

 
20,860,000

 
104,999,000

 
54,721,000

Equity in joint venture income
 
9,379,000

 
1,848,000

 
20,955,000

 
12,472,000

Interest income from loan pool participations and notes receivable
 
3,983,000

 
3,712,000

 
10,209,000

 
7,126,000

Operating income (expense)
 
9,262,000

 
(60,000
)
 
17,725,000

 
6,057,000

Non-operating income (expense)
 
 
 
 
 
 
 
 
Interest income
 
69,000

 
40,000

 
236,000

 
95,000

Interest income — related party
 
136,000

 
139,000

 
208,000

 
2,408,000

Acquisition-related gains
 
1,668,000

 
—

 
11,127,000

 
—

Acquisition-related expenses
 
—

 
—

 
(510,000
)
 
—

Gain on sale of marketable securities
 
—

 
—

 
—

 
2,931,000

Interest expense
 
(13,141,000
)
 
(6,755,000
)
 
(37,104,000
)
 
(19,979,000
)
Other
 
—

 
(6,000
)
 
—

 
(80,000
)
Loss from continuing operations before (provision for)
benefit from income taxes
 
(2,006,000
)
 
(6,642,000
)
 
(8,318,000
)
 
(8,568,000
)
(Provision for) benefit from income taxes
 
(726,000
)
 
2,500,000

 
1,446,000

 
5,121,000

Loss from continuing operations
 
(2,732,000
)
 
(4,142,000
)
 
(6,872,000
)
 
(3,447,000
)
Discontinued operations
 
 
 
 
 
 
 
 
(Loss) income from discontinued operations, net of income taxes
 
(291,000
)
 
—

 
(294,000
)
 
2,000

Gain (loss) from sale of real estate, net of income taxes
 
338,000

 
—

 
555,000

 
(212,000
)
Net loss
 
(2,685,000
)
 
(4,142,000
)
 
(6,611,000
)
 
(3,657,000
)
Net loss (income) attributable to the noncontrolling interests
 
652,000

 
(64,000
)
 
2,550,000

 
(2,990,000
)
Net loss attributable to Kennedy-Wilson Holdings, Inc.
 
(2,033,000
)
 
(4,206,000
)
 
(4,061,000
)
 
(6,647,000
)
Preferred dividends and accretion of preferred stock issuance costs
 
(2,036,000
)
 
(2,036,000
)
 
(6,108,000
)
 
(6,108,000
)
Net loss attributable to Kennedy-Wilson Holdings, Inc. common
     shareholders
 
$
(4,069,000
)
 
$
(6,242,000
)
 
$
(10,169,000
)
 
$
(12,755,000
)
Basic and diluted earnings (loss) per share attributable to Kennedy-Wilson Holdings, Inc. common shareholders
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.06
)
 
$
(0.11
)
 
$
(0.15
)
 
$
(0.23
)
Discontinued operations, net of income taxes
 
—

 
—

 
—

 
—

Earnings (loss) per share - basic and diluted (a)
 
$
(0.06
)
 
$
(0.11
)
 
$
(0.15
)
 
$
(0.24
)
Weighted average number of common shares outstanding
 
72,643,080

 
58,043,357

 
68,486,876

 
53,551,708

Dividends declared per common share
 
$
0.07

 
$
0.05

 
$
0.21

 
$
0.15

—————
(a)  EPS amounts may not add due to rounding.
See accompanying notes to consolidated financial statements.

2
Table of Contents

Kennedy-Wilson Holdings, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Net loss
 
$
(2,685,000
)
 
$
(4,142,000
)
 
$
(6,611,000
)
 
$
(3,657,000
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Unrealized (loss) gain on marketable securities
 
—

 
(37,000
)
 
—

 
3,428,000

Unrealized foreign currency translation gain (loss)
 
8,827,000

 
3,247,000

 
(9,216,000
)
 
2,068,000

Unrealized forward contract, foreign currency (loss) gain
 
(3,635,000
)
 
(925,000
)
 
2,200,000

 
1,255,000

Total other comprehensive income (loss) for the period
 
5,192,000

 
2,285,000

 
(7,016,000
)
 
6,751,000

 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
2,507,000

 
(1,857,000
)
 
(13,627,000
)
 
3,094,000

Comprehensive loss (income) attributable to noncontrolling interests
 
652,000

 
(64,000
)
 
2,550,000

 
(2,990,000
)
Comprehensive income (loss) attributable to Kennedy-Wilson
Holdings, Inc.
 
$
3,159,000

 
$
(1,921,000
)
 
$
(11,077,000
)
 
$
104,000


See accompanying notes to consolidated financial statements.



3
Table of Contents

Kennedy-Wilson Holdings, Inc. and Subsidiaries
Consolidated Statement of Equity
(Unaudited)
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-in Capital
 
Retained Earnings (Accumulated Deficit)
 
Accumulated
Other
Comprehensive
Income
 
Treasury Stock
 
Noncontrolling Interests
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
Total
Balance at December 31, 2012
132,550

 
$
—

 
63,772,598

 
$
6,000

 
$
512,835,000

 
$
(5,910,000
)
 
$
12,569,000

 
$
(9,856,000
)
 
$
9,136,000

 
$
518,780,000

Exercise of warrants into common shares
—

 
—

 
377,319

 
—

 
4,716,000

 
 
 
 
 
 
 
 
 
4,716,000

Issuance of 17,250,000 shares of common
stock
—

 
—

 
17,250,000

 
2,000

 
275,982,000

 
—

 
—

 
—

 
—

 
275,984,000

Repurchase of 427,332 warrants
—

 
—

 
—

 
—

 
(1,393,000
)
 
—

 
—

 
—

 
—

 
(1,393,000
)
Retirement of common shares held in treasury
—

 
—

 
—

 
—

 
(9,856,000
)
 
—

 
—

 
9,856,000

 
—

 
—

Issuance of 136,600 shares of common stock
     under amended and restated equity
     participation plan net of 146,638 shares
     forfeited
—

 
—

 
(10,038
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Stock-based compensation
—

 
—

 
—

 
—

 
10,132,000

 
—

 
—

 
—

 
—

 
10,132,000

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized foreign currency translation
      loss, net of tax of $6,146,000
—

 
—

 
—

 
—

 
—

 
—

 
(9,216,000
)
 
—

 
—

 
(9,216,000
)
Unrealized forward contract foreign
      currency gain, net of tax of $1,465,000
—

 
—

 
—

 
—

 
—

 
—

 
2,200,000

 
—

 
—

 
2,200,000

Preferred stock dividends
—

 
—

 
—

 
—

 
—

 
(6,075,000
)
 
—

 
—

 
—

 
(6,075,000
)
Common stock dividends
—

 
—

 
—

 
—

 
—

 
(15,970,000
)
 
—

 
—

 
—

 
(15,970,000
)
Accretion of preferred stock issuance costs
—

 
—

 
—

 
—

 
33,000

 
(33,000
)
 
—

 
—

 
—

 
—

Net loss
—

 
—

 
—

 
—

 
—

 
(4,061,000
)
 
—

 
—

 
(2,550,000
)
 
(6,611,000
)
Consolidation of noncontrolling interests
      (Note 4)
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,607,000

 
2,607,000

Contributions from noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
889,000

 
889,000

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(384,000
)
 
(384,000
)
Balance at September 30, 2013
132,550

 
$
—

 
81,389,879

 
$
8,000

 
$
792,449,000

 
$
(32,049,000
)
 
$
5,553,000

 
$
—

 
$
9,698,000

 
$
775,659,000

See accompanying notes to consolidated financial statements.


4
Table of Contents

Kennedy-Wilson Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
 
 
Nine Months Ended September 30,
 
 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(6,611,000
)
 
$
(3,657,000
)
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
 
Net (gain) loss from sale of real estate
 
(2,730,000
)
 
212,000

Acquisition-related gain
 
(11,127,000
)
 
—

Gain from sale of marketable securities
 
—

 
(2,931,000
)
Depreciation and amortization
 
12,003,000

 
2,903,000

Benefit from deferred income taxes
 
(1,045,000
)
 
(3,309,000
)
Amortization of deferred loan costs
 
1,578,000

 
845,000

Amortization of discount and accretion of premium on issuance of the senior notes and mortgage loan payable
 
(868,000
)
 
40,000

Equity in joint venture income
 
(20,955,000
)
 
(12,472,000
)
Accretion of interest income on loan pool participations and notes receivable
 
(9,392,000
)
 
(6,671,000
)
Operating distributions from joint ventures
 
34,418,000

 
30,301,000

Operating distributions from loan pool participation
 
8,340,000

 
13,484,000

Stock-based compensation
 
5,466,000

 
5,000,000

Change in assets and liabilities:
 
 
 
 
Accounts receivable
 
(2,176,000
)
 
(264,000
)
Accounts receivable—related parties
 
(9,040,000
)
 
(3,892,000
)
Other assets
 
(10,370,000
)
 
(703,000
)
Accounts payable
 
(48,000
)
 
(492,000
)
Accrued expenses and other liabilities
 
(4,295,000
)
 
3,049,000

Accrued salaries and benefits
 
(234,000
)
 
(8,978,000
)
Net cash (used in) provided by operating activities
 
(17,086,000
)
 
12,465,000

Cash flows from investing activities:
 
 
 
 
Additions to notes receivable
 
(19,600,000
)
 
(38,213,000
)
Collections of notes receivable
 
38,055,000

 
5,468,000

Additions to notes receivable—related parties
 
(10,705,000
)
 
(15,925,000
)
Collections of notes receivable—related parties
 
4,920,000

 
9,093,000

Capitalized development costs
 
(1,251,000
)
 
—

Net proceeds from sale of real estate
 
10,449,000

 
17,905,000

Purchases of and additions to real estate
 
(115,860,000
)
 
(16,172,000
)
Proceeds from sale of marketable securities
 
—

 
21,386,000

Proceeds from maturities of short-term investments
 
10,000,000

 
—

Distributions from joint ventures
 
73,753,000

 
27,616,000

Contributions to joint ventures
 
(279,447,000
)
 
(79,120,000
)
Distributions from loan pool participations
 
69,564,000

 
38,779,000

Contributions to loan pool participations
 
(34,869,000
)
 
(56,957,000
)
Net cash used in investing activities
 
(254,991,000
)
 
(86,140,000
)
Cash flows from financing activities:
 
 
 
 
Borrowings under line of credit
 
125,000,000

 
45,000,000

Repayment of line of credit
 
(125,000,000
)
 
(45,000,000
)
Borrowings under mortgage loans payable
 
72,285,000

 
—

Repayment of mortgage loans payable
 
(1,076,000
)
 
—

Debt issue costs
 
(1,777,000
)
 
(1,026,000
)
Issuance of common stock
 
275,984,000

 
106,274,000

Repurchase of common stock
 
—

 
(47,000
)
Repurchase of warrants
 
(1,393,000
)
 
(1,395,000
)
Exercise of warrants
 
4,716,000

 
—

Dividends paid
 
(16,348,000
)
 
(13,495,000
)
Acquisition of noncontrolling interests
 
—

 
(473,000
)
Contributions from noncontrolling interests
 
889,000

 
—

Distributions to noncontrolling interests
 
(384,000
)
 
(4,931,000
)
Net cash provided by financing activities
 
332,896,000

 
84,907,000

Effect of currency exchange rate changes on cash and cash equivalents
 
(303,000
)
 
(354,000
)
Net change in cash and cash equivalents
 
60,516,000

 
10,878,000

Cash and cash equivalents, beginning of period
 
120,855,000

 
115,926,000

Cash and cash equivalents, end of period
 
$
181,371,000

 
$
126,804,000

See accompanying notes to consolidated financial statements.

5
Table of Contents

Kennedy-Wilson Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)


Supplemental cash flow information:
 
 
Nine Months Ended September 30,
 
 
2013
 
2012
Cash paid for:
 
 
 
 
Interest (1)
 
$
44,115,000

 
$
15,368,000

Income taxes
 
2,281,000

 
100,000

                          
(1) Cash paid for interest includes capitalized interest of $804,000 and $1,792,000 for the nine months ended September 30, 2013 and 2012, respectively.

Supplemental disclosure of non-cash investing and financing activities:
 
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
 
 
 
 
Unrealized gain on marketable securities, net of tax
 
$
—

 
$
3,428,000

Accretion of preferred stock issuance costs
 
33,000

 
33,000

Dividends declared on common stock
 
5,697,000

 
3,189,000

During the nine months ended September 30, 2012, as a result of the sale of a condo unit, in which the Company provided seller backed financing, real estate decreased by $1,193,000 and notes receivable increased by $1,193,000
 
—

 
1,193,000


During the nine months ended September 30, 2013, the Company acquired the interest of some of its existing partners in a 615-unit apartment building in Northern California, increasing its ownership from 15% to 94% and obtaining control of the property. On September 30, 2013, the Company and one of its equity partners amended existing operating agreements governing investments in three retail centers in the Western U.S. in which the Company has on average an approximate 90% ownership interest and which were accounted for on the equity method. These amendments allowed the Company to gain control of the operating properties. As a result of obtaining control, the Company was required to consolidate the assets and liabilities at fair value in accordance with Business Combination guidance as described in note 4.

During the nine months ended September 30, 2013, the Company sold a 50% interest in an entity that held a note receivable secured by the shopping center and 107 residential units in the United Kingdom to an institutional investor. As a result of the sale and loss of control, $96,031,000 in notes receivable and $78,704,000 in mortgage loans were deconsolidated as described in note 3.     
See accompanying notes to consolidated financial statements.


6
Table of Contents

Kennedy-Wilson Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1—BASIS OF PRESENTATION
Kennedy-Wilson Holdings, Inc.’s (together with its wholly owned and controlled subsidiaries, "we," "us," "our," "the Company" or “Kennedy Wilson”) unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") may have been condensed or omitted pursuant to SEC rules and regulations, although we believe that the disclosures are adequate to make their presentation not misleading. In the opinion of Kennedy Wilson, all adjustments, consisting of only normal and recurring items, necessary for a fair presentation of the results of operations for the three and nine months ended September 30, 2013 and 2012 have been included. The results of operations for these periods are not necessarily indicative of results that might be expected for the full year ending December 31, 2013. For further information, your attention is directed to the footnote disclosures found in Kennedy Wilson’s Annual Report on Form 10-K for the year ended December 31, 2012.
The consolidated financial statements include the accounts of Kennedy Wilson and its wholly owned or controlled subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In addition, Kennedy Wilson evaluates its relationships with other entities to identify whether they are variable interest entities ("VIEs") as defined in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Subtopic 810-10 and to assess whether it is the primary beneficiary of such entities. If the determination is made that Kennedy Wilson is the primary beneficiary, then that entity is included in the consolidated financial statements in accordance with the ASC Subtopic 810-10. The ownership of the other interest holders in consolidated subsidiaries is reflected as noncontrolling interests.
The preparation of the accompanying consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosure about contingent assets and liabilities, and reported amounts of revenues and expenses. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
REVENUE RECOGNITION—Performance fees or carried interests are allocated to the general partner, special limited partner or asset manager of Kennedy Wilson's real estate funds and loan pool participations based on the cumulative performance of the funds and loan pools and are subject to preferred return thresholds of the limited partners and participants. At the end of each reporting period, Kennedy Wilson calculates the performance fee that would be due to the general partner, special limited partner or asset manager's interests for a fund or loan pool, pursuant to the fund agreement or participation agreements, as if the fair value of the underlying investments were realized as of such date, irrespective of whether such amounts have been realized. As the fair value of underlying investments varies between reporting periods, it is necessary to make adjustments to amounts recorded as performance fees to reflect either (a) positive performance resulting in an increase in the performance fee allocated to the general partner or asset manager or (b) negative performance that would cause the amount due to Kennedy Wilson to be less than the amount previously recognized as revenue, resulting in a negative adjustment to performance fees allocated to the general partner or asset manager. Substantially all of the performance fees are recognized in management and leasing fees, and substantially all of the carried interest is recognized in equity in joint venture income in our consolidated statements of operations. Total performance fees recognized through September 30, 2013 that may be reversed in future periods if there is negative fund or loan pool performance totaled $24.2 million. Performance fees accrued as of September 30, 2013 and December 31, 2012 were $24.2 million and $12.8 million, respectively, and are included in accounts receivable—related parties in the accompanying consolidated balance sheet.
INVESTMENTS IN LOAN POOL PARTICIPATIONS AND NOTES RECEIVABLE—Interest income from investments in loan pool participations and notes receivable with declining credit quality are recognized on a level yield basis under the provisions of "Loans and Debt Securities Acquired with Deteriorated Credit Quality," ASC Subtopic 310-30, where a level yield model is utilized to determine a yield rate that, based upon projected future cash flows, accretes interest income over the estimated holding period. In the event that the present value of those future cash flows is less than net book value, a loss would be immediately recorded. When the future cash flows of a note cannot be reasonably estimated, cash payments are applied to the cost basis of the note until it is fully recovered before any interest income is recognized. Interest income from investments in notes receivable acquired at a discount are recognized using the effective interest method and interest income from notes receivable which the Company originates are recognized at the stated interest rate.

7
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Kennedy-Wilson Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

DISTRIBUTIONS FROM UNCONSOLIDATED REAL ESTATE JOINT VENTURES—During the quarter ended March 31, 2013, the Company changed its method of accounting for determining the allocation of cash flows received from unconsolidated real estate joint ventures on its consolidated statement of cash flows from the "cumulative earnings" method to the "look-through" method, both of which are acceptable methods under GAAP.  Under the "look-through" approach, distributions are reported under operating cash flow unless the facts and circumstances of a specific distribution clearly indicate that it is a return of capital (e.g., a liquidating dividend or distribution of the proceeds from the joint venture's sale of assets), in which case it is reported as an investing activity.  The newly adopted method is preferable because it enables the Company to look to the nature and source of the distribution received and classify it appropriately between operating and investing activities on the statement of cash flows based upon the source, which allows the Company to present financial statements more consistent with accounting principles of consolidation.  The effects of the change upon the nine month period ended September 30, 2012 are as follows:
 
 
Cumulative Earnings Method
 
Look-through Method
 
 
 
 
 
Operating Cash Flows:
 
 
 
 
Operating distributions from joint ventures
 
$
20,671,000

 
$
30,301,000

Net cash provided from operating activities
 
2,835,000

 
12,465,000

 
 
 
 
 
Investing Cash Flows:
 
 
 
 
Investing distributions from joint ventures
 
37,246,000

 
27,616,000

Net cash used in investing activities
 
(76,510,000
)
 
(86,140,000
)
ACCOUNTS RECEIVABLE—Accounts receivable are recorded at the contractual amount as determined by the underlying agreements and do not bear interest. An allowance for doubtful accounts is provided when the Company determines there are probable credit losses in the Company’s existing accounts receivable based on historical experience. The Company reviews its accounts receivable for probable credit losses on a quarterly basis. As of September 30, 2013, the Company had an immaterial allowance for doubtful accounts and during the nine months ended September 30, 2013 and 2012 recorded no provision for doubtful accounts.
FOREIGN CURRENCIES—The financial statements of subsidiaries located outside the United States are measured using the local currency as the functional currency. The assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date, and income and expenses are translated at the average monthly rate. The foreign currencies include the euro, the British pound sterling, and the Japanese yen. Cumulative translation adjustments, to the extent not included in cumulative net income, are included in the consolidated statement of equity as a component of accumulated other comprehensive income.

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES—All derivative instruments are recognized as either assets or liabilities in the balance sheet at their respective fair values. For derivatives designated in hedging relationships, changes in fair value of cash flow hedges or net investment hedges are recognized in accumulated other comprehensive income, to the extent the derivative is effective at offsetting the changes in the item being hedged until the hedged item affects earnings. Changes in fair value for fair value hedges are recognized in earnings.
RECENT ACCOUNTING PRONOUNCEMENTS— In February 2013, the FASB issued ASC Update No. 2013-02 "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." Update No. 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012. ASC 2013-02 requires an entity to present separately information about the effects on net income of significant amounts reclassified out of each component of accumulated other comprehensive income. An entity can present the information on the face of the comprehensive income statement or as a separate disclosure in the notes to the financial statements. Kennedy Wilson does not have any effect from adoption as it has already followed this presentation.
The FASB did not issue any other ASCs during the first nine months of 2013 that we expect to be applicable and have a material impact on our financial position or results of operations.

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Kennedy-Wilson Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 3—NOTES RECEIVABLE

The following table summarizes Kennedy Wilson's investment in notes receivable at September 30, 2013 and December 31, 2012:
 
 
September 30,
 
December 31,
 
 
2013
 
2012
Notes receivable
 
$
22,444,000

 
$
136,607,000

Notes receivable — related parties
 
5,785,000

 
—

Notes receivable and notes receivable — related parties(1)
 
$
28,229,000

 
$
136,607,000

                          
(1) The note receivables had a weighted average stated interest rate of 8.52% and 5.65% at September 30, 2013 and December 31, 2012 and maturity dates ranging from August 2014 to February 2017. Effective interest rates are higher as certain note receivables were acquired at a discount.
    
During the nine months ended September 30, 2013, Kennedy Wilson sold a 50% interest in an entity that held a note receivable of $122.8 million secured by the shopping center and 107 residential units in the United Kingdom to an institutional investor. As a result of the sale and loss of control, Kennedy Wilson deconsolidated the investment and is accounting for it as an equity method investment.

Interest Income from Notes Receivable
Kennedy Wilson recognized interest income on note receivables of $0.3 million and $1.5 million during the three months ended September 30, 2013 and 2012 and $1.1 million and $2.0 million for the nine months ended September 30, 2013 and 2012.

NOTE 4—REAL ESTATE
The following table summarizes Kennedy Wilson's investment in consolidated real estate properties at September 30, 2013 and December 31, 2012:
 
 
September 30,
 
December 31,
 
 
2013
 
2012
Land
 
$
164,294,000

 
$
99,595,000

Buildings
 
357,686,000

 
193,302,000

Building improvements
 
9,099,000

 
3,964,000

 
 
531,079,000

 
296,861,000

Less accumulated depreciation
 
(13,032,000
)
 
(7,412,000
)
Real estate, net
 
$
518,047,000

 
$
289,449,000


Acquisitions

During the third quarter, the Company acquired a retail center for $5.6 million in Richfield, UT which was financed with a $4.0 million mortgage loan and equity.
    
On June 27, 2013, the Company acquired a Class A office building in the golden triangle section of Beverly Hills, CA for $29.7 million which was financed with an $18.7 million mortgage loan and equity.

On April 29, 2013, the Company acquired a 450-unit apartment building in Salt Lake City, UT for $61.8 million and financed it with a $49.7 million mortgage loan and equity.

Joint Venture Consolidation        

On March 28, 2013, the Company acquired the interest of some of its existing partners in a 615-unit apartment building in Northern California, increasing its ownership from 15% to 94%.  The original 15% interest had a book value of $0 due to prior distributions. Cash consideration of $15.7 million was paid by the Company to increase its ownership in the property to 94%. As

9
Table of Contents
Kennedy-Wilson Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

a result of obtaining control, the Company was required to consolidate the assets and liabilities at fair value in accordance with Business Combination guidance. Kennedy Wilson recorded an acquisition-related gain in the amount of $9.5 million in the accompanying consolidated statements of operations for the nine months ended September 30, 2013 as the fair value was in excess of the carrying value of its ownership interest.  As the transaction was between willing third party market participants, the purchase price was an approximation of fair value.  Accordingly, $1.3 million in cash and cash equivalents, $0.1 million in accounts receivable, $2.2 million in other assets (including $1.2 million of acquired in-place lease values), $120.1 million in real estate, net, $0.1 million in accounts payable, $3.1 million in accrued expenses and other liabilities, $93.5 million in mortgage loans payable, and $1.8 million in noncontrolling interest were recorded as a result of the consolidation.

On September 30, 2013, the Company and one of its equity partners amended existing operating agreements governing investments in three retail centers in the Western U.S. in which the Company has on average an approximate 90% ownership interest and which were accounted for on the equity method. These amendments allowed the Company to gain control of the operating properties. As a result of obtaining control, the Company was required to consolidate the assets and liabilities at fair value in accordance with Business Combination guidance. Due to the consolidation, $26.5 million in real estate, net, $20.1 million in mortgage loans, $2.5 million in other assets (including $2.3 million of acquired in-place lease values), $1.4 million in cash and $0.8 million in noncontrolling interest were recorded as of September 30, 2013. The consolidation resulted in an acquisition-related gain of $1.7 million as the fair value of its ownership interest was in excess of the carrying value. Prior period amounts for these retail centers are still presented on an equity method basis.

Pro forma results of operations

The results of operations of the assets acquired have been included in our consolidated financial statements since the date of its acquisition. The unaudited pro forma data presented below assumes that the acquisitions occurred as of January 1, 2012. The Company’s unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have occurred had this acquisition been consummated at the beginning of the periods presented.
 
 
Unaudited
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Dollars in thousands, except for per share data
 
2013
 
2012
 
2013
 
2012
Pro forma revenues
 
$
34,150

 
$
20,213

 
$
99,170

 
$
55,730

Pro forma net loss attributable to Kennedy-Wilson Holdings, Inc. common shareholders
 
(3,924
)
 
(4,578
)
 
(11,107
)
 
(9,755
)
Pro forma net loss per share:
 
 
 
 
 

 
 
Basic and diluted
 
$
(0.05
)
 
$
(0.08
)
 
$
(0.16
)
 
$
(0.18
)

NOTE 5—INVESTMENTS IN JOINT VENTURES
Kennedy Wilson has a number of joint venture interests, generally ranging from 5% to approximately 50%, that were formed to acquire, manage, develop, and/or sell real estate and invest in loan pools and discounted loan portfolios. Kennedy Wilson has significant influence over these entities, but not control, and accordingly, these investments are accounted for under the equity method.
Joint Venture Holdings
As of September 30, 2013 and December 31, 2012, the Company's equity investment in joint ventures totaled $742.2 million and $543.2 million, respectively.     
The following table details our investments in joint ventures by investment type and geographic location as of September 30, 2013:

10
Table of Contents
Kennedy-Wilson Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

 
Multifamily
Commercial
Loan
Residential
Other
Total
Western U.S.
$
133,425,000

$
155,906,000

$
48,640,000

$
59,566,000

$
460,000

$
397,997,000

Japan
72,187,000

—

—

—

—

72,187,000

United Kingdom
—

99,888,000

13,216,000

—

—

113,104,000

Ireland
48,522,000

98,563,000

—

—

—

147,085,000

Other U.S.
134,000

3,795,000

7,000

342,000

7,570,000

11,848,000

Total
$
254,268,000

$
358,152,000

$
61,863,000

$
59,908,000

$
8,030,000

$
742,221,000

The following table details our investments in joint ventures by investment type and geographic location as of December 31, 2012:
 
Multifamily
Commercial
Loan
Residential
Other
Total
Western U.S.
$
126,860,000

$
141,572,000

$
41,855,000

$
51,784,000

$
460,000

$
362,531,000

Japan
102,658,000

—

—

—

—

102,658,000

Ireland
22,359,000

9,530,000

36,729,000

—

—

68,618,000

Other U.S.
356,000

3,518,000

20,000

222,000

5,270,000

9,386,000

Total
$
252,233,000

$
154,620,000

$
78,604,000

$
52,006,000

$
5,730,000

$
543,193,000

KW Residential LLC    
The Company's largest joint venture investment, KW Residential, LLC ("KWR"), had a balance of $72.2 million and $102.7 million as of September 30, 2013 and December 31, 2012, respectively. KWR is a joint venture investment in a portfolio of 50 apartment buildings comprised of approximately 2,400 units, located primarily in Tokyo and surrounding areas. Kennedy Wilson owns approximately 41% of KWR.
During the three and nine months ended September 30, 2013, Kennedy Wilson recognized $0.3 million and $6.6 million, respectively, in losses from foreign currency translation adjustments, net of hedges from its investment in KWR. For the three and nine months ended September 30, 2012, Kennedy Wilson recognized $0.6 million and $2.5 million, respectively, in gains from foreign currency translation adjustments, net of hedges from its investment in KWR.
During the three and nine months ended September 30, 2013 and 2012, the Company received the following cash distributions from its investment in KWR for the settlement of hedges, refinancing of property level debt, and operating distributions:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Settlement of hedges
$
—

 
$
—

 
$
10,838,000

 
$
—

Refinancing of property level debt
—

 
—

 
5,273,000

 
1,766,000

Operating distributions
4,125,000

 
—

 
6,590,000

 
7,257,000

Total
$
4,125,000

 
$
—

 
$
22,701,000

 
$
9,023,000

The cash received as a result of unwinding KWR's hedges will not be realized in our statement of operations until the underlying investment is substantially liquidated.    
As of September 30, 2013, the Company did not have any other joint venture investments which individually exceeded 10% of the investments in the joint venture balance.
Note Conversion into Real Estate
During the second quarter of 2013, the Company and one of its equity partners foreclosed on a class A office building and an adjacent 3.5 acre site in Dublin, Ireland. As a result of the foreclosure, the joint venture was required to consolidate the assets and liabilities at fair value under ASC 805 - Business Combinations.  As the fair value of the assets was in excess of the basis in the previously held mortgage notes, the joint venture recognized a $30.1 million acquisition related gain. The Company's portion of the gain was $15.0 million and was recognized in equity in joint venture income.
     During the third quarter of 2013, the Company and one of its equity partners converted a mortgage note purchased in the fourth quarter 2012 by the Company and its equity partners into a 100% equity interest on "The Rock", a retail, residential and entertainment center in Manchester, United Kingdom. As a result of the conversion, the joint venture was required to consolidate

11
Table of Contents
Kennedy-Wilson Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

the assets and liabilities at fair value. As the fair value of the assets were in excess of the basis in the previously held mortgage note, the joint venture recognized a $28.8 million acquisition-related gain. The Company's portion of the gain was $14.4 million and was recognized in equity in joint venture income.
Retail Centers Consolidation
On September 30, 2013, the Company and one of its equity partners amended existing operating agreements governing investments in three retail centers in the Western U.S. in which the Company has on average an approximate 90% ownership interest and which were accounted for on the equity method. As a result of obtaining control, the joint venture investments are now consolidated as of September 30, 2013 and not treated as investments in joint ventures. The investments are presented as an equity method investment for prior periods. See note 4.
Contributions to Joint Ventures
During the nine months ended September 30, 2013, Kennedy Wilson made $279.4 million in contributions to new and existing joint venture investments.
See the table below for a breakdown of contributions to new joint venture investments for the nine months ended September 30, 2013:
 
Multifamily
 
Commercial
 
Residential
 
 
 
Amount
No. of Properties
 
Amount
No. of Properties
 
Amount
No. of Properties
 
Total
Western U.S.
$
9,085,000

2
 
$
30,320,000

4
 
$
4,350,000

2
 
$
43,755,000

United Kingdom
—

—
 
92,169,000

3
 
—

—
 
92,169,000

Ireland
57,951,000

1
 
38,734,000

1
 
—

—
 
96,685,000

Total contributions - new joint venture investments
$
67,036,000

3
 
$
161,223,000

8
 
$
4,350,000

2
 
$
232,609,000

In addition to the capital contributions above to new joint venture investments, during the same period, Kennedy Wilson contributed $46.8 million to existing joint ventures to pay off external debt, fund our share of a development project and for working capital needs.
Equity in joint venture income is reduced by acquisition costs of $12.0 million during the nine months ended September 30, 2013.  These costs are the result of investing more than $130 million into new commercial project joint ventures, principally in the United Kingdom and Ireland which resulted in significant stamp duty taxes.
Distributions from Joint Ventures
The following table details cash distributions by investment type and geographic location for the nine months ended September 30, 2013:
 
Multifamily
Commercial
Loan
Residential
Total
 
Operating
Investing
Operating
Investing
Operating
Investing
Operating
Investing
Operating
Investing
Western U.S.
$
7,367,000

$
7,121,000

$
12,638,000

$
15,805,000

$
—

$
—

$
3,290,000

$
444,000

$
23,295,000

$
23,370,000

Japan
6,121,000

16,580,000

—

—

—

—

—

—

6,121,000

16,580,000

United Kingdom
—

—

745,000

4,379,000

226,000

304,000

—

—

971,000

4,683,000

Ireland
1,707,000

28,946,000

1,953,000

—

—

—

—

—

3,660,000

28,946,000

Other
371,000

121,000

—

—

—

—

—

53,000

371,000

174,000

Total
$
15,566,000

$
52,768,000

$
15,336,000

$
20,184,000

$
226,000

$
304,000

$
3,290,000

$
497,000

$
34,418,000

$
73,753,000

During the nine months ended September 30, 2013, Kennedy Wilson received $108.2 million in operating and investing distributions from its joint ventures. Investing distributions resulted from KWR's favorable settlement of Japanese yen-related

12
Table of Contents
Kennedy-Wilson Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

hedges and refinancing a portion of its multifamily portfolio, the refinancing of property level debt, asset sales, and loan resolutions. Operating distributions resulted from operating cash flow generated by the joint venture investments.
Variable Interest Entities
Kennedy Wilson has determined that it has investments in five variable interest entities ("VIEs") as of September 30, 2013 and has concluded that Kennedy Wilson is not the primary beneficiary of any of the investments. As of September 30, 2013, the five VIEs had assets totaling $211.2 million with Kennedy Wilson’s exposure to loss as a result of its interests in these VIEs totaling $84.9 million related to its equity contributions.
The Company determines the appropriate accounting method with respect to all investments that are not VIEs based on the control-based framework (controlled entities are consolidated) provided by the consolidations guidance in ASC Topic 810. The Company's determination considers specific factors cited under ASC 810-20 "Control of Partnerships and Similar Entities" which presumes that control is held by the general partner (and managing member equivalents in limited liability companies). Limited partners' substantive participation rights may overcome this presumption of control. The Company accounts for joint ventures it is deemed not to control using the equity method of accounting while controlled entities are consolidated.
Capital Commitments
As of September 30, 2013, Kennedy Wilson has unfulfilled capital commitments totaling $9.0 million to four of its joint ventures. We may be called upon to contribute additional capital to joint ventures in satisfaction of Kennedy Wilson capital commitment obligations.
Guarantees
Kennedy Wilson has certain guarantees associated with loans secured by consolidated assets or assets held directly or in various joint ventures. As of September 30, 2013 the maximum potential amount of future payments (undiscounted) Kennedy Wilson could be required to make under the guarantees was approximately $53.3 million which is approximately 1.7% of the property level debt of the Company. The guarantees expire through 2017, and Kennedy Wilson’s performance under the guarantees would be required to the extent there is a shortfall upon liquidation between the principal amount of the loan and the net sale proceeds from the property. Based upon Kennedy Wilson’s evaluation of guarantees under ASC Subtopic 460-10 "Estimated Fair Value of Guarantees," the estimated fair value of guarantees made as of September 30, 2013 and December 31, 2012 is immaterial.

NOTE 6—INVESTMENT IN LOAN POOL PARTICIPATION
As of September 30, 2013 and December 31, 2012, the Company's investment in loan pool participations totaled $58.8 million and $95.6 million, respectively.

The Company's largest loan pool based on initial unpaid principal balance ("UPB"), which is secured by real estate primarily located in the United Kingdom (the “UK Loan Pool”), had a balance of $11.4 million and $60.4 million as of September 30, 2013 and December 31, 2012, respectively. As of September 30, 2013, the UPB of the loans was $189.1 million due to loan resolutions of $1.9 billion, representing 91% of the pool. The Company expects to accrete $20.0 million in interest income on the UK Loan Pool over the total estimated collection period (excluding asset management fees) and has accreted $16.7 million to date.


13
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Kennedy-Wilson Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following table represents the demographics of the Company's investment in the loan pools including the initial UPB and the UPB as of September 30, 2013.

 
 
 
 
Kennedy Wilson Ownership
 
Unpaid Principal Balance
 
Kennedy Wilson Initial Equity Invested(2)
 
Investment Balance at September 30, 2013
 
Expected Accretion Over Total Estimated Collection Period
 
 
Acquisition Date
 
Location
 
 
Initial(1)
 
September 30, 2013
 
 
 
 
Accreted to Date
February 2010
 
Western U.S.
 
15.0%
 
$
342,395,000

 
$
16,289,000

 
$
11,154,000

 
$
1,718,000

 
$
4,620,000

 
$
4,565,000

December 2011
 
United Kingdom
 
12.5%
 
2,111,326,000

 
189,108,000

 
61,200,000

 
11,414,000

 
20,003,000

 
16,705,000

April 2012
 
Western U.S.
 
75.0%
 
43,383,000

 
5,680,000

 
30,900,000

 
4,533,000

 
4,091,000

 
3,622,000

August 2012
 
Ireland
 
10.0%
 
477,169,000

 
403,709,000

 
7,032,000

 
8,053,000

 
1,893,000

 
410,000

December 2012
 
United Kingdom
 
5.0%
 
605,052,000

 
459,408,000

 
19,273,000

 
11,887,000

 
1,917,000

 
349,000

April 2013
 
United Kingdom
 
10.0%
 
177,170,000

 
176,790,000

 
12,988,000

 
13,218,000

 
4,147,000

 
349,000

August 2013
 
United Kingdom
 
20.0%
 
136,572,000

 
136,572,000

 
7,450,000

 
7,951,000

 
4,449,000

 
108,000

Total
 
 
 
 
 
$
3,893,067,000

 
$
1,387,556,000

 
$
149,997,000

 
$
58,774,000

 
$
41,120,000

 
$
26,108,000

                          
(1) Initial UPB presented at historical exchange rates
(2) Estimated foreign exchange rate is £0.62 = $1 USD and €0.74 = $1 USD.

The following table presents the interest income and foreign currency gain and (loss) recognized by Kennedy Wilson during the three and nine months ended September 30, 2013 and 2012 for the loan pools that were outstanding:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Interest income recognized
$
3,659,000

 
$
2,249,000

 
$
9,069,000

 
$
5,156,000

Foreign currency translation (loss) gain
2,117,000

 
2,402,000

 
(2,861,000
)
 
3,053,000

Total
$
5,776,000

 
$
4,651,000

 
$
6,208,000

 
$
8,209,000


NOTE 7—FAIR VALUE MEASUREMENTS
The following table presents fair value measurements (including items that are required to be measured at fair value and items for which the fair value option has been elected) as of September 30, 2013:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Short-term investments
$
—

 
$
—

 
$
—

 
$
—

Investment in joint ventures
—

 
—

 
74,183,000

 
74,183,000

Currency forward contract
—

 
(6,773,000
)
 
—

 
(6,773,000
)
Total
$
—

 
$
(6,773,000
)
 
$
74,183,000

 
$
67,410,000

The following table presents fair value measurements (including items that are required to be measured at fair value and items for which the fair value option has been elected) as of December 31, 2012:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Short-term investments
$
—

 
$
10,000,000

 
$
—

 
$
10,000,000

Investments in joint ventures
—

 
—

 
68,363,000

 
68,363,000

Currency forward contract
—

 
(1,188,000
)
 
—

 
(1,188,000
)
Total
$
—

 
$
8,812,000

 
$
68,363,000

 
$
77,175,000

Short-term investments    
The carrying value of short-term investments approximates fair value due to the short-term maturities of these investments at December 31, 2012. The short-term investments matured during the second quarter of 2013.

14
Table of Contents
Kennedy-Wilson Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Investments in joint ventures    
Kennedy Wilson records its investments in KW Property Fund III, L.P., Kennedy Wilson Real Estate Fund IV, L.P., and SG KW Venture I, LLC (the "Funds") based upon the net assets that would be allocated to its interests in the Funds assuming the Funds were to liquidate their investments at fair value as of the reporting date. Kennedy Wilson’s investment balance in the Funds was $27.4 million and $25.8 million at September 30, 2013 and December 31, 2012, respectively, which is included in investments in joint ventures in the accompanying consolidated balance sheets. As of September 30, 2013, Kennedy Wilson had unfunded capital commitments to the Funds in the amount of $8.5 million.
Kennedy Wilson elected to use the fair value option ("FV Option") for two investments in joint venture entities to more accurately reflect the timing of the value created in the underlying investments and report those results in current operations. Kennedy Wilson's investment balance in the FV Option investments was $46.8 million and $42.6 million at September 30, 2013 and December 31, 2012, respectively, which are included in investments in joint ventures in the accompanying balance sheets.
The following table summarizes our investments in joint ventures held at fair value by type:
 
September 30, 2013
 
December 31, 2012
Funds
$
27,381,000

 
$
25,795,000

FV Option
46,802,000

 
42,568,000

Total
$
74,183,000

 
$
68,363,000

The following table presents changes in Level 3 investments for the three and nine months ended September 30, 2013 and 2012:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Beginning balance
$
73,968,000

 
$
51,776,000

 
$
68,363,000

 
$
51,382,000

Unrealized and realized gains
—

 
—

 
—

 
87,000

Unrealized and realized losses
—

 
—

 
—

 
—

Contributions
1,026,000

 
215,000

 
6,875,000

 
2,729,000

Distributions
(811,000
)
 
(996,000
)
 
(1,055,000
)
 
(3,203,000
)
Ending balance
$
74,183,000

 
$
50,995,000

 
$
74,183,000

 
$
50,995,000

The change in unrealized and realized gains and losses is included in equity in joint venture income in the accompanying statements of operations.
There was no material change in unrealized gains and losses on Level 3 investments during the three and nine months ended September 30, 2013 and 2012 for investments still held as of September 30, 2013.
In estimating fair value of real estate held by the Funds and the two FV Option investments, Kennedy Wilson considers significant unobservable inputs such as capitalization and discount rates. The table below describes the range of unobservable inputs for real estate assets:
 
Estimated Rates Used for
 
Capitalization Rates
 
Discount Rates
Multifamily
5.75% - 7.00%
 
7.50% - 9.00%
Commercial
6.25% - 7.50%
 
7.00% - 9.75%
Retail
6.00% - 10.00%
 
9.00% - 12.00%
Land and condominium units
n/a
 
8.00% - 12.00%
Loan
n/a
 
2.00% - 9.30%

15
Table of Contents
Kennedy-Wilson Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

In valuing real estate, related assets and indebtedness, Kennedy Wilson considers significant inputs such as the term of the debt, value of collateral, market loan-to-value ratios, market interest rates and spreads, and credit quality of investment entities. The credit spreads used by Kennedy Wilson for these types of investments range from 2.00% to 9.30%.
The accuracy of estimating fair value for investments utilizing unobservable inputs cannot be determined with precision and cannot be substantiated by comparison to quoted prices in active markets. As such, estimated fair value may not be realized in a current sale or immediate settlement of the asset or liability. Additionally, there are inherent uncertainties in any fair value measurement technique, and changes in the underlying assumptions used, including cap rates, discount rates, liquidity risks, and estimates of future cash flows, could significantly affect the fair value measurement amounts.
Currency forward contracts
Kennedy Wilson has currency forward contracts to manage its exposure to currency fluctuations between its functional currency (U.S. dollars) and the functional currency (euros and GBP) of certain of its wholly owned subsidiaries. To accomplish this objective, Kennedy Wilson hedged these exposures by entering into currency forward contracts to partially hedge Kennedy Wilson's exposure to its net investment in certain foreign operations caused by currency fluctuations. The currency forward contracts are valued based on the difference between the contract rate and the forward rate at maturity of the foreign currency applied to the notional value in that foreign currency discounted at a market rate for similar risks. Although Kennedy Wilson has determined that the majority of the inputs used to value its derivative fall within Level 2 of the fair value hierarchy, the counterparty risk adjustments associated with the derivative utilize Level 3 inputs. However, as of September 30, 2013, Kennedy Wilson assessed the significance of the impact of the counterparty valuation adjustments on the overall valuation of its derivative positions and determined that the counterparty valuation adjustments are not significant to the overall valuation of its derivative. As a result, Kennedy Wilson has determined that its derivative valuation in its entirety be classified in Level 2 of the fair value hierarchy.
Changes in fair value are recorded in other comprehensive income in the accompanying consolidated statements of comprehensive income (loss) as the portion of the currency forward contract used to hedge currency exposure of its certain wholly owned subsidiaries qualifies as a net investment hedge under ASC Topic 815. The fair value of the derivative instruments held as of September 30, 2013 are included in accrued expenses and other liabilities on the balance sheet.
The table below details the currency forward contracts Kennedy Wilson had as of September 30, 2013:
 
 
 
 
 
 
 
Change in Unrealized Gains (Losses)
Currency
Notional Amount
Trade Date
Settlement Date
Exchange Rate
Fair Value
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
Euro
€86,000,000
5/31/2012 - 7/11/2013
6/4/2015 - 7/15/2015
1.2400 - 1.3312
$
(5,157,000
)
 
$
(4,487,000
)
 
$
(3,466,000
)
GBP
£25,500,000
8/9/2013 - 8/23/2013
2/13/2014 - 8/28/2014
1.5479 - 1.5522
(1,616,000
)
 
(1,616,000
)
 
(1,616,000
)
Total
 
 
 
 
$
(6,773,000
)
 
$
(6,103,000
)
 
$
(5,082,000
)
In order to manage currency fluctuations between the Company's functional currency (U.S. dollar) and the functional currency of KWR's functional currency (Japanese yen), the Company entered into forward foreign currency contracts to hedge a portion of its net investment in KWR. During the three and nine months ended September 30, 2013, the Company recognized an immaterial amount and $8.7 million, respectively, of gross unrealized gains related to these hedges.
Fair value of financial instruments
The carrying amounts of cash and cash equivalents, accounts receivable including related party receivables, accounts payable, accrued expenses and other liabilities, accrued salaries and benefits, and deferred and accrued income taxes approximate fair value due to their short-term maturities. The carrying value of notes receivable (excluding related party notes receivable as they are presumed not to be an arm’s length transaction) approximates fair value as the terms are similar to loans with similar characteristics available in the market.
The Company accounts for its debt liabilities at face value plus net unamortized debt premiums. The fair value as of September 30, 2013 and December 31, 2012 for the senior notes payable, borrowings under lines of credit, mortgage loans payable and junior subordinated debentures were estimated to be approximately $822.2 million and $708.2 million, respectively, based on a comparison of the yield that would be required in a current transaction, taking into consideration the risk of the underlying

16
Table of Contents
Kennedy-Wilson Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

collateral and our credit risk to the current yield of a similar security, compared to their carrying value of $789.6 million and $686.2 million at September 30, 2013 and December 31, 2012, respectively.

NOTE 8—OTHER ASSETS
Other assets consist of the following: 
 
September 30, 2013
 
December 31, 2012
Loan fees, net of accumulated amortization of $3,884,000 and $2,413,000 at
     September 30, 2013 and December 31, 2012, respectively
$
14,142,000

 
$
14,508,000

Deposits and other, net of accumulated amortization of $856,000 and
     $230,000 at September 30, 2013 and December 31, 2012, respectively
13,086,000

 
6,089,000

Acquired in-place leases, net of accumulated amortization of $8,230,000
     and $3,086,000 at September 30, 2013 and December 31, 2012, respectively
8,572,000

 
9,311,000

Prepaid expenses
10,649,000

 
5,330,000

Office furniture and equipment net of accumulated amortization of $1,866,000 and
     $1,240,000 at September 30, 2013 and December 31, 2012, respectively
4,654,000

 
2,841,000

Other Assets
$
51,103,000

 
$
38,079,000

The estimated annual amortization expense of in-place leases for each of the years ending December 31, 2013 through December 31, 2017 approximates $1.1 million, $4.1 million, $1.7 million, $0.8 million and $0.6 million, respectively. Depreciation and amortization expense related to the above depreciable assets were $6.4 million and $1.7 million, for the nine months ended September 30, 2013 and 2012, respectively.

NOTE 9—SENIOR NOTES

 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
Unamortized
 
 
 
Unamortized
 
 
Interest Rate
Maturity Date
Face Value
Net Premium/(Discount)
Carrying Value
 
Face Value
Net Premium/(Discount)
Carrying Value
2042 Notes
7.75%
12/1/2042
$
55,000,000

$
—

$
55,000,000

 
$
55,000,000

$
—

$
55,000,000

2019 Notes
8.75%
4/1/2019
350,000,000

4,196,000

354,196,000

 
350,000,000

4,640,000

354,640,000

Senior Notes
 
 
$
405,000,000

$
4,196,000

$
409,196,000

 
$
405,000,000

$
4,640,000

$
409,640,000

The indentures governing the 2019 Notes and the 2042 Notes contain various restrictive covenants, including, among others, limitations on our ability and the ability of certain of our subsidiaries to incur or guarantee additional indebtedness, to make restricted payments, pay dividends or make any other distributions from restricted subsidiaries, redeem or repurchase capital stock, sell assets or subsidiary stock, engage in transactions with affiliates, create or permit liens on assets, enter into sale/leaseback transactions, and enter into consolidations or mergers. The indentures limit Kennedy-Wilson, Inc.'s ability and the ability of its restricted subsidiaries to incur additional indebtedness if, on the date of such incurrence and after giving effect to the new indebtedness, the maximum balance sheet leverage ratio (as defined in the indenture) is greater than 1.50 to 1.00. This ratio is measured at the time of incurrence of additional indebtedness. As of September 30, 2013, the balance sheet leverage ratio was 0.58 to 1.00. See note 18 for the guarantor and non-guarantor financial statements.

17
Table of Contents
Kennedy-Wilson Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)


NOTE 10—MORTGAGE LOANS AND NOTES PAYABLE

Mortgage loans at September 30, 2013 and December 31, 2012 consist of the following:
 
 
 
 
Carrying Amount of Mortgage Notes as of (1)
Types of Property Pledged as Collateral
 
Region
 
September 30,
2013
 
December 31,
2012
Notes receivable
 
United Kingdom
 
$
—

 
$
78,705,000

Multifamily properties (1)
 
Western U.S.
 
239,321,000

 
97,649,000

Commercial buildings
 
Western U.S.
 
95,157,000

 
54,296,000

Total mortgage loans payable
 
 
 
334,478,000

 
230,650,000

 
 
 
 
 
 
 
Notes payable
 
 
 
5,888,000

 
5,888,000

Total notes payable
 
 
 
5,888,000

 
5,888,000

 
 
 
 
 
 
 
Mortgage and notes payable(2)
 
 
 
$
340,366,000

 
$
236,538,000

                          
(1) The mortgage loan payable balances include the unamortized debt premiums. Debt premiums represent the excess of the fair value of debt over the principal value of debt assumed in various acquisitions and are amortized into interest expense over the remaining term of the related debt in a manner that approximates the effective interest method. The unamortized loan premium as of September 30, 2013 and December 31, 2012 was $5.5 million and $2.3 million, respectively.
(2) The mortgage payables had a weighted average interest rate of 3.96% and 4.44% at September 30, 2013 and December 31, 2012 and the note payable had a 15.00% interest rate at September 30, 2013 and December 31, 2012.

In December 2012, Kennedy Wilson acquired a loan secured by a shopping center and 107 residential units in the United Kingdom. At the time of acquisition, Kennedy Wilson invested $43.6 million of equity and borrowed $79.3 million in order to finance the transaction (see note 3). During the nine months ended September 30, 2013, Kennedy Wilson sold a 50% interest in an entity that held a note receivable to an institutional investor. As a result of the sale, Kennedy Wilson deconsolidated the investment and is accounting for it as an equity method investment.

During the nine months ended September 30, 2013, a first trust deed and supplemental mortgage loan were consolidated as part of the acquisition of an apartment building in northern California and three mortgage loans were consolidated as a result of Kennedy Wilson gaining control over existing investments in three retail centers in the Western U.S. Additionally, during the nine months ended September 30, 2013, the acquisition of an apartment building in Salt Lake City, UT, an office building in Beverly Hills, CA, and a retail center in Richfield, UT were partially financed with mortgages. See note 4 for more detail on the acquisitions.
The aggregate maturities of mortgage loans and notes payable subsequent to September 30, 2013 are as follows:
2013
 
$
613,000

2014
 
10,496,000

2015
 
18,900,000

2016
 
41,058,000

2017
 
31,397,000

Thereafter
 
232,367,000

 
 
334,831,000

Debt premium
 
5,535,000

 
 
$
340,366,000


18
Table of Contents
Kennedy-Wilson Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 11—LINE OF CREDIT

In September 2013, Kennedy-Wilson, Inc. amended its existing unsecured revolving credit facility with U.S. Bank and East-West Bank which increased the total principal amount available to be borrowed by an additional $40.0 million, for an aggregate availability of $140.0 million. The loan bears interest at a rate equal to LIBOR plus 2.75% and the maturity date was extended to October 1, 2016. The revolving loan agreement that governs the unsecured credit facility requires Kennedy-Wilson, Inc. to maintain (i) a minimum rent, adjusted fixed charge coverage ratio (as defined in the revolving loan agreement) of not less than 1.50 to 1.00, measured on a four quarter rolling average basis and (ii) maximum balance sheet leverage (as defined in the revolving loan agreement) of not greater than 1.50 to 1.00, measured at the end of each calendar quarter. As of the most recent quarter end, Kennedy-Wilson, Inc.'s adjusted fixed charge coverage ratio was 2.71 to 1.00 and its balance sheet leverage ratio was 0.62 to 1.00.

The revolving loan agreement also requires Kennedy-Wilson, Inc. to maintain unrestricted cash, cash equivalents and publicly traded marketable securities in the aggregate amount of at least $40.0 million, tested quarterly and to maintain a maximum balance sheet leverage (as defined in the revolving loan agreement) of not greater than 1.50 to 1.00, measured at the end of each calendar quarter. As of September 30, 2013, Kennedy-Wilson, Inc. was in compliance with these covenants.
 
During the nine months ended September 30, 2013, the Company drew and repaid $125.0 million on its unsecured credit facility to fund acquisitions. The maximum amount drawn on the unsecured credit facility at any one point during the nine months ended September 30, 2013 was $70.0 million. As of September 30, 2013, the unsecured credit facility was undrawn and $140.0 million was still available.

NOTE 12—JUNIOR SUBORDINATED DEBENTURES
In 2007, Kennedy Wilson issued junior subordinated debentures in the amount of $40.0 million. The debentures were issued to a trust established by Kennedy Wilson, which contemporaneously issued $40.0 million of trust-preferred securities to Merrill Lynch International. The interest rate on the debentures is fixed for the first ten years at 9.06%, and variable thereafter at LIBOR plus 3.70%. Interest is payable quarterly, with the principal due in 2037. Kennedy Wilson may redeem the debentures, in whole or in part, on any interest payment date at par.
The junior subordinated debentures require Kennedy Wilson to maintain (i) a fixed charge coverage ratio (as defined in the indenture governing our junior subordinated debentures) of not less than 1.75 to 1.00, measured on a four quarter rolling basis, and (ii) a ratio of total debt to net worth (as defined in the indenture governing the junior subordinated debentures) of not greater than 3.00 to 1.00 at any time. As of the most recent quarter end, Kennedy Wilson's fixed charge coverage ratio was 3.48 to 1.00 and ratio of total debt to net worth was 1.03 to 1.00. As of September 30, 2013, Kennedy Wilson was in compliance with these covenants.

NOTE 13—RELATED PARTY TRANSACTIONS
    During the following periods, Kennedy Wilson earned fees and other income from affiliates and entities in which Kennedy Wilson holds ownership interests in the following amounts:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Management and leasing fees
$
10,649,000

 
$
6,320,000

 
$
27,962,000

 
$
18,036,000

Commissions
5,025,000

 
668,000

 
9,865,000

 
2,652,000

Sale of real estate