KW 03.31.2015 10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
  
(Mark One)        
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
Commission file number 001-33824
 
  
Kennedy-Wilson Holdings, Inc.
(Exact name of Registrant as specified in its charter)
 
 
  
Delaware
 
26-0508760
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
9701 Wilshire Blvd., Suite 700
Beverly Hills, CA 90212
(Address of principal executive offices)
Registrant’s telephone number, including area code:
(310) 887-6400
 
   
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
(See definition of “large accelerated filer, accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):
Large Accelerated Filer
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 7, 2015 was 104,343,935.

Table of Contents

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


Table of Contents

FORWARD-LOOKING STATEMENTS
Statements made by us in this report and in other reports and statements released by us that are not historical facts constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are necessarily estimates reflecting the judgment of our senior management based on our current estimates, expectations, forecasts and projections and include comments that express our current opinions about trends and factors that may impact future operating results. Disclosures that use words such as “believe,” “anticipate,” “estimate,” “intend,” “could,” “plan,” “expect,” “project” or the negative of these, as well as similar expressions, are intended to identify forward-looking statements. These statements are not guarantees of future performance, rely on a number of assumptions concerning future events, many of which are outside of our control, and involve known and unknown risks and uncertainties that could cause our actual results, performance or achievement, or industry results to differ materially from any future results, performance or achievements, expressed or implied by such forward-looking statements. These risks and uncertainties may include the risks and uncertainties described elsewhere in this report and other filings with the Securities and Exchange Commission (the “SEC”), including the Item 1A. “Risk Factors” section of our annual report on Form 10-K for the year ended December 31, 2014. 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. The results of KWE are consolidated in our financial statements due to our control of KWE as of March 31, 2015. We own an approximately 16.0% equity interest in KWE 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" Acquisition-related gains consist of non-cash gains recognized by the Company upon a GAAP required fair value measurement due to a business combination. These gains are typically recognized when the Company converts a loan into consolidated real estate owned and the fair value of the underlying real estate 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 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 corporate merger and acquisition-related expenses, 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 the Company’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, in accordance with the standards set forth by EPRA, as net asset value adjusted to include properties and other investment interests at fair value and to exclude certain items not expected to be realized in a long-term investment property business model such as the fair value of financial derivatives and deferred taxes on property valuation surpluses.

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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.
"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 U.S. generally accepted accounting principles, or 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 the Company’s equity in: cash held by consolidated investments, consolidated real estate and acquired in-place leases, unconsolidated investments and consolidated loans gross of accumulated depreciation and amortization.
“Equity partners” refers to subsidiaries that we consolidate in our financial statements under U.S. GAAP (other than wholly-owned subsidiaries), including KWE, and third-party equity providers.
"Investment account" refers to the consolidated investment account presented after noncontrolling interest in invested assets gross of accumulated depreciation. 
"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.  
    
    
    
    
    
    




ii
Table of Contents

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

Kennedy-Wilson Holdings, Inc.
Consolidated Balance Sheets
(Unaudited)
 
 
March 31,
2015
 
December 31,
2014
(Dollars in millions, except share and per share amounts)
 
 
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
195.0

 
$
174.6

Cash held by consolidated investments
 
474.9

 
763.1

Accounts receivable (including $23.4 and $18.0 of related party)
 
57.6

 
55.6

Real estate and acquired in place lease values, net of accumulated depreciation and amortization
 
4,776.4

 
4,228.1

Loan purchases and originations
 
336.0

 
313.4

Unconsolidated investments
 
486.8

 
492.2

Other assets
 
353.9

 
305.1

Total assets
 
$
6,680.6

 
$
6,332.1

 
 
 
 
 
Liabilities and equity
 
 
 
 
Liabilities
 
 
 
 
Accounts payable, accrued expenses and other liabilities
 
242.3

 
264.9

Investment debt
 
2,672.7

 
2,195.9

Senior notes payable
 
702.4

 
702.4

Line of credit
 
—

 
125.0

Total liabilities
 
3,617.4

 
3,288.2

 
 
 
 
 
Equity
 
 
 
 
Cumulative preferred stock, $0.0001 par value per share: 1,000,000 shares authorized $1,000 per share liquidation preference
 
—

 
—

Common stock, 103,510,292 and 96,091,446 shares issued and outstanding as of March 31, 2015 and December 31, 2014
 
—

 
—

  Additional paid-in capital
 
1,182.5

 
991.3

  Accumulated deficit
 
(78.0
)
 
(62.0
)
  Accumulated other comprehensive loss
 
(48.5
)
 
(28.2
)
Total Kennedy-Wilson Holdings, Inc. shareholders' equity
 
1,056.0

 
901.1

Noncontrolling interests
 
2,007.2

 
2,142.8

Total equity
 
3,063.2

 
3,043.9

Total liabilities and equity
 
$
6,680.6

 
$
6,332.1

See accompanying notes to consolidated financial statements.

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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)
 
2015
 
2014
Revenue
 
 
 
 
Investment management, property services and research fees (includes $9.5 and $7.3 of related party fees)
 
$
16.4

 
$
13.2

Rental
 
90.4

 
16.0

Hotel
 
23.4

 
9.3

Sale of real estate
 
2.1

 
11.3

Loan purchases, loan originations and other
 
5.4

 
1.7

Total revenue
 
137.7

 
51.5

Operating expenses
 
 
 
 
Commission and marketing
 
1.4

 
1.0

Rental operating
 
24.6

 
5.6

Hotel operating
 
21.6

 
8.5

Cost of real estate sold
 
1.5

 
9.7

Compensation and related
 
26.2

 
20.5

General and administrative
 
9.5

 
8.2

Depreciation and amortization
 
36.6

 
7.3

Total operating expenses
 
121.4

 
60.8

Income from unconsolidated investments
 
11.2

 
2.8

Operating income (loss)
 
27.5

 
(6.5
)
Non-operating income (expense)
 
 
 
 
Gain on sale of real estate
 
5.6

 
—

Acquisition-related gains
 
4.2

 
84.2

Acquisition-related expenses
 
(18.1
)
 
(4.0
)
Interest expense-investment
 
(19.4
)
 
(5.3
)
Interest expense-corporate
 
(13.0
)
 
(10.5
)
Other income
 
0.8

 
0.8

(Loss) income before (provision for) benefit from income taxes
 
(12.4
)
 
58.7

Benefit from (provision for) income taxes
 
8.1

 
(8.8
)
Net (loss) income
 
(4.3
)
 
49.9

Net loss (income) attributable to the noncontrolling interests
 
2.8

 
(37.4
)
Preferred dividends and accretion of preferred stock issuance costs
 
(2.0
)
 
(2.0
)
Net (loss) income attributable to Kennedy-Wilson Holdings, Inc. common shareholders
 
$
(3.5
)
 
$
10.5

Basic (loss) earnings per share
 
 
 
 
(Loss) income per basic
 
$
(0.05
)
 
$
0.12

Weighted average shares outstanding for basic
 
91,547,838

 
88,142,576

Diluted (loss) earnings per share
 
 
 
 
(Loss) income per diluted
 
$
(0.05
)
 
$
0.12

Weighted average shares outstanding for diluted
 
91,547,838

 
89,422,885

Dividends declared per common share
 
$
0.12

 
$
0.09


See accompanying notes to consolidated financial statements.

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Table of Contents

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

 
 
Three Months Ended March 31,
(Dollars in millions)
 
2015
 
2014
 
 
 
 
 
Net (loss) income
 
$
(4.3
)
 
$
49.9

Other comprehensive (loss) income, net of tax:
 
 
 
 
Unrealized foreign currency translation loss(1) 
 
(104.9
)
 
(1.2
)
Amounts reclassified out of AOCI during the period
 
(0.3
)
 
1.2

Unrealized currency derivative contracts gain (loss)(1)
 
18.4

 
(1.5
)
Total other comprehensive (loss) gain for the period
 
(86.8
)
 
(1.5
)
 
 
 
 
 
Comprehensive (loss) income
 
(91.1
)
 
48.4

Comprehensive loss (income) attributable to noncontrolling interests(1)
 
69.3

 
(37.4
)
Comprehensive (loss) income attributable to Kennedy-Wilson Holdings, Inc. common shareholders
 
$
(21.8
)
 
$
11.0

(1) Comprehensive loss (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, 2014
132,550

 
$
—

 
96,091,446

 
$
—

 
$
991.3

 
$
(62.0
)
 
$
(28.2
)
 
$
2,142.8

 
$
3,043.9

Issuance of 7,500,000 shares, net
—

 
—

 
7,500,000

 
—

 
187.1

 
—

 
—

 
—

 
187.1

Shares forfeited
—

 
—

 
(10,000
)
 
—

 
—

 
—

 
—

 
—

 
—

RSG Grants
—

 
—

 
41,400

 
—

 
—

 
—

 
—

 
—

 
—

Shares retired due to RSG Vesting
—

 
—

 
(112,554
)
 
—

 
(3.2
)
 
—

 
—

 
—

 
(3.2
)
Stock based compensation
—

 
—

 
—

 
—

 
7.3

 
—

 
—

 
—

 
7.3

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Unrealized foreign currency translation loss, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
(31.8
)
 
(73.4
)
 
(105.2
)
Unrealized foreign currency derivative contract gain, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
11.5

 
6.9

 
18.4

Preferred stock dividends
—

 
—

 
—

 
—

 
—

 
(2.0
)
 
—

 
—

 
(2.0
)
Common stock dividends
—

 
—

 
—

 
—

 
—

 
(12.5
)
 
—

 
—

 
(12.5
)
Net loss
—

 
—

 
—

 
—

 
—

 
(1.5
)
 
—

 
(2.8
)
 
(4.3
)
Acquisition of Kennedy Wilson Europe (KWE)
shares from noncontrolling interest holders
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(22.5
)
 
(22.5
)
Contributions from noncontrolling interests, excluding KWE
—

 
—

 
—

 
—

 
—

 
—

 
—

 
4.1

 
4.1

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(47.9
)
 
(47.9
)
Balance at March 31, 2015
132,550

 
$
—

 
103,510,292

 
$
—

 
$
1,182.5

 
$
(78.0
)
 
$
(48.5
)
 
$
2,007.2

 
$
3,063.2

See accompanying notes to consolidated financial statements.


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Table of Contents

Kennedy-Wilson Holdings, Inc.
Consolidated Statements of Cash Flows (Unaudited)
 
 
Three Months Ended March 31
(Dollars in millions)
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net (loss) income
 
$
(4.3
)
 
$
49.9

Adjustments to reconcile net (loss) income to net cash provided (used in) by operating activities:
 
 
 
 
Net gain from sale of real estate
 
(6.2
)
 
(1.6
)
Acquisition-related gain
 
(4.2
)
 
(84.2
)
Depreciation and amortization
 
36.6

 
7.3

(Benefit from) provision for deferred income taxes
 
(10.2
)
 
8.8

Amortization of deferred loan costs
 
0.7

 
0.6

Amortization of discount and accretion of premium on issuance of the senior notes and investment debt
 
(4.9
)
 
(0.3
)
Unrealized net losses on derivatives
 
0.4

 
—

Income from unconsolidated investments and loan purchases and originations
 
(12.8
)
 
(2.8
)
Operating distributions from unconsolidated investments
 
17.0

 
10.4

Operating distributions from loan purchases and originations
 
2.0

 
—

Stock-based compensation
 
7.3

 
1.7

Change in assets and liabilities:
 
 
 
 
Accounts receivable
 
(1.9
)
 
(7.5
)
Other assets
 
0.7

 
(0.6
)
Accrued expenses and other liabilities
 
(36.8
)
 
(18.6
)
Net cash used in operating activities
 
(16.6
)
 
(36.9
)
Cash flows from investing activities:
 
 
 
 
Additions to loans
 
(87.5
)
 
(158.6
)
Collections of loans
 
—

 
0.2

Net proceeds from sale of real estate
 
34.4

 
10.0

Purchases of and additions to real estate
 
(757.1
)
 
(367.7
)
Additions to nonrefundable escrow deposits
 
(7.5
)
 
—

Proceeds from settlement of foreign derivative contracts
 
30.1

 
—

Purchases of foreign derivative contracts
 
(3.6
)
 
—

Investment in marketable securities
 
—

 
(4.5
)
Proceeds from sale of marketable securities
 
6.2

 
—

Distributions from unconsolidated investments
 
8.0

 
11.0

Contributions to unconsolidated investments
 
(15.2
)
 
(67.1
)
Net cash used in investing activities
 
(792.2
)
 
(576.7
)
Cash flows from financing activities:
 
 
 
 
Borrowings under senior notes payable
 
—

 
297.2

Borrowings under line of credit
 
25.0

 
90.0

Repayment of line of credit
 
(150.0
)
 
(90.0
)
Borrowings under investment debt
 
843.6

 
195.8

Repayment of investment debt
 
(246.6
)
 
(5.5
)
Debt issue costs
 
(9.2
)
 
(9.6
)
Issuance of common stock
 
187.1

 
190.8

Repurchase and retirement of common stock
 
(3.1
)
 
(2.5
)
Proceeds from the issuance of KWE shares, net
 
—

 
1,350.7

Dividends paid
 
(10.7
)
 
(7.8
)
Acquisition of KWE shares from noncontrolling interest holders
 
(22.5
)
 
—

Contributions from noncontrolling interests, excluding KWE
 
4.1

 
2.9

Distributions to noncontrolling interests
 
(47.9
)
 
(2.8
)
Net cash provided by financing activities
 
569.8

 
2,009.2

Effect of currency exchange rate changes on cash and cash equivalents
 
(28.8
)
 
(0.7
)
Net change in cash and cash equivalents(1)
 
(267.8
)
 
1,394.9

Cash and cash equivalents, beginning of period
 
937.7

 
178.2

Cash and cash equivalents, end of period
 
$
669.9

 
$
1,573.1

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

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

Supplemental cash flow information:
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2015
 
2014
Cash paid for:
 
 
 
 
Interest
 
$
37.3

 
$
23.5

Income taxes
 
0.4

 
—

 

Supplemental disclosure of non-cash investing and financing activities:
 
 
March 31,
(Dollars in millions)
 
2015
 
2014
 
 
 
 
 
Accrued capital expenditures
 
$
4.2

 
$
—

Dividends declared but not paid on common stock
 
12.5

 
8.2


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, as described in note 4.
On February 28, 2014, the Kennedy Wilson contributed its 50% interest in an unconsolidated investment which held 14 commercial, retail, and industrial properties portfolio to KWE as part of Kennedy Wilson's subscription in KWE's initial public offering as described in note 1.
On March 31, 2014, Kennedy Wilson amended the existing operating agreements governing certain of its investments with certain of its equity partners thereby allowing Kennedy Wilson to gain control of these operating properties. As a result of obtaining control, the assets and liabilities of these properties were consolidated in KW Group's financial statements at fair value in accordance with FASB ASC Topic 805 Business Combinations. As the fair value of our interests in these properties were in excess of their carrying value of their ownership interest, we recorded acquisition-related gains of $80.5 million for the quarter ended March 31, 2014, of which $40.3 million was allocated to noncontrolling equity partners.

    
See accompanying notes to consolidated financial statements.

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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, 2015 and 2014 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, 2015. 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, 2014. 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 “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 KWE's IPO. KWE completed a follow-on offering during the fourth quarter of 2014 and the Company participated in the offering based on its ownership percentage acquiring an additional 4.6 million shares for $75.0 million. Outside of the IPO and follow-on offering, the Company has acquired an additional 4.45 million ordinary shares for $73.5 million and owned approximately 16.0% of KWE’s total issued share capital as of March 31, 2015. 
In addition to its investment in KWE, prior to KWE's formation the Company (along with its equity partners ) directly invested in 15 properties, four loan pools and a servicing platform in Europe which have total assets of $890.6 million included in the Company's consolidated balance sheet as of March 31, 2015. Kennedy Wilson's total equity in these investments was $282.7 million and the Company's weighted average ownership in these investments was 59.9% as of March 31, 2015.
 In addition, throughout these unaudited interim consolidated financial statements, we refer to our “equity partners,” which we define as the subsidiaries that we consolidate in our financial statements under U.S. GAAP (other than wholly-owned subsidiaries), 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 FASB ASC Subtopic 810-10 and to assess whether it is the primary beneficiary of such entities. If the determination is made that Kennedy Wilson is the primary beneficiary, then that entity is included in the consolidated financial statements in accordance with the ASC Subtopic 810-10.
The 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 during the first quarter of 2015.
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

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

for a fund or loan pool, pursuant to the fund agreement or participation agreements, as if the fair value of the underlying investments were realized as of such date, irrespective of whether such amounts have been realized. As the fair value of underlying investments varies between reporting periods, it is necessary to make adjustments to amounts recorded as performance fees to reflect either (a) positive performance resulting in an increase in the performance fee allocated to the general partner or asset manager or (b) negative performance that would cause the amount due to 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, 2015 that may be reversed in future periods if there is negative fund or loan pool performance totaled $18.9 million. Performance fees accrued as of March 31, 2015 and December 31, 2014 were $18.9 million and $15.8 million, respectively, and are included in accounts receivable 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 Subtopics 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 interests are reported within equity as a separate component of Kennedy Wilson's equity 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.
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.
As discussed throughout this report, we are required under US GAAP to consolidate certain non-wholly owned subsidiaries or investments that we control.  As such, our 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, we are 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. 
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.
As of March 31, 2015, approximately 44% of our investment account is invested through our foreign platforms in their local currencies. Investment level debt is generally incurred in local currencies and there we consider our equity investment as the appropriate exposure to evaluate for hedging purposes.
    

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

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 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—On April 10, 2014, the FASB issued ASU 2014-08, which amends the definition of discontinued operations and requires additional disclosures for disposal transactions that do not meet the revised discontinued operations criteria. ASU 2014-08 is required to be adopted for fiscal years beginning after December 15, 2014, with early adoption permitted. Our early adoption of this pronouncement on January 1, 2014 did not have a material impact on KW Group's consolidated financial statements.
In May 2014, the FASB issued an accounting standard update that will use 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, 2017. 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,” which 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. ASU 2015-02 is effective for KW Group beginning January 1, 2016. Early adoption is permitted. KW Group does not expect the adoption of this standard to have a significant impact on the consolidated financial statements.
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 and the Company does not expect its adoption to have a material impact on KW Group's consolidated financial statements.
The FASB did not issue any other ASCs during the first three months of 2015 that we expect to be applicable and have a material impact on our 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 loans was $336.0 million and $313.4 million at March 31, 2015 and December 31, 2014, respectively.
During the fourth quarter of 2014, KWE acquired the loans secured by an office building in Dublin, Ireland for $53.0 million. During the first quarter of 2015, KWE converted the loans into a 100% direct ownership interest in the office building. See note 4 for further discussion. Additionally, during the first quarter of 2015, KWE acquired eight loans secured by eight hotels located throughout the United Kingdom for $95.2 million.
KW Group recognized interest income on loans of $5.4 million and $1.7 million during the three months ended March 31, 2015 and 2014, respectively.
NOTE 4—REAL ESTATE AND IN-PLACE LEASE VALUE

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

The following table summarizes KW Group's investment in consolidated real estate properties at March 31, 2015 and December 31, 2014, respectively:
 
 
March 31,
 
December 31,
(Dollars in millions)
 
2015
 
2014
Land
 
$
1,269.6

 
$
1,046.9

Buildings
 
3,236.1

 
2,945.1

Building improvements
 
98.5

 
75.1

In-place lease value
 
323.0

 
282.6

 
 
4,927.2

 
4,349.7

Less accumulated depreciation and amortization
 
(150.8
)
 
(121.6
)
Real estate, net
 
$
4,776.4

 
$
4,228.1


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, 2015.
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, 2015, KW Group acquired the following properties:
(Dollars in millions)
 
 
Preliminary Purchase Price Allocation at Acquisition(1)
Date acquired
Type
Description
Location
Land
Building
Acquired in place lease values(5)
Investment debt
NCI(4)
KWH Shareholders' Equity
Various
Commercial(2)
Portfolio of 171 commercial, retail, and industrial properties
United Kingdom
$
265.5

$
407.8

$
73.6

$
512.0

$
197.3

$
37.6

2/12/2015
Commercial (2)(3)
75.5k sq. ft. office building in Dublin
Ireland
11.1

40.1

2.5

—

44.9

8.8

2/27/2015
Commercial(2)
94.5k sq. ft. retail center
Western U.S.
5.7

12.7

0.6

12.0

0.2

6.8

 
 
 
 
$
282.3

$
460.6

$
76.7

$
524.0

$
242.4

$
53.2

(1) Excludes acquisition expenses and net other assets. The purchase price allocations for properties acquired during the three months ended March 31, 2015 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) These portfolios of properties were directly acquired and are held by KWE. Kennedy Wilson owns approximately 16.0% of the total issued share capital of KWE as of March 31, 2015.
(3) KWE recognized an acquisition-related gain of $4.2 million on the transaction as the property was previously a mortgage note that KWE foreclosed on and converted to real estate. As the fair value of the assets was in excess of the basis in the previously held mortgage notes, KWE recognized an acquisition-related gain upon conversion.
(4) Noncontrolling interest amounts associated with acquisition.
(5) Includes above and below market leases in this table. Above and below market leases are part of other assets and accounts payable, accrued expenses and other liabilities, respectively.

Gains on real estate
KW Group sold five commercial properties and one condominium that were previously included within real estate. The condominium sale resulted in gross sales proceeds $2.1 million and cost of real estate sold of $1.5 million resulting in a net gain of $0.6 million. As the condominium is held as an asset and not treated as a business the gain and resulting cost of real estate is presented gross on the consolidated statement of operations. KWE sold five commercial properties during the quarter that resulted

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

in a gain of $5.6 million which is presented net as a component of non-operating income (expense) as the properties were treated as businesses at acquisition. A $4.2 million acquisition-related gain was also recognized on the conversion of a mortgage note held by KWE into real estate.

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, 2015 occurred as of January 1, 2014.
 
 
Three Months Ended March 31,
(Dollars in millions, except for per share data)
 
2015
 
2014
Pro forma revenues
 
$
142.5

 
$
68.0

Pro forma net income (loss) attributable to Kennedy-Wilson Holdings, Inc. common shareholders (1)
 
(3.2
)
 
11.4

Pro forma net income (loss) per share:
 
 
 
 
Basic
 
$
(0.04
)
 
$
0.13

Diluted
 
$
(0.04
)
 
$
0.13

(1) Excludes the effects of acquisition-related gains.
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, 2015 and December 31, 2014:
 
 
March 31
 
December 31,
(Dollars in millions)
 
2015
 
2014
Investments in joint ventures
 
$
433.6

 
$
435.8

Investments in loan pool participations
 
53.2

 
56.4

Total
 
$
486.8

 
$
492.2

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, 2015 and December 31, 2014, Kennedy Wilson's investment in joint ventures totaled $433.6 million and $435.8 million, respectively.     
The following table details our investments in joint ventures by investment type and geographic location as of March 31, 2015:
(Dollars in millions)
Multifamily
Commercial
Loan
Residential
Other
Total
Western U.S.
$
137.4

$
106.8

$
50.3

$
72.8

$
11.8

$
379.1

United Kingdom
—

26.6

—

—

—

26.6

Spain
—

—

—

—

27.9

27.9

Total
$
137.4

$
133.4

$
50.3

$
72.8

$
39.7

$
433.6


11
Table of Contents
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 December 31, 2014:
(Dollars in millions)
Multifamily
Commercial
Loan
Residential
Other
Total
Western U.S.
$
134.5

$
110.3

$
50.3

$
71.0

$
9.3

$
375.4

United Kingdom
—

31.5

—

—

—

31.5

Spain
—

—

—

—

28.9

28.9

Total
$
134.5

$
141.8

$
50.3

$
71.0

$
38.2

$
435.8

Contributions to Joint Ventures    
During the three months ended March 31, 2015, Kennedy Wilson contributed $1.0 million to new joint ventures as an initial investment. In addition, Kennedy Wilson contributed $14.2 million to existing joint ventures to fund our share of a development project, capital expenditures and for working capital needs.
Distributions from Joint Ventures and Investments in Loan Pools
During the three months ended March 31, 2015, Kennedy Wilson received $25.0 million in operating and investing distributions from its joint ventures and loan pools. Investing distributions resulted from the refinancing of property level debt and asset sales. Operating distributions resulted from operating cash flow generated by the joint venture investments.
The following table details cash distributions by investment type and geographic location for the three months ended March 31, 2015:
 
Multifamily
Commercial
Loan Pools
Residential and Other
Total
(Dollars in millions)
Operating
Investing
Operating
Investing
Operating
Investing
Operating
Investing
Operating
Investing
Western U.S.
$
5.5

$
2.0

$
6.1

2.0

$
—

$
2.2

2.7

$
0.2

$
14.3

$
6.4

United Kingdom
—

—

1.1

1.6

1.6

—

—

—

2.7

1.6

Total
$
5.5

$
2.0

$
7.2

$
3.6

$
1.6

$
2.2

$
2.7

$
0.2

$
17.0

$
8.0

Variable Interest Entities
We determine 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. Kennedy Wilson's determination considers specific factors cited under FASB ASC Topic 810-20 Control of Partnerships and Similar Entities which presumes that control is held by the general partner (and managing member equivalents in limited liability companies). Limited partners' substantive participation rights may overcome this presumption of control. We account for joint ventures where it is deemed that we do not have control through the equity method of accounting while entities we control are consolidated in KW Group's financial statements.
Capital Commitments
As of March 31, 2015, Kennedy Wilson has unfulfilled capital commitments totaling $30.5 million to five of its joint ventures. We may be called upon to contribute additional capital to joint ventures in satisfaction of such capital commitment obligations.
Guarantees
Kennedy Wilson has certain guarantees associated with loans secured by consolidated assets or assets held directly or in various joint ventures. As of March 31, 2015, the maximum potential amount of future payments (undiscounted) Kennedy Wilson could be required to make under the guarantees was approximately $54.5 million which is approximately 1% of investment level debt of Kennedy Wilson and its equity partners. The guarantees expire through 2021, 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 our 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, 2015 and December 31, 2014 was immaterial.
Investments in loan pool participation

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


As of March 31, 2015 and December 31, 2014, KW Group's investment in loan pool participations totaled $53.2 million and $56.4 million, respectively.

The following table represents the demographics of KW Group's investment in the loan pools including the initial unpaid principal balance ("UPB") and the UPB as of March 31, 2015.
(Dollars in millions)
 
KW Group Ownership
 
Unpaid Principal Balance
 
KW Group initial equity
 
Investment Balance at March 31, 2015
 
Expected Accretion Over Total Estimated Collection Period
 
 
Acquisition Date
 
Location
 
 
Initial(1)
 
March 31, 2015(1)
 
 
 
 
Accreted to Date
February 2010(2)
 
Western U.S.
 
15.0%
 
$
342.4

 
$
—

 
$
11.1

 
$
0.5

 
$
4.6

 
$
4.6

August 2012
 
Ireland
 
10.0%
 
391.8

 
42.9

 
7.0

 
7.9

 
1.9

 
1.7

December 2012
 
United Kingdom
 
10.0%
 
576.6

 
89.2

 
19.3

 
3.1

 
3.3

 
3.3

April 2013
 
United Kingdom
 
10.0%
 
172.8

 
94.9

 
13.0

 
6.2

 
5.3

 
2.6

August 2013
 
United Kingdom
 
20.0%
 
126.7

 
126.7

 
7.5

 
9.1

 
5.3

 
3.3

May 2014(3)
 
United Kingdom
 
33.3%
 
96.7

 
94.9

 
30.3

 
26.4

 
4.7

 
1.6

Total
 
 
 
 
 
$
1,707.0

 
$
448.6

 
$
88.2


$
53.2


$
25.1


$
17.1

                          
(1) Estimated foreign exchange rate is £0.67= $1 USD and €0.92 = $1 USD as of March 31, 2015.
(2) Equity invested represents guarantee claims against note holders in loan pool.
(3) This loan portfolio was directly acquired and held by KWE. Kennedy Wilson owns approximately 16.0% of the total issued share capital of KWE as of March 31, 2015.

The following table presents the income from unconsolidated investments for loan pools and foreign currency gain and (loss) recognized by KW Group during the three months ended March 31, 2015 and 2014 for the loan pools that were outstanding:
 
Three Months Ended March 31,
(Dollars in millions)
2015
 
2014
Income from unconsolidated investments - loan pools
$
3.1

 
$
2.1

Foreign currency translation (loss) gain(1)
(2.6
)
 
0.2

Total
$
0.5

 
$
2.3

(1) Excludes impact of currency derivative contracts. These amounts are recognized through the Statement of Comprehensive Income (Loss).
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, 2015:
 
(Dollars in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Marketable securities
$
0.4

 
$
—

 
$
—

 
$
0.4

Unconsolidated investments
—

 
—

 
89.6

 
89.6

Currency forward contracts
—

 
33.4

 
—

 
33.4

Currency option contracts
—

 
1.7

 
—

 
1.7

Total
$
0.4

 
$
35.1

 
$
89.6

 
$
125.1

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, 2014:
 

13
Table of Contents
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

(Dollars in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Marketable securities
$
6.5

 
$
—

 
$
—

 
$
6.5

Unconsolidated investments
—

 
—

 
85.9

 
85.9

Currency forward contracts
—

 
23.9

 
—

 
23.9

Currency option contracts
—

 
6.7

 
—

 
6.7

Total
$
6.5

 
$
30.6

 
$
85.9

 
$
123.0


Marketable Securities

Marketable securities include Kennedy Wilson's investment in publicly traded equity securities. 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 21.7 million shares in KWE as the investment is eliminated due to the consolidation of KWE's results in KW Group's financial statements. Based on the March 31, 2015 share price, Kennedy Wilson's investment in KWE had a market value of approximately $353.7 million (cost basis of $359.0 million). As of March 31, 2015, the Company had hedged 61.7% of its net investment in KWE by entering into currency forward contracts and options, which had a fair value of $12.8 million.

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 $23.1 million and $24.9 million at March 31, 2015 and December 31, 2014, respectively, which is included in unconsolidated investments in the accompanying consolidated balance sheets. As of March 31, 2015, Kennedy Wilson had unfunded capital commitments to the Funds in the amount of $27.5 million.
Kennedy Wilson elected to use the fair value option ("FV Option") for three 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 $66.5 million and $61.0 million at March 31, 2015 and December 31, 2014, respectively, which is included in unconsolidated investments in the accompanying balance sheets.
In estimating fair value of real estate held by the Funds and the three 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, 2015
 
December 31, 2014
Funds
$
23.1

 
$
24.9

FV Option
66.5

 
61.0

Total
$
89.6

 
$
85.9

The following table presents changes in Level 3 investments for the three months ended March 31, 2015 and 2014:
 
Three Months Ended March 31,
(Dollars in millions)
2015
 
2014
Beginning balance
$
85.9

 
$
81.1

Unrealized gains
5.2

 
—

Contributions
1.9

 
1.3

Distributions
(3.1
)
 
(0.4
)
Other
(0.3
)
 
—

Ending balance
$
89.6

 
$
82.0


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

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
5.25% - 8.25%
 
7.00% - 11.00%
Retail
6.70% - 7.00%
 
8.00% - 9.00%
Hotel
6.50%
 
7.50%
Multifamily
4.40% - 6.50%
 
4.90% - 9.50%
Loan
n/a
 
12.00% - 25.50%
Land and condominium units
n/a
 
8.00% - 9.00%
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 0.50% to 4.94%.
The accuracy of estimating fair value for investments utilizing unobservable inputs cannot be determined with precision and cannot be substantiated by comparison to quoted prices in active markets. As such, estimated fair value may not be realized in a current sale or immediate settlement of the asset or liability. Additionally, there are inherent uncertainties in any fair value measurement technique, and changes in the underlying assumptions used, including cap rates, discount rates, liquidity risks, and estimates of future cash flows, could significantly affect the fair value measurement amounts.
Currency 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-Sholes 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 counterparty risk adjustments associated with the currency derivative contracts utilize Level 3 inputs. However, as of March 31, 2015, KW Group assessed the significance of the impact of the counterparty valuation adjustments on the overall valuation of its currency derivative contracts and determined that the counterparty valuation adjustments are not significant to the overall valuation of its currency derivative contracts. As a result, we have determined that the valuation of our derivative instruments 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. The fair value of the currency derivative contracts held as of March 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.

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

The table below details the currency derivative contracts KW Group held as of March 31, 2015:
(Dollars in millions)
 
 
 
 
 
Change in Unrealized Gains (Losses)
Currency Hedged
Type
Underlying Currency
Notional Amount
Trade Date
Settlement/Expiration Date
Forward Rate/Strike Price
Fair Value
 
Three Months Ended March 31, 2015
EUR
Forward
USD
€20.0
6/25/2014
6/27/2019
1.4471
$
5.6

 
$
2.9

EUR
Option
USD
€130.0
3/10/2015 - 3/19/2015
3/7/2019 - 3/19/2020
1.0700 - 1.0960
0.4

 
0.4

GBP
Forward
USD
£92.5
2/25/2014 - 10/9/2014
10/9/2018 - 10/15/2019
1.5943 - 1.6371
11.3

 
7.4

GBP
Option
USD
£43.0
1/7/2015 - 3/31/2015
1/7/2016 - 3/29/2019
1.4245-1.4325
1.5

 
0.3

EUR (1)
Forward
GBP
€128.0
6/18/2014 - 11/10/2014
7/2/2018 - 11/12/2019
0.8388 - 0.8621
16.5

 
10.5

EUR(1)
Option
GBP
€125.0
3/13/2015
3/15/2018 - 3/14/2019
.707 - .715
(1.3
)
 
(1.3
)
YEN (2) (3)
Option
USD
¥23,965.0
11/14/2014 - 12/11/2014
6/11/2015 - 7/31/2015
120.00 - 130.00
1.1

 
(1.6
)
Total(4)
 
 
 
 
 
 
$
35.1

 
$
18.6

(1) Hedge is held by KWE on its wholly-owned subsidiaries.
(2) Hedge is held by KW Residential on its wholly-owned subsidiaries.
(3) For the three months ended March 31, 2015, $0.5 million loss recognized through results of operations due to portion of hedge not designated as a net investment hedge.
(4) 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 was $12.1 million of unrealized gains recognized through other comprehensive income on currency derivative contracts that were settled during the period. These gains will remain in accumulated other comprehensive income until the underlying investments they were hedging are substantially liquidated by KW Group. There was also $0.6 million of gains recognized through the income statement associated with currency derivative contracts that were unwound.

KW Group also enters into zero-cost collar option contracts to hedge a portion of its net investment in certain non-U.S. dollar denominated foreign operations. The strike prices above represent the put strike prices associated with those contracts. KW Group will participate in the currency appreciation up to the strike price of the call options, which it sold to offset the cost of the purchased put options.
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.
We account for our debt liabilities 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, 2015 and December 31, 2014 for the senior notes payable, investment debt and junior subordinated debentures were estimated to be approximately $3,386.7 million and $3,044.8 million, respectively, based on a comparison of the yield that would be required in a current transaction, taking into consideration the risk of the underlying collateral and our credit risk to the current yield of a similar security, compared to their carrying value of $3,375.1 million and

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

$3,023.3 million at March 31, 2015 and December 31, 2014, respectively. The inputs used to value our senior notes payable, borrowings under lines of credit, mortgage loans payable and junior subordinated debentures 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, 2015
 
December 31, 2014
Above-market leases, net of accumulated amortization of $9.1 and $6.7 million at March 31, 2015 and December 31, 2014, respectively
 
87.6

 
71.6

Deposits
 
8.9

 
49.9

Other, net of accumulated amortization of $2.1 and $1.8 million at March 31, 2015 and December 31, 2014, respectively
 
27.3

 
25.8

Loan fees, net of accumulated amortization of $6.2 and $5.0 million at March 31, 2015 and December 31, 2014, respectively
 
41.5

 
36.0

Hedge Assets
 
35.2

 
30.6

Goodwill
 
23.9

 
23.9

Office furniture and equipment net of accumulated depreciation of $5.8 million and $5.7 million at March 31, 2015 and December 31, 2014, respectively
 
20.8

 
22.0

Marketable securities (1)
 
0.4

 
6.5

Prepaid expenses
 
9.8

 
11.2

Deferred tax asset, net
 
98.5

 
27.6

Other Assets
 
$
353.9

 
$
305.1

(1) The amount above excludes Kennedy Wilson's 21.7 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, 2015, the fair value of Kennedy Wilson's investment in KWE is $353.7 million.

NOTE 8—INVESTMENT DEBT

Investment debt at March 31, 2015 and December 31, 2014 consists of the following:
(Dollars in millions)
 
 
 
Carrying Amount of Investment Debt as of (1)
Types of Property Pledged as Collateral
 
Region
 
March 31,
2015
 
December 31,
2014
Multifamily (1)
 
Western U.S.
 
$
592.9

 
$
565.5

Commercial
 
Western U.S.
 
142.8

 
131.0

Hotel
 
Western U.S
 
38.7

 
37.2

Multifamily (1)
 
Japan
 
236.6

 
242.9

Commercial
 
Japan
 
2.1

 
2.1

Commercial (1)(2)
 
Ireland
 
366.3

 
412.5

Multifamily (1)(3)
 
Ireland
 
162.3

 
133.6

Residential and Other(1)(5)
 
Ireland
 
36.3

 
29.0

Hotel
 
Ireland
 
64.9

 
72.9

Commercial (1)(4)
 
United Kingdom
 
1,029.8

 
569.2

Investment debt
 
 
 
$
2,672.7

 
$
2,195.9

                           
(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 premium as of March 31, 2015 and December 31, 2014 was $9.7 million and $15.4 million.
(2) Includes $287.1 million and $323.8 million of investment debt on properties that were acquired and held by KWE as of March 31, 2015 and December 31, 2014, respectively. Kennedy Wilson owns approximately 16.0% of the total issued share capital of KWE as of March 31, 2015.

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

(3) Includes $32.2 million and $40.3 million of investment debt on properties that were acquired and held by KWE as of March 31, 2015 and December 31, 2014, respectively. Kennedy Wilson owns approximately 16.0% of the total issued share capital of KWE as of March 31, 2015.
(4) Includes $946.2 million and $483.0 million of investment debt on properties that were acquired and held by KWE as of March 31, 2015 and December 31, 2014, respectively. Kennedy Wilson owns approximately 16.0% of the total issued share capital of KWE as of March 31, 2015.
(5) Includes $16.7 million and $14.6 million of investment debt on properties that were acquired and held by KWE as of March 31, 2015 and December 31, 2014, respectively. Kennedy Wilson owns approximately 16.0% of the total issued share capital of KWE as of March 31, 2015.

The investment debt had a weighted average interest rate of 2.89% and 3.03% per annum at March 31, 2015 and December 31, 2014, respectively. As of March 31, 2015, 58% of KW Group's property level debt is fixed rate, 25% is floating rate with interest caps and 17% is floating rate without interest caps. As of December 31, 2014, 43% of our property level debt was fixed rate, 38% was floating rate with interest caps and 19% was floating rate without interest caps.

During the three months ended March 31, 2015, four acquisitions were partially financed with mortgages, one existing investment was partially financed with a mortgage, and seven existing investments with existing mortgages were refinanced. See note 4 for more detail on the acquisitions and the investment debt associated with them.
The aggregate maturities of investment debt subsequent to March 31, 2015 are as follows:
(Dollars in millions)
 
Aggregate Maturities
2015
 
$
17.4

2016
 
61.4

2017
 
95.4

2018
 
220.5

2019
 
953.3

Thereafter
 
1,315.0

 
 
2,663.0

Debt premium
 
9.7

 
 
$
2,672.7

NOTE 9—SENIOR NOTES

 
 
 
March 31, 2015
 
December 31, 2014
(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

(2.6
)
647.4

 
650.0

(2.6
)
647.4

Senior Notes
 
 
$
705.0

$
(2.6
)
$
702.4

 
$
705.0

$
(2.6
)
$
702.4

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, 2015, the balance sheet leverage ratio was 0.67 to 1.00. See Note 15 for the guarantor and non-guarantor financial statements.
NOTE 10—BORROWINGS UNDER LINES OF CREDIT
KWH Facility

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


Kennedy-Wilson, Inc. has an unsecured revolving credit facility ("KWH Facility") with U.S. Bank and East-West Bank and Bank of Ireland that bears interest at a rate equal to LIBOR plus 2.75% and has a maturity date of October 1, 2016. In July 2014 Kennedy-Wilson, Inc. increased its unsecured corporate line of credit facility from $140.0 million to $300.0 million. The increase was driven by the admission of Bank of America, N.A., Deutsche Bank AG New York Branch and J.P. Morgan Chase Bank, N.A. to the existing lender syndicate and an increased commitment from The Governor and Company of the Bank of Ireland.
    
The revolving loan agreement that governs the unsecured credit facility was updated due to the increase in the facility. The updated facility requires Kennedy-Wilson, Inc. to maintain (i) a minimum rent, adjusted fixed charge coverage ratio (as defined in the revolving loan agreement) of not less than 1.50 to 1.00, measured on a four quarter rolling average basis and (ii) maximum balance sheet leverage (as defined in the revolving loan agreement) of not greater than 1.50 to 1.00, measured at the end of each calendar quarter; (iii) an effective tangible net worth (as defined in the revolving loan agreement) equal to or greater than $500.0 million plus 50% of any equity offerings after March 31, 2014, measured at the end of each calendar quarter; and (iv) unrestricted cash, cash equivalents and publicly traded marketable securities in the aggregate amount of at least $40.0 million.

As of March 31, 2015, Kennedy-Wilson, Inc.'s adjusted fixed charge coverage ratio was 2.65 to 1.00, its balance sheet leverage ratio was 0.71 to 1.00, and its effective tangible net worth and its unrestricted cash, cash equivalents and publicly traded marketable securities were $990.6 million and $564.0 million, respectively, and Kennedy-Wilson, Inc. was in compliance with these covenants. The revolving loan agreement also provides that any subsidiary guarantors under our 2042 Notes must provide guarantees of the loans drawn on our unsecured revolving credit facility.  See Note 9 for a discussion of our senior notes.
    
During the three months ended March 31, 2015, the Company drew $25.0 million and repaid $150.0 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, 2015 was $150.0 million. As of March 31, 2015, the unsecured credit facility was undrawn and $300.0 million was still available. As of December 31, 2014, there was $125.0 million outstanding under the unsecured facility, and $175.0 million was still available.

KWE Facility

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 $334 million (£225 million) with a syndicate of banks. The facility was undrawn as of March 31, 2015 and expires in August of 2017. The KWE Facility requires KWE to maintain (i) a maximum consolidated leverage ratio (as defined in the revolving loan agreement) not to exceed 60%; (ii) minimum net asset value not to fall below IFRS NAV (as defined in the KWE Facility agreement) of £744.4 million plus 75% of equity proceeds received by subsidiaries; (iii) a minimum fixed charge coverage ratio where consolidated EBITDA to consolidated fixed charges not to be less than 1.5 to 1.0 for the last four quarters; (iv) minimum unsecured interest where property level net operating income ("NOI") and loan asset NOI to interest expense on unsecured debtors not to be less than 1.9 to 1.0 for the last four quarters; and (v) a maximum secured recourse indebtedness for consolidated secured recourse debt to not exceed 2.5% of total asset value at any time.

NOTE 11—EQUITY
Common Stock
In March 2015, Kennedy Wilson completed an offering of 7.5 million shares of its common stock, which raised $187.2 million of net proceeds.

19
Table of Contents
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

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, 2015
 
Three Months Ended March 31, 2014
(Dollars in millions)
 
Declared
 
Paid
 
Declared
 
Paid
Preferred Stock
 
 
 
 
 
 
 
 
Series A (1)
 
$
1.5

 
$
1.5

 
$
1.5

 
$
1.5

Series B (2)
 
0.5

 
0.5

 
0.5

 
0.5

Total Preferred Stock
 
2.0

 
2.0

 
2.0

 
2.0

Common Stock (3)
 
12.5

 
8.7

 
8.2

 
5.8

Total (4)
 
$
14.5

 
$
10.7

 
$
10.2

 
$
7.8

                           
(1) 6.00% Series A, 100,000 shares issued and outstanding as of March 31, 2015 and 2014, mandatorily convertible on May 19, 2015, or earlier at the option of the holders thereof. The conversion price for the Series A mandatory convertible preferred stock was $11.74 and $11.91 per share as of March 31, 2015 and March 31, 2014, respectively, and is subject to further adjustment pursuant to customary anti-dilution provisions.
(2) 6.45% Series B, 32,550 shares issued and outstanding as of March 31, 2015 and 2014, mandatorily convertible on November 3, 2018, or earlier at the option of the holders thereof, or, in certain circumstances, at our election on or after May 3, 2017. The conversion price for the Series B mandatory convertible preferred stock was $10.13 and $10.27 per share as of March 31, 2015 and March 31, 2014, respectively, and is subject to further adjustment pursuant to customary anti-dilution provisions.
(3) $0.0001 par value per share, 200,000,000 and 125,000,000 shares authorized as of March 31, 2015 and 2014 respectively.
(4) Common stock dividends were declared at the end of each quarter and paid in the following quarter. The amount declared and not paid is accrued on the consolidated balance sheet.
Share-based Compensation
During the three months ended March 31, 2015 and 2014, KW Group recognized $7.3 million and $1.7 million of compensation expense related to the vesting of restricted stock grants. The increase for the three months ended March 31, 2015 is due to $5.9 million of expense recognized during the first quarter of 2015 in relation to the 3.3 million shares of restricted stock grants issued in July of 2014 under Kennedy Wilson's Amended and Restated 2014 Equity Participation Plan.
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, 2014
 
$
(42.4
)
 
$
14.4

 
$
(0.2
)
 
$
(28.2
)
Unrealized (loss) gains, arising during the period
 
(175.2
)
 
30.7

 
0.1

 
(144.4
)
Amounts reclassified out of AOCI during the period
 
(0.3
)
 
—

 
(0.1
)
 
(0.4
)
Taxes on unrealized gains (losses), arising during the period
 
70.3

 
(12.3
)
 
—

 
58.0

Noncontrolling interest
 
73.4

 
(6.9
)
 
—

 
66.5

Balance at March 31, 2015
 
$
(74.2
)
 
$
25.9

 
$
(0.2
)
 
$
(48.5
)
The functional 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 losses on foreign currency translation is a result of the strengthening of the U.S. dollar against the euro, the British pound and the Japanese yen during the three months ended March 31, 2015.

20
Table of Contents
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

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. dollars) and the functional currency (euros, 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, we are required under US GAAP to consolidate certain non-wholly owned subsidiaries or investments that we control.  As such, our 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, we are 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, 2015 and December 31, 2014 KW Group had noncontrolling interest of $2.0 billion and $2.1 billion, respectively. The decrease in noncontrolling interest was due to $66.5 million of foreign currency losses, net of hedges allocated to noncontrolling interest holders, and $47.9 million of distributions made to noncontrolling interest holders, offset by $4.1 million of contributions made to noncontrolling interest holders. Additionally, the Company increased its ownership in KWE through the acquisition of $22.5 million worth of KWE shares from noncontrolling interest holders, thus reducing the noncontrolling interest.
Kennedy Wilson currently owns approximately 16.0% of KWE’s total issued share capital as of March 31, 2015.  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. 


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. Because KW Group incurred losses for the three months ended March 31, 2015, all potentially dilutive instruments are anti-dilutive and have been excluded from our computation of weighted average dilutive shares outstanding for that period. 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, 2015 and 2014:
 
Three Months Ended March 31,
(Dollars in millions, except share and per share amounts)
2015
 
2014
Net (loss) income attributable to Kennedy-Wilson Holdings, Inc. common shareholders
$
(3.5
)
 
$
10.5

Net income and dividends allocated to participating securities
(0.6
)
 
(0.2
)
Net (loss) income attributable to Kennedy-Wilson Holdings, Inc. common shareholders, net of allocation to participating securities
(4.1
)
 
10.3

Dividends declared on common shares
(11.8
)
 
(8.0
)
Undistributed (losses) earnings attributable to Kennedy-Wilson Holdings, Inc. common shareholders, net of allocation to participating securities
$
(15.9
)
 
$
2.3

 
 
 
 
Distributed earnings per share
$
0.12

 
$
0.09

Undistributed (losses) earnings per share
(0.17
)
 
0.03

(Loss) income per basic
(0.05
)
 
0.12

 
 
 
 
(Loss) income per diluted
$
(0.05
)
 
$
0.12

 
 
 
 
Weighted average shares outstanding for basic
91,547,838

 
88,142,576

Weighted average shares outstanding for diluted(1)
91,547,838

 
89,422,885

Dividends declared per common share
$
0.12

 
$
0.09

                           
(1) For the three months ended March 31, 2015, and 2014, a total of 12,212,481 and 11,100,074, respectively, 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's business is defined by two core segments: KW Investments and KW Services. KW Investments invests in multifamily, commercial, residential and hotel properties as well as loans secured by real estate. KW Services provides a full array of real estate-related services to investors and lenders, with a strong focus on financial institution-based clients and publicly traded companies. Kennedy Wilson’s segment disclosure with respect to the determination of segment profit or loss and segment assets is based on these services and investments.
There have been no changes in the basis of segmentation or in the basis of measurement of segment profit or loss since the December 31, 2014 financial statements.
KW INVESTMENTS—Kennedy Wilson invests its capital in real estate assets and loans secured by real estate either on its own or with equity partners through joint ventures, separate accounts, and commingled funds. For investments with equity partners we are typically the general partner or investment manager in these investments with a promoted interest in the profits of our investments beyond our ownership percentage. Kennedy Wilson has an average ownership interest across all investments of approximately 35%. Our equity partners include publicly traded companies, financial institutions, foundations, endowments, high net worth individuals and other institutional investors.
KW SERVICES—KW Services offers a comprehensive line of real estate services for the full lifecycle of real estate ownership to clients that include publicly traded companies, financial institutions, institutional investors, insurance companies, developers, builders and government agencies. KW Services has four main lines of business: investment management, property services, research and auction and conventional sales. These four business lines generate revenue for us through fees and commissions. Related party fee revenue primarily consists of fees earned on investments in which entities in the KW Group also have an ownership interest.
We manage over 68 million square feet of properties for institutional clients and individual investors in the United States, Europe, and Japan, which includes assets we have ownership in and third party assets. With 25 offices throughout the United States, the United Kingdom, Ireland, Spain, Jersey and Japan, we have the capabilities and resources to provide property services to real estate owners as well as the experience, as a real estate investor, to understand client concerns. The managers of KW

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

Services have an extensive track record in their respective lines of business and the real estate community as a whole. Their knowledge and relationships is an excellent driver of business through the services business as well as on the investment front.
Additionally, KW Services plays a critical role in supporting the company's 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.
The following tables summarize income activity by segment and corporate for the three months ended March 31, 2015 and 2014 and balance sheet data as of March 31, 2015 and December 31, 2014:
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2015
 
2014
Investments
 
 
 
 
Rental
 
$
90.4

 
$
16.0

Hotel
 
23.4

 
9.3

Sale of real estate
 
2.1

 
11.3

Loan purchases, loan originations and other
 
5.4

 
1.7

     Total revenue
 
121.3

 
38.3

Depreciation and amortization
 
(36.6
)
 
(7.3
)
Operating expenses
 
(59.8
)
 
(36.1
)
Income from unconsolidated investments
 
9.7

 
1.8

     Operating income (loss)
 
34.6

 
(3.3
)
Gain on sale of real estate
 
5.6

 
—

Acquisition-related gains
 
4.2

 
84.2

Acquisition-related expenses
 
(18.1
)
 
(4.0
)
Interest expense - investment
 
(19.4
)
 
(5.3
)
Other
 
0.8

 
0.8

Net income
 
7.7

 
72.4

Net (income) loss attributable to the noncontrolling interests
 
1.4

 
(37.4
)
Net income attributable to Kennedy-Wilson Holdings, Inc. common shareholders
 
$
9.1

 
$
35.0

 
 
Three Months Ended March 31,
(Dollars in millions)
 
2015
 
2014
Services
 
 
 
 
Investment management, property services and research fees (includes $9.5 and $7.3 of related party fees, respectively)
 
$
16.4

 
$
13.2

     Total revenue
 
16.4

 
13.2

Operating expenses
 
(14.4
)
 
(11.2
)
Income from unconsolidated investments
 
1.5

 
1.0

Operating income
 
3.5

 
3.0

Net loss attributable to the noncontrolling interests
 
1.4

 
—

Net income attributable to Kennedy-Wilson Holdings, Inc. common shareholders
 
$
4.9

 
$
3.0


22
Table of Contents
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

 
 
Three Months Ended March 31,
(Dollars in millions)
 
2015
 
2014
Corporate
 
 
 
 
Operating expenses
 
$
(10.6
)
 
$
(6.2
)
     Operating loss
 
(10.6
)
 
(6.2
)
Interest expense-corporate
 
(13.0
)
 
(10.5
)
Loss before (provision for) benefit from income taxes
 
(23.6
)
 
(16.7
)
(Provision for) benefit from income taxes
 
8.1

 
(8.8
)
Net loss
 
(15.5
)
 
(25.5
)
Preferred dividends and accretion of preferred stock issuance costs
 
(2.0
)
 
(2.0
)
Net loss attributable to Kennedy-Wilson Holdings, Inc. common shareholders
 
$
(17.5
)
 
$
(27.5
)
 
 
Three Months Ended March 31,
(Dollars in millions)
 
2015
 
2014
Consolidated
 
 
 
 
Investment management, property services and research fees (includes $9.5 and $7.3 of related party fees, respectively)
 
$
16.4

 
$
13.2

Rental
 
90.4

 
16.0

Hotel
 
23.4