10-Q
Filed by Kennedy-Wilson Holdings, Inc.
pursuant to Rule 424(b)(3) under the Securities Act of 1933
Commission File No.: 333-164926

QUARTERLY REPORT ON FORM 10-Q
On March 6, 2016, Kennedy-Wilson Holdings, Inc. filed with the Securities and Exchange Commission its Quarterly Report on Form 10-Q for the period ended March 31, 2016 which is reproduced below as Appendix A to this filing.

The exhibits filed with the Quarterly Report are attached to Appendix A to this filing.
In connection with the offering (the “Offering”) of up to 20,278,690 shares of common stock and 4,993,471 warrants to purchase common stock of Kennedy-Wilson Holdings, Inc. (the “Company”) by certain selling security holders, the Company has filed with the Securities and Exchange Commission (“SEC”) a registration statement (the “Registration Statement”) on Form S-1 (No. 333-164926), as amended, which was declared effective on June 11, 2010. A prospectus, dated June 11, 2010, covering the Offering was filed with the SEC on June 11, 2010 (as supplemented from time to time, the “Prospectus”).
ANY POTENTIAL INVESTORS IN THE SECURITIES OF THE COMPANY ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT CAREFULLY AND IN THEIR ENTIRETY BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT THE OFFERING.
This Prospectus Supplement and the Prospectus are required to be delivered by the selling security holders of the above-referenced securities or by certain of their transferees, pledges, donees or their successors in connection with the offer and sale of the above-referenced securities.
The information contained herein, including the information attached hereto, supplements and supersedes, in part, the information contained in the Prospectus. This Prospectus Supplement should be read in conjunction with the Prospectus and all prior prospectus supplements, and is qualified by reference to the Prospectus and all prior prospectus supplements except to the extent that the information in this Prospectus Supplement supersedes the information contained in the Prospectus or any prior prospectus supplement.
You may obtain a copy of the Registration Statement, the Prospectus, this Prospectus Supplement and all prior prospectus supplements, as well as other filings containing information about the Company, without charge, at the SEC's Internet site (http://www.sec.gov). Copies of the Registration Statement, the Prospectus and this Prospectus Supplement can also be obtained, without charge, from the Company's corporate website at www.kennedywilson.com, or by directing a request to the Company, Attention: Investor Relations, 151 S El Camino Drive, Beverly Hills, California 90212.
In addition to the documents described above, the Company files annual, quarterly and current reports, proxy statements and other information with the SEC, which are available at the SEC's website at www.sec.gov or at the Company's website at www.kennedywilson.com.

The information contained in, or that can be accessed through, the Company's website is deemed not to be a part of this filing.
THIS FILING IS FOR INFORMATION PURPOSES ONLY AND SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SECURITIES, NOR SHALL THERE BE ANY SALE OF SECURITIES IN ANY JURISDICTION IN WHICH SUCH SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF SUCH JURISDICTION.



Table of Contents

Appendix A
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 March 31, 2016
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.)
151 S El Camino Drive
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
x
  
Accelerated Filer
o
 
 
 
 
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 May 6, 2016 was 113,689,389.
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,” "may," “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, 2015. 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.
Non-GAAP Measures and Certain Definitions
“KWH,” “Kennedy Wilson,” the "Company," "we," "our," or "us" refer to Kennedy-Wilson Holdings, Inc. and its wholly-owned subsidiaries.
“KWE” refers to Kennedy Wilson Europe Real Estate plc, a London Stock Exchange listed company that we externally manage through a wholly-owned subsidiary. In accordance with accounting principles generally accepted in the United States ("U.S. GAAP"), the results of KWE are consolidated in our financial statements due to our control of KWE. We own an approximate 20.3% equity interest in KWE as of March 31, 2016 and throughout this report, we refer to our pro-rata ownership stake in investments made and held directly by KWE.
"KW Group" refers to Kennedy Wilson and its consolidated subsidiaries that we consolidate in our financial statements under U.S. GAAP, including KWE.
"Acquisition-related gains" consist of non-cash gains recognized by the Company or its consolidated subsidiaries upon a GAAP required fair value measurement due to a business combination. These gains are typically recognized when a loan is converted into consolidated real estate owned and the fair value of the underlying real estate at the time of conversion exceeds the basis in the previously held loan. These gains also arise when there is a change of control of an investment. The gain amount is based upon the fair value of the Company’s or its consolidated subsidiaries' equity in the investment in excess of the carrying amount of the equity directly preceding the change of control. 
"Adjusted EBITDA" represents Consolidated EBITDA, as defined below, adjusted to exclude, share-based compensation expense for the Company and EBITDA attributable to noncontrolling interests. Our management uses Adjusted EBITDA to analyze our business because it adjusts Consolidated EBITDA for items we believe do not accurately reflect the nature of our business going forward or that relate to non-cash compensation expense or noncontrolling interests. Such items may vary for different companies for reasons unrelated to overall operating performance. Additionally, we believe Adjusted EBITDA is useful to investors to assist them in getting a more accurate picture of our results from operations. However, Consolidated EBITDA and Adjusted EBITDA are not recognized measurements under GAAP and when analyzing our operating performance, readers should use Consolidated EBITDA and Adjusted EBITDA in addition to, and not as an alternative for, net income as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of Consolidated EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, Consolidated EBITDA and Adjusted EBITDA are not intended to be a measure of free cash flow for our management’s discretionary use, as it does not remove all non-cash items (such as acquisition-related gains) or consider certain cash requirements such as tax and debt service payments. The amounts shown for Consolidated EBITDA and Adjusted EBITDA also differ from the amounts calculated under similarly titled definitions in our debt instruments, which are further adjusted to reflect certain other cash and non-cash charges and are used to determine compliance with financial covenants and our ability to engage in certain activities, such as incurring additional debt and making certain restricted payments.
"Adjusted fees" refers to Kennedy Wilson’s investment management, property services and research fees adjusted to include fees eliminated in consolidation and Kennedy Wilson’s share of fees in unconsolidated service businesses.
"Adjusted Net Asset Value" is calculated by KWE as net asset value adjusted to include properties and other investment interests at fair value and to exclude certain items not expected to crystallize in a long-term investment property business model such as the fair value of financial derivatives and deferred taxes on property valuation surpluses.

i

Table of Contents

"Adjusted Net Income" represents Consolidated Adjusted Net Income as defined below, adjusted to exclude net income attributable to noncontrolling interests, before depreciation and amortization.
"Assets under Management" ("AUM") generally refers to the properties and other assets with respect to which we provide (or participate in) oversight, investment management services and other advice, and which generally consist of real estate properties or loans, and investments in joint ventures. Our AUM is principally intended to reflect the extent of our presence in the real estate market, not the basis for determining our management fees. Our AUM consists of the total estimated fair value of the real estate properties and other real estate related assets either owned by third parties, wholly owned by us or held by joint ventures and other entities in which our sponsored funds or investment vehicles and client accounts have invested. Committed (but unfunded) capital from investors in our sponsored funds is not included in our AUM. The estimated value of development properties is included at estimated completion cost.
 "Cap rate” represents the net operating income of an investment of the year preceding its acquisition or disposition divided, as applicable, by the purchase or sale price.  Cap rates set forth in this presentation only includes data from income-producing properties.  Cap rates represent historical performance and are not a guarantee of future NOI. Properties for which a cap rate is provided may not continue to perform at that cap rate.
"Consolidated Adjusted Net Income" represents net income before depreciation and amortization, our share of depreciation and amortization included in income from unconsolidated investments and share-based compensation expense.
"Consolidated EBITDA" represents net income before interest expense, our share of interest expense included in income from investments in unconsolidated investments, depreciation and amortization, our share of depreciation and amortization included in income from unconsolidated investments, loss on early extinguishment of corporate debt and income taxes. We do not adjust Consolidated EBITDA for gains or losses on the extinguishment of mortgage debt as we are in the business of purchasing discounted notes secured by real estate and, in connection with these note purchases, we may resolve these loans through discounted payoffs with the borrowers. Consolidated EBITDA is not a recognized term under GAAP, and does not purport to be an alternative to net earnings as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, Consolidated EBITDA is not intended to be a measure of free cash flow available for management's discretionary use, as it does not remove all non-cash items (such as acquisition-related gains) or consider certain cash requirements such as interest payments, tax payments and debt service requirements. Our presentation of Consolidated EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Our management believes Consolidated EBITDA is useful in evaluating our operating performance compared to that of other companies in our industry because the calculation of Consolidated EBITDA generally eliminates the effects of financing and income taxes and the accounting effects of capital spending and acquisitions. Such items may vary for different companies for reasons unrelated to overall operating performance. Additionally, we believe Consolidated EBITDA is useful to investors to assist them in getting a more accurate picture of our results from operations.
"Consolidated investment account" refers to the sum of Kennedy Wilson’s equity in: cash held by consolidated investments, consolidated real estate and acquired in-place leases, net hedge assets, unconsolidated investments, consolidated loans gross of accumulated depreciation and amortization, and net other assets.
  “Equity multiple” is calculated by dividing the amount of total distributions received by KW from an investment (including any gains, return of equity invested by KW and promoted interests) by the amount of total contributions invested by KW in such investment. This metric does not take into account management fees, organizational fees, or other similar expenses, all of which in the aggregate may be substantial and lower the overall return to KW. Equity multiples represent historical performance and are not a guarantee of the future performance of investments.
 “Equity partners” refers to non-wholly-owned subsidiaries that we consolidate in our financial statements under U.S. GAAP, including KWE, and third-party equity providers.
 "Investment account” refers to the consolidated investment account presented after noncontrolling interest on invested assets gross of accumulated depreciation and amortization. 
  "Net operating income" or " NOI” is a non-GAAP measure representing the income produced by a property calculated by deducting operating expenses from operating revenues.
"Operating associates" generally refer to individuals that are employed by or affiliated with third-party consultants, contractors, property managers or other service providers that we manage and oversee on a day-to-day basis with respect to our investments and services businesses.  
"Property operating income" is a non-GAAP measure calculated by deducting Kennedy Wilson’s share of rental and hotel operating expenses from rental and hotel revenues. Please refer to the Pro-Rata Statement of Operations in the Supplemental Financial Information for more information.


ii

Table of Contents

“Same property" refers to properties in which Kennedy Wilson has an ownership interest during the entire span of both periods being compared.  The same property information presented throughout this report is shown on a cash basis and excludes non-recurring expenses. This analysis excludes properties that are either under development or undergoing lease up as part of our asset management strategy.   
 

iii

Table of Contents

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

Kennedy-Wilson Holdings, Inc.
Consolidated Balance Sheets
(Unaudited)
 
 
March 31,
2016
 
December 31,
2015
(Dollars in millions, except share and per share amounts)
 
 
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
180.9

 
$
182.6

Cash held by consolidated investments
 
717.2

 
549.0

Accounts receivable (including $27.0 and $22.9 of related party)
 
68.3

 
54.7

Real estate and acquired in place lease values, net of accumulated depreciation and amortization
 
5,826.1

 
5,797.5

Loan purchases and originations (including $41.2 and $40.9 of related party)
 
165.1

 
299.7

Unconsolidated investments (including $234.8 and $223.8 at fair value)
 
456.7

 
444.9

Other assets
 
244.1

 
267.2

Total assets (1)
 
$
7,658.4

 
$
7,595.6

 
 
 
 
 
Liabilities and equity
 
 
 
 
Liabilities
 
 
 
 
Accounts payable
 
$
15.9

 
$
22.2

Accrued expenses and other liabilities
 
408.0

 
392.0

Investment debt
 
3,729.4

 
3,627.5

Senior notes payable
 
689.2

 
688.8

Line of credit
 
50.0

 

Total liabilities (1)
 
4,892.5

 
4,730.5

 
 
 
 
 
Equity
 
 
 
 
Cumulative preferred stock, $0.0001 par value per share: 1,000,000 shares authorized $1,000 per share liquidation preference; 32,550 shares of Series B preferred stock issued and outstanding as of March 31, 2016 and December 31, 2015
 

 

Common stock, 113,951,389 and 114,533,581 shares issued and outstanding as of March 31, 2016 and December 31, 2015
 

 

  Additional paid-in capital
 
1,229.4

 
1,225.7

  Accumulated deficit
 
(68.4
)
 
(44.2
)
  Accumulated other comprehensive loss
 
(46.8
)
 
(47.7
)
Total Kennedy-Wilson Holdings, Inc. shareholders' equity
 
1,114.2

 
1,133.8

Noncontrolling interests
 
1,651.7

 
1,731.3

Total equity
 
2,765.9

 
2,865.1

Total liabilities and equity
 
$
7,658.4

 
$
7,595.6


                           

(1) The  assets and liabilities as of March 31, 2016 include $5,004.0 million (including cash held by consolidated investments of $676.6 million and real estate and acquired in place lease values, net of accumulated depreciation and amortization of $3,964.0 million) and $2,780.2 million (including investment debt of $2,503.3), respectively from consolidated variable interest entities ("VIEs"). The  assets and liabilities as of December 31, 2015 include $4,973.9 million (including cash held by consolidated investments of $507.8 million and real estate and acquired in place lease values, net of accumulated depreciation and amortization of $3,955.8 million) and $2,655.1 million (including investment debt of $2,414.0 million), respectively from VIEs. These assets can only be used to settle obligations of the consolidated VIEs and the liabilities do not have recourse to the Company.

See accompanying notes to consolidated financial statements.


1

Table of Contents

Kennedy-Wilson Holdings, Inc.
Consolidated Statements of Operations
(Unaudited)
 
 
Three Months Ended March 31,
(Dollars in millions, except share and per share amounts)
 
2016
 
2015
Revenue
 
 
 
 
Rental
 
$
119.9

 
$
90.4

Hotel
 
29.1

 
23.4

Sale of real estate
 
1.9

 
2.1

Investment management, property services and research fees (includes $11.0 and $9.5 of related party fees)
 
19.1

 
16.4

Loan purchases, loan originations and other
 
2.1

 
5.4

Total revenue
 
172.1

 
137.7

Operating expenses
 
 
 
 
Rental operating
 
31.0

 
24.6

Hotel operating
 
24.5

 
21.6

Cost of real estate sold
 
1.4

 
1.5

Commission and marketing
 
1.8

 
1.4

Compensation and related
 
45.7

 
26.2

General and administrative
 
10.1

 
9.5

Depreciation and amortization
 
48.3

 
36.6

Total operating expenses
 
162.8

 
121.4

Income from unconsolidated investments
 
19.2

 
11.2

Operating income
 
28.5

 
27.5

Non-operating income (expense)
 
 
 
 
Gain on sale of real estate
 
38.4

 
5.6

Acquisition-related gains
 

 
4.2

Acquisition-related expenses
 
(2.0
)
 
(18.1
)
Interest expense-investment
 
(32.5
)
 
(19.4
)
Interest expense-corporate
 
(12.1
)
 
(13.0
)
Other income
 
0.7

 
0.8

Income (loss) before provision for income taxes
 
21.0

 
(12.4
)
Provision for (benefit from) income taxes
 
(0.5
)
 
8.1

Net income (loss)
 
20.5

 
(4.3
)
Net (income) loss attributable to the noncontrolling interests
 
(27.4
)
 
2.8

Preferred dividends and accretion of preferred stock issuance costs
 
(0.5
)
 
(2.0
)
Net loss attributable to Kennedy-Wilson Holdings, Inc. common shareholders
 
$
(7.4
)
 
$
(3.5
)
Basic loss per share
 
 
 
 
Loss per basic
 
$
(0.07
)
 
$
(0.05
)
Weighted average shares outstanding for basic
 
109,214,633

 
91,547,838

Diluted loss per share
 
 
 
 
Loss per diluted
 
$
(0.07
)
 
$
(0.05
)
Weighted average shares outstanding for diluted
 
109,214,633

 
91,547,838

Dividends declared per common share
 
$
0.14

 
$
0.12


See accompanying notes to consolidated financial statements.

2

Table of Contents

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

 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
 
 
 
 
 
Net income (loss)
 
$
20.5

 
$
(4.3
)
Other comprehensive income (loss), net of tax:
 
 
 
 
Unrealized foreign currency translation gain (loss)
 
22.2

 
(104.9
)
Unrealized gain on marketable securities
 
0.1

 

Amounts reclassified out of AOCI during the period
 

 
(0.3
)
Unrealized currency derivative contracts (loss) gain
 
(50.3
)
 
18.4

Total other comprehensive loss for the period
 
(28.0
)
 
(86.8
)
 
 
 
 
 
Comprehensive loss
 
(7.5
)
 
(91.1
)
Comprehensive loss attributable to noncontrolling interests(1)
 
1.5

 
69.3

Comprehensive loss attributable to Kennedy-Wilson Holdings, Inc. common shareholders
 
$
(6.0
)
 
$
(21.8
)
                           
(1) Comprehensive income attributable to noncontrolling interest includes allocation of unrealized currency translation losses and currency derivative contracts.
See accompanying notes to consolidated financial statements.


3

Table of Contents

Kennedy-Wilson Holdings, Inc.
Consolidated Statement of Equity
(Unaudited)
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-in Capital
 
Retained Earnings (Accumulated Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling Interests
 
 
(Dollars in millions, except share amounts)
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Total
Balance at December 31, 2015
32,550

 
$

 
114,533,581

 
$

 
$
1,225.7

 
$
(44.2
)
 
$
(47.7
)
 
$
1,731.3

 
$
2,865.1

Shares forfeited

 

 
(2,000
)
 

 

 

 

 

 

Restricted stock grants (RSG)

 

 
56,250

 

 

 

 

 

 

Shares retired due to RSG vesting

 

 
(636,442
)
 

 
(12.4
)
 
(0.7
)
 

 

 
(13.1
)
Stock based compensation

 

 

 

 
17.5

 

 

 

 
17.5

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Unrealized foreign currency translation gain, net of tax

 

 

 

 

 

 
7.5

 
14.7

 
22.2

Unrealized foreign currency derivative contract loss, net of tax

 

 

 

 

 

 
(6.7
)
 
(43.6
)
 
(50.3
)
Unrealized gains on marketable securities, net of tax

 

 

 

 

 

 
0.1

 

 
0.1

Preferred stock dividends

 

 

 

 

 
(0.5
)
 

 

 
(0.5
)
Common stock dividends

 

 

 

 

 
(16.1
)
 

 

 
(16.1
)
Net (loss) income

 

 

 

 

 
(6.9
)
 

 
27.4

 
20.5

Acquisition of Kennedy Wilson Europe (KWE)
shares from noncontrolling interest holders

 

 

 

 

 

 

 
(41.3
)
 
(41.3
)
Acquisition of noncontrolling interests from consolidated entity

 

 

 

 
(1.4
)
 

 

 
1.4

 

Contributions from noncontrolling interests, excluding KWE

 

 

 

 

 

 

 
5.5

 
5.5

Distributions to noncontrolling interests

 

 

 

 

 

 

 
(43.7
)
 
(43.7
)
Balance at March 31, 2016
32,550

 
$

 
113,951,389

 
$

 
$
1,229.4

 
$
(68.4
)
 
$
(46.8
)
 
$
1,651.7

 
$
2,765.9

See accompanying notes to consolidated financial statements.


4

Table of Contents

Kennedy-Wilson Holdings, Inc.
Consolidated Statements of Cash Flows (Unaudited)
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
20.5

 
$
(4.3
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
 
Net gain from sale of real estate
 
(38.9
)
 
(6.2
)
Acquisition-related gain
 

 
(4.2
)
Depreciation and amortization
 
48.3

 
36.6

Provision for deferred income taxes
 
0.6

 
(10.2
)
Amortization of deferred loan costs
 
2.5

 
0.7

Amortization of discount and accretion of premium on issuance of the senior notes and investment debt
 
(0.2
)
 
(4.9
)
Unrealized net gains on derivatives
 
(0.6
)
 
0.4

Income from unconsolidated investments and loan purchases and originations
 
(21.1
)
 
(12.8
)
Operating distributions from unconsolidated investments
 
6.6

 
17.0

Operating distributions from loan purchases and originations
 
9.0

 
2.0

Share-based compensation
 
17.5

 
7.3

Change in assets and liabilities:
 
 
 
 
Accounts receivable
 
(12.0
)
 
(1.9
)
Other assets
 
(11.6
)
 
0.7

Accounts payable, accrued expenses and other liabilities
 
(29.5
)
 
(36.8
)
Net cash used in operating activities
 
(8.9
)
 
(16.6
)
Cash flows from investing activities:
 
 
 
 
Additions to loans
 
(4.8
)
 
(87.5
)
Collections of loans
 
130.2

 

Net proceeds from sale of real estate
 
108.0

 
34.4

Purchases of and additions to real estate
 
(102.2
)
 
(757.1
)
Additions to nonrefundable escrow deposits
 
(1.7
)
 
(7.5
)
Proceeds from settlement of foreign derivative contracts
 
22.6

 
30.1

Purchases of foreign derivative contracts
 
(3.4
)
 
(3.6
)
Investment in marketable securities
 
(0.9
)
 

Proceeds from sale of marketable securities
 

 
6.2

Distributions from unconsolidated investments
 
23.8

 
8.0

Contributions to unconsolidated investments
 
(23.2
)
 
(15.2
)
Net cash provided by (used in) investing activities
 
148.4

 
(792.2
)
Cash flows from financing activities:
 
 
 
 
Borrowings under line of credit
 
50.0

 
25.0

Repayment of line of credit
 

 
(150.0
)
Borrowings under investment debt
 
126.2

 
843.6

Repayment of investment debt
 
(41.1
)
 
(246.6
)
Debt issue costs
 
(2.2
)
 
(9.2
)
Issuance of common stock
 

 
187.1

Repurchase and retirement of common stock
 
(13.1
)
 
(3.1
)
Dividends paid
 
(14.3
)
 
(10.7
)
Acquisition of KWE shares from noncontrolling interest holders
 
(41.3
)
 
(22.5
)
Contributions from noncontrolling interests, excluding KWE
 
5.5

 
4.1

Distributions to noncontrolling interests
 
(43.7
)
 
(47.9
)
Net cash provided by financing activities
 
26.0

 
569.8

Effect of currency exchange rate changes on cash and cash equivalents
 
1.0

 
(28.8
)
Net change in cash and cash equivalents(1)
 
166.5

 
(267.8
)
Cash and cash equivalents, beginning of period
 
731.6

 
937.7

Cash and cash equivalents, end of period
 
$
898.1

 
$
669.9

                           

(1) See discussion of non-cash effects in notes to statement of cash flows.


See accompanying notes to consolidated financial statements.

5

Table of Contents

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

Supplemental cash flow information:
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Cash paid for:
 
 
 
 
Interest
 
$
23.4

 
$
37.3

Income taxes
 
7.6

 
0.4

 
Supplemental disclosure of non-cash investing and financing activities:
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
 
 
 
 
 
Accrued capital expenditures
 
$
13.8

 
$
4.2

Dividends declared but not paid on common stock
 
16.1

 
12.5

    
On February 12, 2015, KWE foreclosed on the notes secured by a 75,500 square foot office building located in Dublin, Ireland. As a result of such foreclosure, the assets and liabilities of the property were consolidated in KW Group's financial statements at fair value under ASC Topic 805 Business Combinations.


    
See accompanying notes to consolidated financial statements.

6

Table of Contents

Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1—BASIS OF PRESENTATION
KW Group's 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 ("U.S. 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 our opinion, all adjustments, consisting of only normal and recurring items, necessary for a fair presentation of the results of operations for the three months ended March 31, 2016 and 2015 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, 2016. For further information, your attention is directed to the footnote disclosures found in our Annual Report on Form 10-K for the year ended December 31, 2015. Throughout this unaudited interim consolidated financial statements we refer to “KW Group,” which we define as the Company and its subsidiaries that are consolidated in its financial statements under U.S. GAAP (including KWE as defined below).  All significant intercompany balances and transactions have been eliminated in consolidation. We also refer to "KW," “KWH,” “Kennedy Wilson,” the “Company,” “we,” “our,” or “us” which we define as Kennedy-Wilson Holdings, Inc. and its wholly-owned subsidiaries.
Kennedy Wilson Europe Real Estate Plc (“KWE,” LSE: KWE), a Jersey investment company formed to invest in real estate and real estate-related assets in Europe, closed its initial public offering ("IPO") on the London Stock Exchange during the quarter ended March 31, 2014. KWE is externally managed by a wholly-owned subsidiary of Kennedy Wilson incorporated in Jersey pursuant to an investment management agreement.  Due to the terms provided in the investment management agreement and Kennedy Wilson's equity ownership interest in KWE, pursuant to the guidance set forth in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Subtopic 810 - Consolidation (“Subtopic 810”), the Company is required to consolidate KWE’s results in its consolidated financial statements. Additionally, the Company invested $145.2 million of cash and contributed $58.3 million of assets acquired by the Company as part of the IPO. KWE completed a follow-on offering during the fourth quarter of 2014 where the Company participated based on its ownership percentage acquiring an additional 4.6 million shares for $75 million. Outside of the IPO and follow-on offering, the Company has acquired an additional 6.9 million ordinary shares for $119.4 million and owned approximately 20.3% of KWE’s total issued share capital as of March 31, 2016
In addition to its investment in KWE, prior to KWE's formation, the Company (along with its equity partners) directly invested in 17 properties, one loan pool and a servicing platform in Europe which had total assets of $855.8 million included in the Company's consolidated balance sheet as of March 31, 2016. Kennedy Wilson's total equity in these investments was $412.9 million and the Company's weighted average ownership in these investments was 58% as of March 31, 2016.
 In addition, throughout these unaudited interim consolidated financial statements, we refer to our “equity partners,” which we define as the non-wholly owned subsidiaries that we consolidate in our financial statements under U.S. GAAP, including KWE, and third-party equity providers. 
Kennedy Wilson evaluates its relationships with other entities to identify whether they are variable interest entities ("VIEs") as defined in the ASC Subtopic 810-10, as amended by ASU 2015-02, 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 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. See comment in Note 4 about the preliminary nature of the estimates used in relation to acquisitions.
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 our 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, we calculate 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

7


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



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 us 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. A majority of the performance fees are recognized in investment management revenue, and substantially all of the carried interest is recognized in income from unconsolidated investments in our consolidated statements of operations. Total performance fees recognized from inception through March 31, 2016 that may be reversed in future periods if there is negative fund or loan pool performance totaled $25.3 million. Performance fees recognized during the quarters ended March 31, 2016 and March 31, 2015 were $6.4 million and $3.1 million, respectively, and the amounts that have not been received are included in accounts receivable - related parties in the accompanying consolidated balance sheet.
REAL ESTATE ACQUISITIONS—The purchase price of acquired properties is recorded to land, buildings and building improvements and intangible lease value (value of above-market and below-market leases, acquired in-place lease values, and tenant relationships, if any) based on their respective estimated fair values in accordance with ASC Subtopic 805-10, Business Combinations. Acquisition-related costs are expensed as incurred. The ownership of the other interest holders in consolidated subsidiaries is reflected as noncontrolling interests.
The valuations of real estate are based on management estimates of the real estate assets using income and market approaches. The indebtedness securing the real estate is valued, in part, based on third party valuations and management estimates also using an income approach.
NONCONTROLLING INTERESTS—Noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly to the Company. These amounts are reported within equity as a separate component in accordance with ASC Subtopic 810-10, Noncontrolling Interests in Consolidated Financial Statements. Revenues, expenses, gains, losses, net income (loss), and other comprehensive income (loss) are reported in the consolidated statements of operations at the consolidated amounts and net income (loss) and comprehensive income (loss) attributable to noncontrolling interests are separately stated.
The largest component of noncontrolling interest relates to the Company's investment in KWE, which had a corresponding noncontrolling interest balance of $1.5 billion as of March 31, 2016.
FOREIGN CURRENCIES—The financial statements of KW Group's subsidiaries located outside the United States are measured using the local currency as this is their 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.
At March 31, 2016, approximately 47% of the Company's investment account is invested through our foreign platforms in their local currencies. Investment level debt is generally incurred in local currencies. Fluctuations in foreign exchanges rates may have a significant impact on the results of our operations. In order to manage the effect of these fluctuations, the Company generally hedges its book equity exposure to foreign currencies through currency forward contracts and options. See note 6 for a complete discussion on currency derivative contracts.
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.
Fluctuations in foreign exchanges rates may have a significant impact on the results of our operations. In order to manage the effect of these fluctuations, we generally hedge our book equity exposure to changes in foreign currency rates through currency forward contracts and options. We typically hedge 50%-100% of book equity exposure against these foreign currencies.
INCOME TAXES—Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of

8


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



existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In accordance with ASC Subtopic 740-10, Accounting for Uncertainty in Income Taxes, the effect of income tax positions is recognized only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
RECENT ACCOUNTING PRONOUNCEMENTS—In May 2014, the FASB issued Accounting Standards Updated ("ASU") 2014-09, Revenue from Contracts with Customers, a five step model to recognize revenue from customer contracts in an effort to increase consistency and comparability throughout global capital markets and across industries. The model will identify the contract, identify any separate performance obligations in the contract, determine the transaction price, allocate the transaction price and recognize revenue when the performance obligation is satisfied. The new standard will replace most existing revenue recognition in GAAP when it becomes effective for the Company on January 1, 2018. We have not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis ("ASU 2015-02"). ASU 2015-02 was adopted by the KW Group on January 1, 2016.  The new standard makes certain changes to both the variable interest model and the voting model, including changes to (1) the identification of variable interests (fees paid to a decision maker or service provider), (2) the variable interest entity characteristics for a limited partnership or similar entity and (3) the primary beneficiary determination. The adoption of ASU 2015-02 did not result in any changes to our conclusions regarding the consolidation of investments under the new standard. We identified several entities, already consolidated under the previous standard but not considered VIEs, which under the new standard, are considered VIEs and will continue to be consolidated. KWE was determined to be a VIE under the new standard as were seven other less significant consolidated investments, all with the same partner and sharing similar legal structures.  However because our analysis concludes that we are the primary beneficiary of those entities, they continue to be consolidated.  
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, to reduce the complexity of financial statement presentation pursuant to which debt issuance costs will be presented as a direct deduction from the carrying amount of debt liabilities as opposed to a deferred charge recognized as an asset. ASU 2015-03 is required to be adopted for fiscal years beginning after December 15, 2015. ASU 2015-03 became effective for KW Group beginning January 1, 2016. The adoption of this standard did not have a material impact on the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. Because the Company's existing operating lease commitments are not material and the accounting for leases by the lessor is substantially unchanged, the Company does not expect the ASU to have a significant impact on its results of operations or financial position.   
The FASB did not issue any other ASUs during the first three months of 2016 that the Company expects to be applicable and have a material impact on the Company's financial position or results of operations.
RECLASSIFICATIONS—Certain balances included in prior year's financial statements have been reclassified to conform to the current year's presentation.
NOTE 3—LOAN PURCHASES AND ORIGINATIONS

KW Group's investment in loan purchases and originations was $165.1 million and $299.7 million at March 31, 2016 and December 31, 2015, respectively.

9


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



During the first quarter of 2016, KWH originated a loan secured by a beach-front hotel located in Waimea, Hawaii for $4.5 million. Additionally, KWE sold a tranche of five loans secured by five assets in the United Kingdom, which had a carrying value of $138.5 million, recognized a gain of $6.9 million.
KW Group recognized interest income on loans of $2.1 million and $5.4 million during the three months ended March 31, 2016 and 2015, respectively.
NOTE 4—REAL ESTATE AND IN-PLACE LEASE VALUE
The following table summarizes KW Group's investment in consolidated real estate properties at March 31, 2016 and December 31, 2015:
 
 
March 31,
 
December 31,
(Dollars in millions)
 
2016
 
2015
Land
 
$
1,472.0

 
$
1,471.5

Buildings
 
3,918.9

 
3,905.5

Building improvements
 
307.0

 
247.2

In-place lease values
 
413.3

 
421.8

 
 
6,111.2

 
6,046.0

Less accumulated depreciation and amortization
 
(285.1
)
 
(248.5
)
Real estate and acquired in place lease values, net of accumulated depreciation and amortization
 
$
5,826.1

 
$
5,797.5


Real property, including land, buildings, and building improvements, are included in real estate and are generally stated at cost. Buildings and building improvements are depreciated on a straight-line method over their estimated lives not to exceed 40 years. Acquired in-place lease values are recorded at their estimated fair value and depreciated over their respective weighted-average lease term which was 8.4 years at March 31, 2016.
Consolidated Acquisitions    
The purchase of property is recorded to land, buildings, building improvements, and intangible lease value (including the value of above-market and below-market leases, acquired in-place lease values, and tenant relationships, if any) based on their respective estimated fair values. The purchase price generally approximates the fair value of the properties as acquisitions are generally transacted with third-party willing sellers.
During the three months ended March 31, 2016, KW Group acquired the following consolidated properties:
(Dollars in millions)
Preliminary Purchase Price Allocation at Acquisition(1)
Location
Description
Land
Building
Acquired in place lease values(2)
Investment debt
NCI(3)
KWH Shareholders' Equity
Western U.S.
108k square feet of commercial property
$
2.6

$
9.5

$
0.7

$
8.0

$
0.2

$
4.6

Ireland
Two properties totaling 57k square feet (4)
3.9

20.8

2.0


21.3

5.4

Spain
One development project(4)

13.8



11.0

2.8

 
 
$
6.5

$
44.1

$
2.7

$
8.0

$
32.5

$
12.8

(1) Excludes acquisition expenses and net other assets. The purchase price allocations for properties acquired during the three months ended March 31, 2016 are based on preliminary measurements of fair value that are subject to change. These allocations represent the Company's current best estimates of fair value.
(2) Includes above and below market leases in this table. Above and below market leases are part of other assets and accrued expenses and other liabilities.
(3) Noncontrolling interest amounts associated with acquisition.
(4) This portfolio of properties was directly acquired and is held by KWE. Kennedy Wilson owns approximately 20.3% of the total issued share capital of KWE as of March 31, 2016.

Gains on real estate

10


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



During the three months ended March 31, 2016, KW Group sold its investment in a commercial property in the United Kingdom, which resulted in a gain of $11.0 million before noncontrolling interest ($5.5 million net of noncontrolling interests) and KWE sold 13 commercial properties which resulted in a gain of $27.0 million before noncontrolling interest ($4.9 million net of noncontrolling interests). These gains are presented net as a component of non-operating income (expense) as the properties were treated as businesses at acquisition.
Guarantees
Kennedy Wilson has certain guarantees associated with loans secured by consolidated assets. As of March 31, 2016, the maximum potential amount of future payments (undiscounted) Kennedy Wilson could be required to make under the guarantees was approximately $61.8 million which is approximately 1% of investment level debt of Kennedy Wilson and its equity partners. The guarantees expire through 2026, 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 on the Company's evaluation of guarantees under FASB ASC Subtopic 460-10 Estimated Fair Value of Guarantees, the estimated fair value of guarantees made as of March 31, 2016 and December 31, 2015 was immaterial.
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 their acquisition. KW Group'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.
The pro forma data presented below assumes that the acquisitions during the three months ended March 31, 2016 occurred as of January 1, 2015.
 
 
Three Months Ended March 31,
(Dollars in millions, except for per share data)
 
2016
 
2015
Pro forma revenues
 
$
172.6

 
$
138.3

Pro forma net loss attributable to Kennedy-Wilson Holdings, Inc. common shareholders
 
(7.0
)
 
(3.0
)
Pro forma net loss per share:
 
 
 
 
Basic
 
$
(0.06
)
 
$
(0.03
)
Diluted
 
$
(0.06
)
 
$
(0.03
)

NOTE 5—UNCONSOLIDATED INVESTMENTS

KW Group has unconsolidated investments through real estate related joint ventures and loan pool participations. The following table details its investments in joint ventures and loan pool participations as of March 31, 2016 and December 31, 2015:
 
 
March 31,
 
December 31,
(Dollars in millions)
 
2016
 
2015
Investments in joint ventures
 
$
455.5

 
$
443.6

Investments in loan pool participations
 
1.2

 
1.3

Total
 
$
456.7

 
$
444.9

Investments in Joint Ventures
Kennedy Wilson has a number of joint venture interests, generally ranging from 5% to 50%, that were formed to acquire, manage, develop, service 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 March 31, 2016 and December 31, 2015, Kennedy Wilson's investment in joint ventures totaled $455.5 million and $443.6 million, respectively.     

11


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



The following table details our investments in joint ventures by investment type and geographic location as of March 31, 2016:
(Dollars in millions)
Multifamily
Commercial
Loan
Residential
Other
Total
Western U.S.
$
147.2

$
54.6

$
11.8

$
184.2

$
15.8

$
413.6

Japan
6.4





6.4

United Kingdom

21.5




21.5

Spain




14.0

14.0

Total
$
153.6

$
76.1

$
11.8

$
184.2

$
29.8

$
455.5

The following table details our investments in joint ventures by investment type and geographic location as of December 31, 2015:
(Dollars in millions)
Multifamily
Commercial
Loan
Residential
Other
Total
Western U.S.
$
144.8

$
51.4

$
12.2

$
180.1

$
13.2

$
401.7

Japan
5.8





5.8

United Kingdom

23.3




23.3

Spain




12.8

12.8

Total
$
150.6

$
74.7

$
12.2

$
180.1

$
26.0

$
443.6

Vintage Housing Holdings ("VHH")
During the second quarter of 2015, the Company purchased a 61% noncontrolling interest for $78.7 million in VHH, an existing venture that holds controlling interests in 30 syndicated limited partnerships ("LPs") that own multifamily properties via a traditional low-income tax credit structure in the Western United States. The remaining 39% is held by a non-affiliated entity who is appointed as the manager. Neither party controls VHH, and, accordingly, the Company accounts for its investment under the equity method.
The LPs generate cash flow through their controlling interests in entities owning multifamily housing that is predominantly structured with low income housing credits to benefit the LPs. The Company has elected the fair value option on its unconsolidated investment in VHH. During the quarter ended March 31, 2016, the Company recognized a total of $9.6 million in fair value gains through equity income. The fair values gains were driven by recapitalizations through refinancings, sales to new partnerships, new developments to the portfolio and unrealized developer fees.  Since the investment is accounted for under fair value, operating distributions are recorded as equity income. The Company has recognized $1.6 million in equity income related to operating distributions during the quarter ended March 31, 2016.
VHH is KW Group's largest joint venture investment; there were no other investments that represented more than 10% of the investment in joint ventures balance as of March 31, 2016 or December 31, 2015.
Contributions to Joint Ventures    
During the three months ended March 31, 2016, Kennedy Wilson did not contribute to any new joint ventures. Kennedy Wilson contributed $23.3 million to existing joint ventures during the three months ended March 31, 2016 to fund our share of a development project, to pay off external debt and for capital expenditures and working capital needs.
Distributions from Joint Ventures and Investments in Loan Pools
During the three months ended March 31, 2016, Kennedy Wilson received $30.4 million in operating and investing distributions from its joint ventures and loan pools. Operating distributions resulted from operating cash flow generated by the joint venture investments. Investing distributions resulted from the refinancing of property level debt and asset sales.

12


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



The following table details cash distributions by investment type and geographic location for the three months ended March 31, 2016:
 
Multifamily
Commercial
Loan Pools
Residential and Other
Total
(Dollars in millions)
Operating
Investing
Operating
Investing
Operating
Investing
Operating
Investing
Operating
Investing
Western U.S.
$
4.5

$
18.9

$
1.7

$
0.8

$

$

$
0.3

$
4.1

$
6.5

$
23.8

Japan
0.1








0.1


Total
$
4.6

$
18.9

$
1.7

$
0.8

$

$

$
0.3

$
4.1

$
6.6

$
23.8

Consolidation Considerations
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 FASB ASC Topic 810. The Company accounts for joint ventures where it is deemed that the Company does not have control through the equity method of accounting while entities the Company controls are consolidated in KW Group's financial statements.
Capital Commitments
As of March 31, 2016, Kennedy Wilson had unfulfilled capital commitments totaling $42.1 million to four of its joint ventures. The Company may be called upon to contribute additional capital to joint ventures in satisfaction of such capital commitment obligations.

NOTE 6—FAIR VALUE MEASUREMENTS AND THE FAIR VALUE OPTION
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 March 31, 2016:
 
(Dollars in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Unconsolidated investments
$

 
$

 
$
234.8

 
$
234.8

Marketable securities
5.4

 

 

 
5.4

Currency derivative contracts

 
(41.4
)
 

 
(41.4
)
Total
$
5.4

 
$
(41.4
)
 
$
234.8

 
$
198.8

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, 2015:
 
(Dollars in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Unconsolidated investments
$

 
$

 
$
223.8

 
$
223.8

Marketable securities
5.3

 

 

 
5.3

Currency derivative contracts

 
11.7

 

 
11.7

Total
$
5.3

 
$
11.7

 
$
223.8

 
$
240.8


Marketable Securities

Marketable securities include Kennedy Wilson's investment in publicly traded equity securities and fixed income investments. The fixed income portfolio consists mainly of U.S. government and investment grade corporate bonds. The carrying value of marketable securities is a level 1 valuation as the fair value is based off of unadjusted quoted market prices in active markets for identical securities. The amount above excludes Kennedy Wilson's 27.6 million shares in KWE as the investment is eliminated due to the consolidation of KWE's results in KW Group's consolidated financial statements. Kennedy Wilson's investment in KWE had a market value of approximately $464.4 million (cost basis of $457.4 million) based on a per share price of $16.86 at March 31, 2016. As of March 31, 2016, the Company had hedged 48% of the foreign currency rate risk of its net investment in KWE through using currency forward contracts and options, with a notional amount of £230.2 million.

13


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



    
Fair Value and Fair Value Option - Unconsolidated Investments    
Kennedy Wilson records its investments in certain funds it manages and sponsors ("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 $40.5 million and $30.6 million at March 31, 2016 and December 31, 2015, respectively, which is included in unconsolidated investments in the accompanying consolidated balance sheets. As of March 31, 2016, Kennedy Wilson had unfunded capital commitments to the Funds in the amount of $39.4 million.
Kennedy Wilson elected to use the fair value option ("FV Option") for ten unconsolidated investments 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 $194.3 million and $193.2 million at March 31, 2016 and December 31, 2015, respectively, which is included in unconsolidated investments in the accompanying balance sheets. Refer to Note 5 for more detail.
In estimating fair value of real estate held by the Funds and the ten FV Option investments, we consider significant unobservable inputs such as capitalization and discount rates.
The following table summarizes our investments in unconsolidated investments held at fair value by type:
(Dollars in millions)
March 31,
2016
 
December 31, 2015
FV Option
$
194.3

 
$
193.2

Funds
40.5

 
30.6

Total
$
234.8

 
$
223.8

The following table presents changes in Level 3 investments for the three months ended March 31, 2016 and 2015:
 
Three Months Ended March 31,
(Dollars in millions)
2016
 
2015
Beginning balance
$
223.8

 
$
85.9

Unrealized and realized gains
17.6

 
5.2

Unrealized and realized losses

 

Contributions
15.9

 
1.9

Distributions
(22.9
)
 
(3.1
)
Other
0.4

 
(0.3
)
Ending balance
$
234.8

 
$
89.6

Unobservable inputs for real estate
The table below describes the range of unobservable inputs for real estate assets:
 
Estimated Rates Used for
 
Capitalization Rates
 
Discount Rates
Office
5.00% - 9.00%
 
6.75% - 11.25%
Retail
6.25% - 8.75%
 
8.00% - 13.75%
Multifamily
5.75% - 7.75%
 
8.00% - 9.75%
Loan
n/a
 
20.00%
Land and condominium units
n/a
 
8.00% - 15.00%

14


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



In valuing real estate, related assets and indebtedness, we consider 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 for these types of investments range from 1.40% to 3.85%.
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 capitalization rates, discount rates, liquidity risks, and estimates of future cash flows, could significantly affect the fair value measurement amounts.
Currency derivative contracts
KW Group uses foreign currency derivative contracts such as forward contracts and options to manage its foreign currency risk exposure against the effects of a portion of its certain non-U.S. dollar denominated currency net investments. Foreign currency options are valued using a variant of the Black-Scholes model tailored for currency derivatives and the foreign currency forward contracts are valued based on the difference between the contract rate and the forward rate at maturity of the underlying currency applied to the notional value in the underlying currency discounted at a market rate for similar risks. Although we have determined that the majority of the inputs used to value its currency derivative contracts fall within Level 2 of the fair value hierarchy, the counter-party risk adjustments associated with the currency derivative contracts utilize Level 3 inputs. However, as of March 31, 2016, KW Group assessed the significance of the impact of the counter-party valuation adjustments on the overall valuation of its derivative positions and determined that the counter-party valuation adjustments are not significant to the overall valuation of its derivative. As a result, we have determined that our 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 derivative contracts used to hedge foreign currency exposure of its certain net investments in foreign operations qualifies as a net investment hedge under FASB ASC Topic 815. Ineffective portions of currency derivative contracts and contracts that do not quality for net investment hedges are recognized in the statement of operations within other income.
The fair value of the currency derivative contracts held as of March 31, 2016 and December 31, 2015 are reported in other assets for hedge assets and included in accrued expenses and other liabilities for hedge liabilities on the balance sheet. See note 11 for a complete discussion on other comprehensive income including currency derivative contracts and foreign currency translations.
The table below details the currency derivative contracts KW Group held as of March 31, 2016:
(Dollars in millions)
 
 
 
Fair Value
 
Change in Unrealized Gains (Losses)
Currency Hedged
Type
Underlying Currency
Notional Amount
Trade Date
Settlement/Expiration Date
Forward Rate/
Strike Price
March 31, 2016
 
Three Months Ended March 31, 2016
EUR
Option
USD
130.0

3/10/2015 - 3/19/2015
3/7/2019 - 3/19/2020
1.0700 - 1.0960
$
(4.7
)
 
$
(4.1
)
GBP
Option
USD
£
230.2

3/31/2015 - 3/24/2016
9/13/2018 - 2/17/2021
1.3000 - 1.5434
2.6

 
(1.2
)
EUR (1)
Forward
GBP
370.8

6/18/2014 - 1/21/2016
7/2/2018 - 6/30/2022
0.7110 - 0.8621
(24.6
)
 
(27.3
)
EUR (1)
Option
GBP
200.0

3/13/2015 - 1/21/2016
3/15/2018 - 6/3/2020
0.7070 - 0.8587
(14.3
)
 
(11.0
)
YEN
Forward
USD
¥
495.0

6/23/2015
6/25/2020
111.2600
(0.4
)
 
(0.2
)
Total(2)
 
 
 
 
 
 
$
(41.4
)
 
$
(43.8
)
(1) Hedge is held by KWE on its wholly-owned subsidiaries.
(2) Hedges are presented gross in the consolidated balance sheet. Hedge assets are included in other assets and hedge liabilities are included in other liabilities.    
    
In addition to the hedge assets held above there were $4.9 million of unrealized gains recognized through other comprehensive income and $1.7 million of gains recognized through the consolidated statement of operations on currency derivative contracts that were settled during the period. The gains recognized through other comprehensive income will remain in accumulated other comprehensive income until the underlying investments they were hedging are substantially liquidated by KW Group.

15


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



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 loans (excluding related party loans 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.
Debt liabilities are accounted for at face value plus net unamortized debt premiums and any fair value adjustments as part of business combinations. The fair value as of March 31, 2016 and December 31, 2015 for the senior notes payable, investment debt and line of credit were estimated to be approximately $4.6 billion and $4.3 billion, respectively, based on a comparison of the yield that would be required in a current transaction, taking into consideration the risk of the underlying collateral and our credit risk to the current yield of a similar security, compared to their carrying value of $4.5 billion and $4.4 billion at March 31, 2016 and December 31, 2015, respectively. The inputs used to value our senior notes payable, borrowings under lines of credit and mortgage loans payable are based on observable inputs for similar assets and quoted prices in markets that are not active and are therefore determined to be level 2 inputs.
NOTE 7—OTHER ASSETS
Other assets consist of the following: 
(Dollars in millions)
 
March 31, 2016
 
December 31, 2015
Above-market leases, net of accumulated amortization of $22.8 and $19.6 at March 31, 2016 and December 31, 2015, respectively
 
$
99.8

 
$
103.3

Other, net of accumulated amortization of $3.9 and $3.1 at March 31, 2016 and December 31, 2015, respectively
 
46.7

 
40.4

Office furniture and equipment net of accumulated depreciation of $19.0 and $14.0 at March 31, 2016 and December 31, 2015, respectively
 
24.3

 
27.9

Goodwill
 
23.9

 
23.9

Deferred tax asset, net
 
21.1

 
22.2

Prepaid expenses
 
11.6

 
10.1

Hedge assets
 
6.4

 
30.9

Marketable securities(1)
 
5.4

 
4.3

Deposits
 
4.9

 
4.2

Other Assets
 
$
244.1

 
$
267.2

                           
(1) The amount above excludes Kennedy Wilson's 27.6 million shares in KWE as the investment is eliminated due to the consolidation of KWE's results. Based on the closing price of KWE shares on March 31, 2016, the fair value of Kennedy Wilson's investment in KWE is $464.4 million.


16


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



NOTE 8—INVESTMENT DEBT

Investment debt at March 31, 2016 and December 31, 2015 consists of the following:
(Dollars in millions)
 
 
 
Carrying Amount of Investment Debt as of (1)
Investment Debt by Product Type
 
Region
 
March 31,
2016
 
December 31,
2015
Mortgage debt
 
 
 
 
 
 
Multifamily (1)
 
Western U.S.
 
$
838.3

 
$
835.2

Commercial
 
Western U.S.
 
291.3

 
286.4

Residential, Hotel and Other
 
Western U.S
 
39.3

 
39.4

Commercial
 
Japan
 
2.2

 
2.0

Commercial (1)(2)
 
Ireland
 
398.6

 
380.3

Multifamily (1)(2)
 
Ireland
 
196.0

 
187.1

Residential and Other(1)(2)
 
Ireland
 
11.9

 
7.3

Hotel
 
Ireland
 
81.9

 
78.2

Residential and Other(1)(2)
 
Spain
 
3.5

 
3.4

Commercial (2)
 
Spain
 
99.3

 

Commercial (1)(2)
 
United Kingdom
 
924.6

 
976.2

Secured investment debt
 
 
 
2,886.9

 
2,795.5

 
 
 
 
 
 
 
Unsecured investment debt  (1)(2)
 
United Kingdom
 
873.6

 
862.7

Investment debt (excluding loan fees)
 
 
 
$
3,760.5

 
$
3,658.2

Unamortized loan fees
 
 
 
(31.1
)
 
(30.7
)
Total Investment debt
 
 
 
$
3,729.4

 
$
3,627.5

                           
(1) The investment debt payable balances include 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 discounts as of March 31, 2016 and December 31, 2015 was $5.8 million and $5.4 million, respectively.
(2) Kennedy Wilson owns approximately 20.3% and 18.2% of the total issued share capital of KWE as of March 31, 2016 and December 31, 2015, respectively. See the table below for a detailed breakout.
(Dollars in millions)
 
 
 
Carrying amount of investment debt as of (1)
Types of Property Pledged as Collateral (KWE)
 
Region
 
March 31,
2016
 
December 31,
2015
Commercial (1)(2)
 
Ireland
 
300.5

 
286.7

Multifamily (1)(2)
 
Ireland
 
54.0

 
51.5

Residential and Other(1)(2)
 
Spain
 
3.5

 
3.4

Commercial (1)(2)
 
Spain
 
99.3

 

Commercial (1)(2)
 
United Kingdom
 
848.1

 
897.9

Investment debt
 
 
 
$
1,305.4

 
$
1,239.5

 
 
 
 
 
 
 
Unsecured(1),(2)
 
United Kingdom
 
873.6

 
862.7

Investment debt (excluding loan fees)
 
 
 
$
2,179.0

 
$
2,102.2

Unamortized loan fees
 
 
 
(20.0
)
 
(19.4
)
Total Investment debt
 
 
 
$
2,159.0

 
$
2,082.8

                           
(1) The mortgage loan payable balances include unamortized debt premiums (discounts). Debt premiums (discounts) 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

17


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



that approximates the effective interest method. The unamortized loan (discount) premium as of March 31, 2016 and December 31, 2015 was $(13.4) million and $(13.6) million, respectively.
(2) Kennedy Wilson owns approximately 20.3% and 18.2% of the total issued share capital of KWE as of March 31, 2016 and December 31, 2015, respectively.

The investment debt had a weighted average interest rate of 3.16% and 3.19% per annum at March 31, 2016 and December 31, 2015, respectively. As of March 31, 2016, 66% of KW Group's investment level debt is fixed rate, 19% is floating rate with interest caps and 15% is floating rate without interest caps, compared to 67% fixed rate, 17% floating rate with interest caps and 16% floating rate without interest caps, as of December 31, 2015.

In addition, during the second quarter of 2015, KWE completed its inaugural bond offering of approximately $431.8 million (based on March 31, 2016 rates) (£300 million) in 3.95% fixed-rate senior unsecured bonds due 2022. The bonds were issued at a discount and have a carrying value of $425.6 million at March 31, 2016. KWE effectively reduced the interest rate to 3.35% as a result of it entering into swap arrangements to convert 50% of the proceeds into Euros.

In addition, during the fourth quarter of 2015, KWE established a £2.0 billion (approximately $2.9 billion based on March 31, 2016 rates) Euro Medium Term Note ("EMTN") Programme. Under the EMTN Programme, KWE may issue, from time to time, up to £2.0 billion of various types of debt securities in certain markets and currencies. During the fourth quarter of 2015, KWE drew down under its EMTN Programme, with the issuance of senior unsecured notes for an aggregate principal amount of approximately $455.2 million (based on March 31, 2016 rates) (€400 million) (the "KWE Notes"). The KWE Notes were issued at a discount and have a carrying value of $448.0 million with an annual fixed coupon of 3.25%, and mature in 2025. As KWE invests proceeds from the KWE Notes to fund equity investments in new euro denominated assets it designates the KWE Notes as net investment hedges under FASB ASC Topic 815. Subsequent fluctuations in foreign currency rates that impact the carrying value of the KWE Notes are recorded to accumulated other comprehensive income. During the three months ended March 31, 2016, KW Group recognized a loss of $15.8 million in accumulated other comprehensive income due to the strengthening of the euro against the U.S dollar during the period. The KWE Notes rank pari passu with the KWE Bonds (as defined below), and are subject to the same restrictive covenants.

The trust deed that governs the bonds contains various restrictive covenants for KWE, including, among others, limitations on KWE’s and its material subsidiaries’ ability to provide certain negative pledges. The trust deed limits the ability of KWE and its subsidiaries to incur additional indebtedness if, on the date of such incurrence and after giving effect to the incurrence of the new indebtedness, (1) KWE’s consolidated net indebtedness (as defined in the trust deed) would exceed 60% of KWE’s total assets (as calculated pursuant to the terms of the trust deed); and (2) KWE’s consolidated secured indebtedness (as defined in the trust deed) would exceed 50% of KWE’s total assets (as calculated pursuant to the terms of the trust deed). The trust deed also requires KWE, as of each reporting date, to maintain an interest coverage ratio (as defined in the trust deed) of at least 1.50 to 1.00 and have unencumbered assets of no less than 125% of its unsecured indebtedness (as defined in the trust deed). As of March 31, 2016, KWE was in compliance with these covenants.

In August 2014, KWE entered into a three-year unsecured floating rate revolving debt facility ("KWE Facility") with Bank of America Merrill Lynch, Deutsche Bank, and J.P. Morgan Chase of approximately $323.9 million (£225 million) based on rates as of March 31, 2016. During the three months ended March 31, 2016, KWE did not draw on the KWE facility. As of March 31, 2016, the unsecured credit facility was undrawn and $323.9 million (£225 million) based on rates as of March 31, 2016 was still available.

During the three months ended March 31, 2016, one acquisition was partially financed with a mortgage, two existing investments were partially financed with mortgages and one existing investment with an existing mortgage was refinanced. See note 4 for more detail on the acquisitions and the investment debt associated with them.

18


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



The aggregate maturities of investment debt subsequent to March 31, 2016 are as follows:
(Dollars in millions)
 
Aggregate Maturities
2016
 
$
38.8

2017
 
191.5

2018
 
228.9

2019
 
844.9

2020
 
264.2

Thereafter
 
2,198.0

 
 
3,766.3

Debt discount
 
(5.8
)
Unamortized loan fees
 
(31.1
)
 
 
$
3,729.4

NOTE 9—SENIOR NOTES

 
 
 
March 31, 2016
 
December 31, 2015
(Dollars in millions)
 
 
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
$
55.0

$

$
55.0

 
$
55.0

$

$
55.0

2024 Notes
5.88%
4/1/2024
650.0

(2.4
)
647.6

 
650.0

(2.4
)
647.6

Senior Notes
 
 
$
705.0

$
(2.4
)
$
702.6

 
$
705.0

$
(2.4
)
$
702.6

Unamortized loan fees
 
 
 
 
(13.4
)
 
 
 
(13.8
)
Total Senior Notes
 
 
 
 
$
689.2

 
 
 
$
688.8

The indentures governing the 2024 Notes and 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 governing the 2024 and 2042 Notes limit the ability of Kennedy Wilson and 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 March 31, 2016, the maximum balance sheet leverage ratio was 0.68 to 1.00. See Note 15 for the guarantor and non-guarantor financial statements.
NOTE 10—BORROWINGS UNDER LINES OF CREDIT
KWH Facility
On December 10, 2015, Kennedy-Wilson, Inc. (the “Borrower”), a wholly-owned subsidiary of Kennedy-Wilson Holdings, Inc. ("KWH") entered into a $475 million unsecured revolving credit facility (the “KW Revolving Facility”) with a syndicate of lenders including Bank of America, N.A., JP Morgan Chase Bank, N.A., Deutsche Bank AG New York Branch, U.S. Bank N.A., East West Bank, Fifth Third Bank, The Governor and Company of the Bank of Ireland, Compass Bank and City National Bank with Bank of America, N.A., as administrative agent and letter of credit issuer. Loans under the KW Revolving Facility bear interest at a rate equal to LIBOR plus 2.50% or 3.00%, depending on the consolidated leverage ratio as of the applicable measurement date, and have a maturity date of December 10, 2018. Subject to certain conditions precedent and at the Borrower’s option, the maturity date of the KW Revolving Facility may be extended by one year.
The KW Revolving Facility has certain covenants that, among other things, limit the Borrower and certain of its subsidiaries’ ability to incur additional indebtedness, repurchase capital stock or debt, sell assets or subsidiary stock, create or

19


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



permit liens on assets, engage in transactions with affiliates, enter into sale/leaseback transactions, issue subsidiary equity and enter into consolidations or mergers. The credit agreement that governs the KW Revolving Facility requires the Borrower to maintain (i) a maximum consolidated leverage ratio (as defined in the credit agreement) of not greater than 65%, measured as of the last day of each fiscal quarter, (ii) a minimum fixed charge coverage ratio (as defined in the credit agreement) of not less than 1.60 to 1.00, measured as of the last day of each fiscal quarter for the period of four full fiscal quarters then ended, (iii) a minimum consolidated tangible net worth equal to or greater than the sum of $920,660,504.65 plus an amount equal to fifty percent (50%) of net equity proceeds received by the Borrower after the date of September 30, 2015 financial statements, measured as of the last day of each fiscal quarter, (iv) a maximum recourse leverage ratio (as defined in the credit agreement) of not greater than an amount equal to consolidated tangible net worth as of the measurement date multiplied by 1.5, measured as of the last day of each fiscal quarter, (v) a maximum secured recourse leverage ratio (as defined in the credit agreement) of not greater than an amount equal to the greater of 3.5% of consolidated total asset value (as defined in the credit agreement) and $138,187,197, (vi) a maximum adjusted secured leverage ratio (as defined in the credit agreement) of not greater than 55%, measured as of the last day of each fiscal quarter, and (vii) liquidity (as defined in the credit agreement) of at least $250 million.
As of March 31, 2016, the Company’s consolidated leverage ratio was 53.2%, its fixed charge coverage ratio was 3.2 to 1.00, its consolidated tangible net worth was $1,358.4 million, its adjusted secured leverage ratio was 41%, its secured recourse leverage ratio was 1.5%, its recourse leverage ratio was 0.60, and liquidity was $717.1 million. The obligations of the Borrower pursuant to the Credit Agreement are guaranteed by KWH and certain of its wholly-owned subsidiaries of the Company.

During the three months ended March 31, 2016, the Borrower drew $50.0 million and repaid $0.0 million on its unsecured credit facility to fund acquisitions. The maximum amount drawn on the unsecured credit facility at any one point during the three months ended March 31, 2016 was $50.0 million. As of March 31, 2016, there was $50.0 million outstanding under the unsecured credit facility, and $425.0 million was still available. As of December 31, 2015, there was $0.0 million outstanding under the unsecured facility, and $475.0 million was still available.

NOTE 11—EQUITY
Common Stock Repurchase Program
On February 25, 2016, Kennedy Wilson announced the authorization of a stock repurchase program for up to $100 million.  Repurchases under the program may be made in the open market, in privately negotiated transactions or otherwise, with the amount and timing of repurchases depending on market conditions and subject to the Company's discretion. During the three months ended March 31, 2016, Kennedy Wilson repurchased 240,000 shares for $5.0 million.
Dividend Distributions    
During the following periods, Kennedy Wilson declared and paid the following cash distributions on its common and preferred stock:
 
 
Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2015
(Dollars in millions)
 
Declared
 
Paid
 
Declared
 
Paid
Preferred Stock
 
 
 
 
 
 
 
 
Series A (1)
 
$

 
$

 
$
1.5

 
$
1.5

Series B
 
0.5

 
0.5

 
0.5

 
0.5

Total Preferred Stock
 
0.5

 
0.5

 
2.0

 
2.0

Common Stock
 
16.1

 
13.8

 
12.5

 
8.7

Total (2)
 
$
16.6

 
$
14.3

 
$
14.5

 
$
10.7

                           
(1) The decrease in Series A dividends during the current year is due to the conversion of the Series A preferred stock into common shares during the second quarter of 2015.
(2) The difference between declared and paid is the amount accrued on the consolidated balance sheets.
Share-based Compensation
During the three months ended March 31, 2016 and 2015, KW Group recognized $17.5 million and $7.3 million of compensation expense related to the vesting of restricted stock grants. The increase for the three months ended March 31, 2016

20


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



is mainly due to vesting of 60% of the shares granted during 2012 under the Amended and Restated 2009 Equity Participation Plan as well as shares granted during the fourth quarter of 2015.
Accumulated Other Comprehensive Income
        
The following table summarizes the changes in each component of accumulated other comprehensive income (loss), net of taxes:
 
 
Foreign Currency Translation
 
Currency Derivative Contracts
 
Marketable Securities
 
Total Accumulated Other Comprehensive Income
(Dollars in millions)
 
 
 
 
 
 
 
 
Balance at December 31, 2015
 
$
(69.9
)
 
$
22.4

 
$
(0.2
)
 
$
(47.7
)
Unrealized gains (loss), arising during the period
 
27.2

 
(54.7
)
 
0.2

 
(27.3
)
Noncontrolling interest
 
(14.7
)
 
43.6

 

 
28.9

Taxes on unrealized gains (losses), arising during the period
 
(5.0
)
 
4.4

 
(0.1
)
 
(0.7
)
Balance at March 31, 2016
 
$
(62.4
)
 
$
15.7

 
$
(0.1
)
 
$
(46.8
)
The local currencies for our interests in foreign operations include the euro, the British pound sterling, and the Japanese yen. The related amounts on KW Group's balance sheets are translated into U.S. dollars at the exchange rates at the respective financial statement date, while amounts on its statements of operations are translated at the average exchange rates during the respective period. The increase in the unrealized gains on foreign currency translation is a result of the weakening of the U.S. dollar against the euro, the British pound and the Japanese yen during the three months ended March 31, 2016.
In order to manage currency fluctuations, KW Group entered into currency derivative contracts to manage its exposure to currency fluctuations between its functional currency (U.S. dollar) and the functional currency (Euro, GBP and Yen) of certain of its wholly-owned and consolidated subsidiaries. See note 6 for a more detailed discussion of KW Group's currency derivative contracts.
As discussed throughout this report, the Company is required under U.S. GAAP to consolidate certain non-wholly owned subsidiaries or investments that it controls.  As such, the Company's financial statements reflect currency translation adjustments and related hedging activities on a gross basis. In many instances, these fluctuations are not reflective of the actual foreign currency exposure of the underlying consolidated subsidiary. For example, the Company is required to translate the activities of KWE into US dollars even though KWE does not invest in US dollar denominated assets.  Therefore, it is important to look at the provided currency translation and currency derivative adjustment information net of noncontrolling interests to get a more accurate understanding of the actual currency exposure for the Company
Noncontrolling Interests
Noncontrolling interests consist of the ownership interests of noncontrolling shareholders in consolidated subsidiaries, and are presented separately on KW Group's balance sheet. As of March 31, 2016 and December 31, 2015 KW Group had noncontrolling interest of $1.7 billion and $1.7 billion, respectively.
Kennedy Wilson currently owns approximately 20.3% of KWE’s total issued share capital as of March 31, 2016. The noncontrolling interest holders in KWE had an equity balance of $1.5 billion as of March 31, 2016.  Due to the terms provided in the investment management agreement between KWE and a wholly-owned subsidiary of Kennedy Wilson, the results of KWE are consolidated in KW Group's financial statements. 


21


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



NOTE 12—EARNINGS PER SHARE

Under FASB ASC Topic 260-10-45, Earnings Per Share, the Company uses the two-class method to calculate earnings per share. Basic earnings per share is calculated based on dividends declared (“distributed earnings”) and the rights of common shares and participating securities in any undistributed earnings, which represents net income remaining after deduction of dividends declared during the period. Participating securities, which include unvested restricted stock, are included in the computation of earnings per share pursuant to the two-class method. The undistributed earnings are allocated to all outstanding common shares and participating securities based on the relative percentage of each security to the total number of outstanding securities. Basic earnings per common share and participating securities represent the summation of the distributed and undistributed earnings per common share and participating security divided by the total weighted average number of common shares outstanding and the total weighted average number of participating securities outstanding during the respective periods. We only present the earnings per share attributable to the common shareholders.
 
Net losses, after deducting the dividends to participating securities, are allocated in full to the common shares since the participating security holders do not have an obligation to share in the losses, based on the contractual rights and obligations of the participating securities. The following is a summary of the elements used in calculating basic and diluted income (loss) per share for the three months ended March 31, 2016 and 2015:
 
Three Months Ended March 31,
(Dollars in millions, except share and per share amounts)
2016
 
2015
Net loss attributable to Kennedy-Wilson Holdings, Inc. common shareholders
$
(7.4
)
 
$
(3.5
)
Dividends allocated to participating securities
(0.5
)
 
(0.6
)
Net loss attributable to Kennedy-Wilson Holdings, Inc. common shareholders, net of allocation to participating securities
(7.9
)
 
(4.1
)
Dividends declared on common shares
(15.6
)
 
(11.8
)
Undistributed earnings attributable to Kennedy-Wilson Holdings, Inc. common shareholders, net of allocation to participating securities
$
(23.5
)
 
$
(15.9
)
 
 
 
 
Distributed earnings per share
$
0.14

 
$
0.12

Undistributed earnings per share
(0.21
)
 
(0.17
)
Loss per basic
(0.07
)
 
(0.05
)
 
 
 
 
Loss per diluted
$
(0.07
)
 
$
(0.05
)
 
 
 
 
Weighted average shares outstanding for basic
109,214,633

 
91,547,838

Weighted average shares outstanding for diluted(1)
109,214,633

 
91,547,838

Dividends declared per common share
$
0.14

 
$
0.12

                           
(1) For the three months ended March 31, 2016, a total of 8,381,629 potentially dilutive securities were not included in the diluted weighted average shares as they were anti-dilutive. For the three months ended March 31, 2015, a total of 12,212,481 potentially dilutive securities have not been included in the diluted weighted average shares as they are anti-dilutive. Potentially anti-dilutive securities include preferred stock and unvested restricted stock grants.
NOTE 13—SEGMENT INFORMATION
Kennedy Wilson is a global real estate investment company. We own, operate, and invest in real estate both on our own and through our investment management platform. To complement our investment business, the Company also provides real estate services primarily to financial services clients. 
Kennedy Wilson’s segment disclosure with respect to the determination of segment profit or loss and segment assets is based on these two core segments: KW Investments and KW Investment Management and Real Estate Services (IMRES).
KW Investments

22


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



KW Investments invests in multifamily, office, retail, and residential properties as well as loans secured by real estate in the Western U.S., UK, Ireland, Spain, Italy and Japan. The Company has an average ownership interest across all investments of approximately 38% as of March 31, 2016.
When we have partners, those partners include public shareholders, financial institutions, foundations, endowments, high net worth individuals and other institutional investors. In these instances, we are typically the general partner in the arrangement with a promoted interests in the profits of our investments beyond our ownership percentage. These promoted interest are typically fees earned by IMRES as described below.
KW Investment Management and Real Estate Services (IMRES)
IMRES encompasses our fee generating businesses which includes both our investment management platform as well as our third party services business. Our clients include shareholders of KWE, financial institutions, institutional investors, insurance companies, developers, builders and government agencies. IMRES has five main lines of business: investment management, property services, research, brokerage, and auction and conventional sales. These five business lines generate revenue for us through fees and commissions.
The Company manages approximately 62 million square feet of properties for the Company and its investment partners (including KWE) in the United States, Europe, and Asia, which includes assets we have ownership interests in and third party owned assets. With 25 offices throughout the United States, the United Kingdom, Ireland, Jersey, Spain, Italy and Japan, we have the capabilities and resources to provide investment management and property services to real estate owners as well as the experience, as a real estate investor, to understand client concerns. The managers of IMRES have an extensive track record in their respective lines of business and in the real estate community as a whole.
Additionally, IMRES plays a critical role in supporting our investment strategy by providing local market intelligence and real-time data for evaluating investments, generating proprietary transaction flow and creating value through efficient implementation of asset management or repositioning strategies.    

23


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



The following tables summarize income activity by segment and corporate for the three months ended March 31, 2016 and 2015 and balance sheet data as of March 31, 2016 and December 31, 2015:
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Investments
 
 
 
 
Rental
 
$
119.9

 
$
90.4

Hotel
 
29.1

 
23.4

Sale of real estate
 
1.9

 
2.1

Loan purchases, loan originations and other
 
2.1

 
5.4

     Total revenue
 
153.0

 
121.3

Operating expenses
 
(75.2
)
 
(59.8
)
Depreciation and amortization
 
(48.3
)
 
(36.6
)
Income from unconsolidated investments
 
18.1

 
9.7

     Operating income
 
47.6

 
34.6

Gain on sale of real estate
 
38.4

 
5.6

Acquisition-related gains
 

 
4.2

Acquisition-related expenses
 
(2.0
)
 
(18.1
)
Interest expense - investments
 
(32.5
)
 
(19.4
)
Other
 
0.7

 
0.8

Income before provision for income taxes
 
52.2

 
7.7

Provision for income taxes
 
(1.0
)
 

Net income
 
51.2

 
7.7

Net (income) loss attributable to the noncontrolling interests
 
(27.4
)
 
1.4

Net income attributable to Kennedy-Wilson Holdings, Inc. common shareholders
 
$
23.8

 
$
9.1

 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Investment Management and Real Estate Services
 
 
 
 
Property services and research fees (includes $11.0 and $9.5 of related party fees)
 
$
19.1

 
$
16.4

     Total revenue
 
19.1

 
16.4

Operating expenses
 
(15.9
)
 
(14.4
)
Income from unconsolidated investments
 
1.2

 
1.5

Operating income
 
4.4

 
3.5

Net income attributable to the noncontrolling interests
 

 
1.4

Net income attributable to Kennedy-Wilson Holdings, Inc. common shareholders
 
$
4.4

 
$
4.9


24


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



 
 
Three Months Ended March 31,
(Dollars in millions)
 
2016
 
2015
Corporate
 
 
 
 
Operating expenses
 
$
(23.5
)
 
$
(10.6
)
     Operating loss
 
(23.5
)
 
(10.6
)
Interest expense-corporate
 
(12.1
)
 
(13.0
)
Loss before provision for income taxes
 
(35.6
)
 
(23.6
)
Provision for income taxes
 
0.5

 
8.1