Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2019
Or
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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)
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| | |
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company or an emerging growth company.
(See definition of “large accelerated filer," "accelerated filer," "smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act). (Check one):
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| | | | |
Large Accelerated Filer | x | | Accelerated Filer | o |
| | | |
Non-Accelerated Filer | o | | Smaller Reporting Company | o |
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Emerging Growth 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
Securities registered pursuant to Section 12(b) of the Act:
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| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common stock, $.0001 par value | KW | NYSE |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
The number of shares of common stock outstanding as of April 29, 2019 was 142,534,436.
Index
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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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.
Forward-looking 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, 2018. 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
In addition to the results reported in accordance with U.S. generally accepted accounting principles ("GAAP") included within this report, Kennedy Wilson has provided certain information, which includes non-GAAP financial measures (including Adjusted EBITDA, Adjusted Net Income, Net Operating Income, and Adjusted Fees, as defined below). Such information is reconciled to its closest GAAP measure in accordance with the rules of the SEC, and such reconciliations are included within this report. These measures may contain cash and non-cash acquisition-related gains and expenses and gains and losses from the sale of real-estate related investments. Consolidated non-GAAP measures discussed throughout this report contain income or losses attributable to non-controlling interests. Management believes that these non-GAAP financial measures are useful to both management and Kennedy Wilson's shareholders in their analysis of the business and operating performance of the Company. Management also uses this information for operational planning and decision-making purposes. Non-GAAP financial measures are not and should not be considered a substitute for any GAAP measures. Additionally, non-GAAP financial measures as presented by Kennedy Wilson may not be comparable to similarly titled measures reported by other companies.
“KWH,” "KW," “Kennedy Wilson,” the "Company," "we," "our," or "us" refers to Kennedy-Wilson Holdings, Inc. and its wholly-owned subsidiaries. The consolidated financial statements of the Company include the results of the Company's consolidated subsidiaries.
“KWE” refers to Kennedy Wilson Europe Real Estate Limited (formerly known as Kennedy Wilson Europe Real Estate plc), which was a London Stock Exchange-listed company that we externally managed through a wholly-owned subsidiary. On October 20, 2017 we acquired KWE, which is now a wholly-owned subsidiary.
“Adjusted 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, early extinguishment of corporate debt, provision for (benefit from) income taxes, share-based compensation expense for the Company and EBITDA attributable to noncontrolling interests. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP measures” for a reconciliation of Adjusted EBITDA to net income as reported under GAAP. Our management uses Adjusted EBITDA to analyze our business because it adjusts net income 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, Adjusted EBITDA is not a recognized measurement under GAAP and when analyzing our operating performance, readers should use 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 Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, Adjusted EBITDA is 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 or consider certain cash requirements such as tax and debt service payments. The amount shown for Adjusted EBITDA also differs from the amount 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 gross investment management, property services and research fees adjusted to include Kennedy Wilson's share of fees eliminated in consolidation, Kennedy Wilson’s share of fees in unconsolidated service businesses and performance fees included in unconsolidated investments. Effective January 1, 2018, we adopted new GAAP guidance on revenue recognition and implemented a change in accounting principle related to performance allocations, which results in us now accounting for performance allocations (commonly referred to as "performance fees") under the GAAP guidance for equity method investments and presenting performance allocations as a component of income from unconsolidated investments. Our management uses Adjusted fees to analyze our investment management and real estate services business because the measure removes required eliminations under GAAP for properties in which the Company provides services but also has an ownership interest. These eliminations understate the economic value of the investment management, property services and research fees and makes the Company comparable to other real estate companies that provide investment management and real estate services but do not have an ownership interest in the properties they manage. Our management believes that adjusting GAAP fees to reflect these amounts eliminated in consolidation presents a more holistic measure of the scope of our investment management and real estate services business.
“Adjusted Net Income” represents net income before depreciation and amortization, our share of depreciation and amortization included in income from unconsolidated investments, share-based compensation, the tax impact of the recently enacted tax reform and net income attributable to noncontrolling interests, before depreciation and amortization. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP measures” for a reconciliation of Adjusted Income to net income as reported under GAAP.
“Cap rate” represents the net operating income of an investment for the year preceding its acquisition or disposition, as applicable, divided by the purchase or sale price, as applicable. Cap rates set forth in this presentation only includes data from income-producing properties. We calculate cap rates based on information that is supplied to us during the acquisition diligence process. This information is not audited or reviewed by independent accountants and may be presented in a manner that is different from similar information included in our financial statements prepared in accordance with GAAP. In addition, 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.
"Equity partners" refers to non-wholly-owned subsidiaries that we consolidate in our financial statements under U.S. GAAP and third-party equity providers.
"Fee Bearing Capital" represents total third-party committed or invested capital that we manage in our joint-ventures and commingled funds that entitle us to earn fees, including without limitation, asset management fees, construction management fees, acquisition and disposition fees and/or promoted interest, if applicable.
"Gross Asset Value” refers to the gross carrying value of assets determined in accordance with GAAP, before debt, depreciation and amortization, and net of noncontrolling interests.
"Investment Management and Real Estate Services Assets under Management" ("IMRES 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 IMRES 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 IMRES 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 IMRES AUM. The estimated value of development properties is included at estimated completion cost.
"Net operating income" or " NOI” is a non-GAAP measure representing the income produced by a property calculated by deducting certain property expenses from property revenues. Our management uses net operating income to assess and compare the performance of our properties and to estimate their fair value. Net operating income does not include the effects of depreciation or amortization or gains or losses from the sale of properties because the effects of those items do not necessarily represent the actual change in the value of our properties resulting from our value-add initiatives or changing market conditions. Our management believes that net operating income reflects the core revenues and costs of operating our properties and is better suited to evaluate trends in occupancy and lease rates.
"Noncontrolling interests" represents the portion of equity ownership in a consolidated subsidiary not attributable to Kennedy Wilson.
“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.
PART I
FINANCIAL INFORMATION
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Item 1. | Financial Statements (Unaudited) |
Kennedy-Wilson Holdings, Inc.
Consolidated Balance Sheets
(Unaudited)
(Dollars in millions, except share and per share amounts)
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| | | | | | | |
| March 31,
2019 | | December 31,
2018 |
Assets | | | |
Cash and cash equivalents | $ | 442.9 |
| | $ | 488.0 |
|
Accounts receivable (including $4.3 and $4.2 of related party) | 43.5 |
| | 56.6 |
|
Real estate and acquired in place lease values (net of accumulated depreciation and amortization of $656.2 and $623.6) | 5,561.9 |
| | 5,702.5 |
|
Unconsolidated investments (including $710.0 and $662.2 at fair value) | 907.3 |
| | 859.9 |
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Other assets, net | 284.0 |
| | 274.8 |
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Total assets(1) | $ | 7,239.6 |
| | $ | 7,381.8 |
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| | | |
Liabilities | | | |
Accounts payable | $ | 18.4 |
| | $ | 24.1 |
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Accrued expenses and other liabilities | 464.9 |
| | 513.7 |
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Mortgage debt | 2,988.8 |
| | 2,950.3 |
|
KW unsecured debt | 1,203.3 |
| | 1,202.0 |
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KWE unsecured bonds | 1,262.0 |
| | 1,260.5 |
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Total liabilities(1) | 5,937.4 |
| | 5,950.6 |
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Equity | | | |
Common stock, $0.001 par value per share, 200,000,000 authorized, 142,834,730 and 143,205,394 shares issued and outstanding as of March 31, 2019 and December 31, 2018 | — |
| | — |
|
Additional paid-in capital | 1,747.2 |
| | 1,744.6 |
|
Accumulated deficit | (92.1 | ) | | (56.4 | ) |
Accumulated other comprehensive loss | (424.6 | ) | | (441.5 | ) |
Total Kennedy-Wilson Holdings, Inc. shareholders' equity | 1,230.5 |
| | 1,246.7 |
|
Noncontrolling interests | 71.7 |
| | 184.5 |
|
Total equity | 1,302.2 |
| | 1,431.2 |
|
Total liabilities and equity | $ | 7,239.6 |
| | $ | 7,381.8 |
|
(1) The assets and liabilities as of March 31, 2019 include $595.2 million (including cash held by consolidated investments of $59.1 million and real estate and acquired in place lease values, net of accumulated depreciation and amortization of $510.7 million) and $455.3 million (including investment debt of $437.9 million), respectively, from consolidated variable interest entities ("VIEs"). The assets and liabilities as of December 31, 2018 include $657.8 million (including cash held by consolidated investments of $31.6 million and real estate and acquired in place lease values, net of accumulated depreciation and amortization of $602.5 million) and $317.4 million (including investment debt of $283.6 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.
Kennedy-Wilson Holdings, Inc.
Consolidated Statements of Operations
(Unaudited)
(Dollars in millions, except share and per share amounts)
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2019 | | 2018 |
Revenue | | | | |
Rental | | $ | 115.8 |
| | $ | 134.3 |
|
Hotel | | 15.0 |
| | 36.3 |
|
Sale of real estate | | 1.1 |
| | 9.4 |
|
Investment management, property services and research fees (includes $4.8 and $2.8 of related party fees) | | 8.8 |
| | 10.1 |
|
Total revenue | | 140.7 |
| | 190.1 |
|
Expenses | | | | |
Rental | | 41.0 |
| | 41.6 |
|
Hotel | | 14.6 |
| | 30.8 |
|
Cost of real estate sold | | 1.2 |
| | 8.4 |
|
Commission and marketing | | 1.0 |
| | 1.4 |
|
Compensation and related (includes $10.4 and $9.9 of share-based compensation) | | 35.3 |
| | 39.6 |
|
General and administrative | | 10.9 |
| | 11.4 |
|
Depreciation and amortization | | 49.1 |
| | 55.7 |
|
Total expenses | | 153.1 |
| | 188.9 |
|
Income from unconsolidated investments | | 41.7 |
| | 26.0 |
|
Gain on sale of real estate, net | | 34.9 |
| | 28.0 |
|
Acquisition-related expenses | | (0.8 | ) | | — |
|
Interest expense | | (55.3 | ) | | (58.9 | ) |
Other (loss) income | | (2.5 | ) | | 0.1 |
|
Income (loss) before (provision for) benefit from income taxes | | 5.6 |
| | (3.6 | ) |
(Provision for) benefit from income taxes | | (4.0 | ) | | 2.6 |
|
Net income (loss) | | 1.6 |
| | (1.0 | ) |
Net (income) attributable to the noncontrolling interests | | (6.9 | ) | | (1.4 | ) |
Net loss attributable to Kennedy-Wilson Holdings, Inc. common shareholders | | $ | (5.3 | ) | | $ | (2.4 | ) |
Basic and diluted loss per share | | | | |
Loss per share | | $ | (0.04 | ) | | $ | (0.02 | ) |
Weighted average shares outstanding | | 139,756,358 |
| | 147,941,982 |
|
Dividends declared per common share | | $ | 0.21 |
| | $ | 0.19 |
|
See accompanying notes to consolidated financial statements.
Kennedy-Wilson Holdings, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(Dollars in millions)
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2019 | | 2018 |
| | | | |
Net income (loss) | | $ | 1.6 |
| | $ | (1.0 | ) |
Other comprehensive income (loss), net of tax: | | | | |
Unrealized foreign currency translation (loss) gain | | (18.3 | ) | | 35.4 |
|
Amounts reclassified out of AOCI during the period | | — |
| | (0.1 | ) |
Unrealized currency derivative contracts gain (loss) | | 32.9 |
| | (7.4 | ) |
Total other comprehensive income for the period | | 14.6 |
| | 27.9 |
|
| | | | |
Comprehensive income | | 16.2 |
| | 26.9 |
|
Comprehensive income attributable to noncontrolling interests | | (4.6 | ) | | (6.5 | ) |
Comprehensive income attributable to Kennedy-Wilson Holdings, Inc. common shareholders | | $ | 11.6 |
| | $ | 20.4 |
|
See accompanying notes to consolidated financial statements.
Kennedy-Wilson Holdings, Inc.
Consolidated Statement of Equity
(Unaudited)
(Dollars in millions, except share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional
Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Loss | | Noncontrolling Interests | | |
| Shares | | Amount | | | | | | Total |
Balance at December 31, 2018 | 143,205,394 |
| | $ | — |
| | $ | 1,744.6 |
| | $ | (56.4 | ) | | $ | (441.5 | ) | | $ | 184.5 |
| | $ | 1,431.2 |
|
Restricted stock grants (RSG) | 31,875 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Shares retired due to RSG vesting | (250,287 | ) | | — |
| | (5.1 | ) | | — |
| | — |
| | — |
| | (5.1 | ) |
Shares retired due to common stock repurchase program | (152,252 | ) | | — |
| | (2.7 | ) | | (0.1 | ) | | — |
| | — |
| | (2.8 | ) |
Stock based compensation | — |
| | — |
| | 10.4 |
| | — |
| | — |
| | — |
| | 10.4 |
|
Other comprehensive income (loss): | | | | | | | | | | | | |
|
|
Unrealized foreign currency translation loss, net of tax | — |
| | — |
| | — |
| | — |
| | (16.0 | ) | | (2.3 | ) | | (18.3 | ) |
Unrealized foreign currency derivative contract gain, net of tax | — |
| | — |
| | — |
| | — |
| | 32.9 |
| | — |
| | 32.9 |
|
Common stock dividends ($0.21 per common share) | — |
| | — |
| | — |
| | (30.3 | ) | | — |
| | — |
| | (30.3 | ) |
Net (loss) income | — |
| | — |
| | — |
| | (5.3 | ) | | — |
| | 6.9 |
| | 1.6 |
|
Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | 5.3 |
| | 5.3 |
|
Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (122.7 | ) | | (122.7 | ) |
Balance at March 31, 2019 | 142,834,730 |
| | $ | — |
| | $ | 1,747.2 |
| | $ | (92.1 | ) | | $ | (424.6 | ) | | $ | 71.7 |
| | $ | 1,302.2 |
|
See accompanying notes to consolidated financial statements.
\
Kennedy-Wilson Holdings, Inc.
Consolidated Statement of Equity
(Unaudited)
(Dollars in millions, except share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional
Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Loss | | Noncontrolling Interests | | |
(Dollars in millions, except share amounts) | Shares | | Amount | | | | | | Total |
Balance at December 31, 2017 | 151,561,284 |
| | $ | — |
| | $ | 1,883.3 |
| | $ | (90.6 | ) | | $ | (427.1 | ) | | $ | 211.9 |
| | $ | 1,577.5 |
|
Shares forfeited | (2,600 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Restricted stock grants (RSG) | 42,500 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Shares retired due to RSG vesting | (112,115 | ) | | — |
| | (1.9 | ) | | — |
| | — |
| | — |
| | (1.9 | ) |
Shares retired due to common stock repurchase program | (1,132,018 | ) | | | | (20.1 | ) | | 0.1 |
| | — |
| | — |
| | (20.0 | ) |
Stock based compensation | — |
| | — |
| | 9.9 |
| | — |
| | — |
| | — |
| | 9.9 |
|
Other comprehensive income (loss): | | | | | | | | | | | | | |
Unrealized foreign currency translation gain, net of tax | — |
| | — |
| | — |
| | — |
| | 30.3 |
| | 5.1 |
| | 35.4 |
|
Unrealized foreign currency derivative contract loss, net of tax | — |
| | — |
| | — |
| | — |
| | (7.4 | ) | | — |
| | (7.4 | ) |
Unrealized loss on marketable securities, net of tax | — |
| | — |
| | — |
| | — |
| | (0.1 | ) | | — |
| | (0.1 | ) |
Common stock dividends declared | — |
| | — |
| | — |
| | (28.6 | ) | | — |
| | — |
| | (28.6 | ) |
Net (loss) income | — |
| | — |
| | — |
| | (2.4 | ) | | — |
| | 1.4 |
| | (1.0 | ) |
Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | 4.1 |
| | 4.1 |
|
Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (1.2 | ) | | (1.2 | ) |
Balance at March 31, 2018 | 150,357,051 |
| | $ | — |
| | $ | 1,871.2 |
| | $ | (121.5 | ) | | $ | (404.3 | ) | | $ | 221.3 |
| | $ | 1,566.7 |
|
See accompanying notes to consolidated financial statements.
Kennedy-Wilson Holdings, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in millions) |
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2019 | | 2018 |
Cash flows from operating activities: | | | | |
Net income (loss) | | $ | 1.6 |
| | $ | (1.0 | ) |
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | | | | |
Net gain from sale of real estate | | (34.8 | ) | | (29.1 | ) |
Depreciation and amortization | | 49.1 |
| | 55.7 |
|
Above/below and straight-line rent amortization | | (2.0 | ) | | (4.6 | ) |
Benefit from deferred income taxes | | (0.1 | ) | | (4.5 | ) |
Amortization of deferred loan costs | | 2.6 |
| | 3.1 |
|
Accretion of interest income on loans | | — |
| | (0.6 | ) |
Amortization of discount and accretion of premium on issuance of the senior notes and investment debt | | 0.2 |
| | 0.1 |
|
Unrealized net loss on derivatives | | 0.2 |
| | 0.3 |
|
Income from unconsolidated investments | | (41.7 | ) | | (26.0 | ) |
Operating distributions from unconsolidated investments | | 12.0 |
| | 7.9 |
|
Deferred compensation | | 0.9 |
| | — |
|
Share-based compensation | | 10.4 |
| | 9.9 |
|
Change in assets and liabilities: | | | | |
Accounts receivable | | 9.9 |
| | 14.6 |
|
Other assets | | (6.2 | ) | | 0.5 |
|
Accounts payable, accrued expenses and other liabilities | | (27.2 | ) | | 22.5 |
|
Net cash (used in) provided by operating activities | | (25.1 | ) | | 48.8 |
|
Cash flows from investing activities: | | | | |
Collections of loans | | — |
| | 4.5 |
|
Additions to loans | | (0.4 | ) | | — |
|
Net proceeds from sale of consolidated real estate | | 177.3 |
| | 113.9 |
|
Purchases of consolidated real estate | | — |
| | (131.2 | ) |
Capital expenditures to real estate | | (56.9 | ) | | (59.0 | ) |
Additions to non refundable escrow deposits | | (5.0 | ) | | (10.4 | ) |
Proceeds from settlement of foreign derivative contracts | | — |
| | (4.2 | ) |
Investment in marketable securities | | — |
| | (0.2 | ) |
Proceeds from sale of marketable securities | | — |
| | 7.2 |
|
Additions to development project asset | | (1.2 | ) | | (8.4 | ) |
Proceeds from development project asset | | 1.7 |
| | 38.9 |
|
Distributions from unconsolidated investments | | 5.6 |
| | 13.1 |
|
Contributions to unconsolidated investments | | (20.3 | ) | | (18.8 | ) |
Net cash provided by (used in) investing activities | | 100.8 |
| | (54.6 | ) |
Cash flows from financing activities: | | | | |
Borrowings under senior notes payable | | — |
| | 246.6 |
|
Borrowings under line of credit | | — |
| | 75.0 |
|
Repayment of lines of credit | | — |
| | (175.0 | ) |
Borrowings under investment debt | | 296.9 |
| | 98.0 |
|
Repayment of investment debt | | (251.4 | ) | | (29.2 | ) |
Repayment of term loan | | — |
| | (75.0 | ) |
Debt issue costs | | (2.1 | ) | | (4.6 | ) |
Repurchase and retirement of common stock | | (7.9 | ) | | (22.0 | ) |
Dividends paid | | (30.3 | ) | | (29.3 | ) |
KWE closing dividend | | — |
| | (17.2 | ) |
Repayment of shareholder loans to noncontrolling interests | | (10.7 | ) | | — |
|
Contributions from noncontrolling interests | | 5.3 |
| | 13.0 |
|
Distributions to noncontrolling interests | | (122.7 | ) | | (1.2 | ) |
Net cash (used in) provided by financing activities | | (122.9 | ) | | 79.1 |
|
Effect of currency exchange rate changes on cash and cash equivalents | | 2.1 |
| | 8.4 |
|
Net change in cash and cash equivalents(1) | | (45.1 | ) | | 81.7 |
|
Cash and cash equivalents, beginning of period | | 488.0 |
| | 351.3 |
|
Cash and cash equivalents, end of period | | $ | 442.9 |
| | $ | 433.0 |
|
(1) See discussion of non-cash effects in notes to consolidated statements of cash flows.
See accompanying notes to consolidated financial statements.
Kennedy-Wilson Holdings, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Supplemental cash flow information:
|
| | | | | | | | |
| | Three Months Ended March 31, |
(Dollars in millions) | | 2019 | | 2018 |
Cash paid for: | | | | |
Interest(1) | | $ | 26.2 |
| | $ | 27.7 |
|
Income taxes | | 3.4 |
| | 3.9 |
|
(1) $1.1 million and $2.0 million attributable to noncontrolling interests for the three months ended March 31, 2019 and 2018, respectively.
As of March 31, 2019 and December 31, 2018 the Company had $36.2 million and $88.0 million, respectively, of restricted cash, which is included in cash and cash equivalents, that primarily relates to lender reserves associated with consolidated mortgages that the Company holds on properties. These reserves typically relate to interest, tax, insurance and future capital expenditures at the properties.
Supplemental disclosure of non-cash investing and financing activities:
|
| | | | | | | | |
| | Three Months Ended March 31, |
(Dollars in millions) | | 2019 | | 2018 |
| | | | |
Accrued capital expenditures | | $ | 9.8 |
| | $ | 2.7 |
|
Dividends declared but not paid on common stock | | 30.3 |
| | 28.6 |
|
Due to the adoption of ASU 2016-02 on January 1, 2019, the Company has recorded a right of use asset and a corresponding lease liability of $13.6 million, which is recorded as a component of other assets and accrued expenses, respectively, in the accompanying consolidated balance sheets.
During the three months ended March 31, 2018, the Company gained control over a pool of loans secured by six hotels located in the United Kingdom that had a carrying value of $52.8 million that were previously accounted for as loan purchases. The assets and liabilities of these properties were consolidated in Kennedy Wilson's financial statements at fair value.
See accompanying notes to consolidated financial statements.
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1—BASIS OF PRESENTATION
Kennedy Wilson'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 the Company believes that the disclosures are adequate to make their presentation not misleading. In the Company's 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, 2019 and 2018 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, 2019. For further information, your attention is directed to the footnote disclosures found in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. Throughout these unaudited interim consolidated financial statements “Kennedy Wilson” is referenced, which is defined as the Company and its subsidiaries that are consolidated in its financial statements under U.S. GAAP. All significant intercompany balances and transactions have been eliminated in consolidation. "KW," “KWH,” “Kennedy Wilson,” the “Company,” “we,” “our,” or “us” are also referred to which are defined as Kennedy-Wilson Holdings, Inc. and its wholly-owned subsidiaries.
In addition, throughout these unaudited interim consolidated financial statements, “equity partners” is referred to, which is defined as the non-wholly owned subsidiaries that are consolidated in the Company's financial statements under U.S. GAAP and third-party equity partners.
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 Accounting Standards Update ("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.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
REVENUE RECOGNITION—Revenue consists of management and leasing fees (including performance fees), commissions, rental and hotel income and sales of real estate. ASC Topic 606, Revenue from Contracts with Customers, is a five step model to recognize revenue from customer contracts. The model identifies the contract, any separate performance obligations in the contract, determines the transaction price, allocates the transaction price and recognizes revenue when the performance obligations are satisfied. Management has concluded that, with the exception of performance fees, the nature of the Company's revenue streams is such that the requirements are generally satisfied at the time that the fee becomes receivable.
Management fees are primarily comprised of investment management and property services fees. Investment management fees are earned from limited partners of funds, co-investments, or separate accounts and are generally based on a fixed percentage of committed capital or net asset value. Property services fees are earned for managing the operations of real estate assets and are generally based on a fixed percentage of the revenues generated from the respective real estate assets. The Company provides investment management and property services on investments it also has an ownership interest in. Fees earned on consolidated properties are eliminated in consolidation and fees on unconsolidated investments are eliminated for the portion that relate to the Company's ownership interest.
Rental income from operating leases is generally recognized on a straight-line basis over the terms of the leases. Hotel income is earned when rooms are occupied or goods and services have been delivered or rendered. Sales of real estate are recognized when title to the real property passes to the buyer and there is no continuing involvement in the real property.
Performance fees or carried interest are allocated to the general partner, special limited partner or asset manager of Kennedy Wilson's real estate funds or joint ventures based on the cumulative performance of the fund and are subject to preferred return thresholds of the limited partners. At the end of each reporting period, Kennedy Wilson calculates the performance fee that would be due as if the fair value of the underlying investments were realized as of such date, irrespective of whether such amounts
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
have been realized. As the fair value of underlying investments varies between reporting periods, it is necessary to make adjustments to amounts recorded as performance fees to reflect either (a) positive performance resulting in an increase in the performance fee allocated to the general partner or asset manager or (b) negative performance that would cause the amount due to Kennedy Wilson to be less than the amount previously recognized as revenue, resulting in a negative adjustment to performance fees allocated to the general partner or asset manager. The Company has concluded that performance fees to the Company, based on cumulative fund or joint venture performance to-date, represent equity method investments that are not in the amended revenue recognition guidance under ASC Topic 606. Under the equity method of accounting, the Company recognizes its allocation of performance fees along with its share of income or loss and fair value, proportionate to the Company’s equity ownership in each applicable investment as a component of income from unconsolidated investments.
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). The ownership of the other interest holders in consolidated subsidiaries is reflected as noncontrolling interests. Real estate is recorded based on cumulative costs incurred and allocated based on relative fair value.
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.
UNCONSOLIDATED INVESTMENTS — Kennedy Wilson has a number of joint venture interests that were formed to acquire, manage, and/or sell real estate. Investments in unconsolidated investments are accounted for under the equity method of accounting as Kennedy Wilson can exercise significant influence, but does not have the ability to control the unconsolidated investment. An investment in an unconsolidated investment is recorded at its initial investment and is increased or decreased by Kennedy Wilson’s share of income or loss, plus additional contributions and less distributions. A decline in the value of an unconsolidated investment that is other than temporary is recognized when evidence indicates that such a decline has occurred in accordance with Equity Method Investments ASC Subtopic 323-10.
Kennedy Wilson records its investments in certain commingled funds it manages and sponsors (the "Funds") that are investment companies under the Investment Companies ASC Subtopic 946-10, 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. Thus, the Funds reflect their investments at fair value, with unrealized gains and losses resulting from changes in fair value reflected in their earnings.
Additionally, Kennedy Wilson elected the fair value option for 22 investments in unconsolidated investment entities. Due to the nature of these investments, Kennedy Wilson elected to record these investments at fair value in order to report the change in value in the underlying investments in the results of our current operations.
FOREIGN CURRENCIES—The financial statements of Kennedy Wilson'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 and the British pound sterling. 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.
Investment level debt is generally incurred in local currencies. Fluctuations in foreign exchanges rates may have a significant impact on the results of the Company's operations. In order to manage the effect of these fluctuations, the Company enters into hedging transactions, in the form of currency derivative contracts, that are designed to reduce its book equity exposure to foreign currencies. See Note 5 for a complete discussion on currency derivative contracts.
FAIR VALUE MEASUREMENTS — Kennedy Wilson accounts for fair value measurements of financial assets and financial liabilities and for fair value measurements of non-financial items that are recognized or disclosed at fair value in the financial statements on a recurring basis under the provisions of ASC Subtopic 820-10, Fair Value Measurements ("Subtopic 820-10"). Subtopic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When estimating fair value in the absence of an orderly transaction between market participants, 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 and the investments in debt securities are valued, in part, based on third party valuations and management estimates also using an income approach.
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
FAIR VALUE OF FINANCIAL INSTRUMENTS — The estimated fair value of financial instruments is determined using available market information and appropriate valuation methodologies. Considerable judgment, is necessary, however, to interpret market data and develop the related estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have a material impact on the estimated fair value amounts.
RECENT ACCOUNTING PRONOUNCEMENTS—Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842) and other related follow-on ASUs issued in connection with 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).
Lessees
| |
• | 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. The Company identified no significant direct financing leases and as operating leases, the Company will continue to report lease expense 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. |
| |
• | Due to the adoption of ASU 2016-02 the Company has recorded a right of use asset and a corresponding lease liability of $13.6 million, which is recorded as a component of other assets, net and accrued expenses, respectively, in the accompanying consolidated balance sheets. The average remaining lease term is 78 years and weighted average discount rate is 2.9% as of March 31, 2019. |
Lessors
| |
• | 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. The new lease standard provides lessors a practical expedient to not separate rental recovery revenue from the associated rental revenue if certain criteria are met. The Company assessed these criteria and concluded that the timing and pattern of transfer for rental recoveries and the associated rental revenue are the same and its leases will continue to qualify as operating leases under which the Company will recognize rental revenue. Accordingly, the Company will account for and present rental revenue and rental recovery revenue as a single component. |
| |
• | The new lease standard requires that lessors expense, on an as-incurred basis, certain initial direct costs including the salaries and related costs for employees directly working on leasing activities. Prior to adoption, these costs could be capitalized. The Company did not typically incur costs such as these but to the extent that it does going forward they will be expensed in the period in which they are incurred |
| |
• | The Company has elected the practical expedients available for implementation and consequently there is no opening balance impact related to: (i) whether an expired or existing contract meets the definition of a lease; (ii) the lease classification at the adoption date for existing leases; and (iii) whether costs previously capitalized as initial direct costs would continue to be amortized. Further, because the accounting for leases by the lessor is substantially unchanged and it has elected the practical expedients to not separate rental recovery revenue from the associated rental revenue, the ASU did not have a significant impact on its results of operations or financial position. |
Consistent with the transition guidance under ASU 2018-11, all prior period disclosures remain in accordance with ASC Topic 840.
In January 2017, the FASB issued ASU 2017-04, which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. ASU 2017-04 is required to be adopted for public entities that are SEC filers, for annual and interim periods in fiscal years beginning after December 15, 2019. The Company does not expect the ASU to have a significant impact on Kennedy Wilson's consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12 that simplifies the application of hedge accounting guidance in current U.S. GAAP and improves the reporting of hedging relationships to better portray the economic results of an entity’s risk management
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
activities in its consolidated financial statements. Among the simplification updates, the standard eliminates the requirement in current GAAP to separately recognize periodic hedge ineffectiveness. Mismatches between the changes in value of the hedged item and hedging instrument may still occur but they will no longer be separately reported. The standard requires the presentation of the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. This ASU is effective for public business entities, for annual and interim periods in fiscal years beginning after December 15, 2018. The adoption of this standard did not have a material impact on Kennedy Wilson's consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act ("TCJA"). This ASU is effective for all entities, for annual and interim periods in fiscal years beginning after December 15, 2018. The adoption of this standard did not have a material impact on Kennedy Wilson's consolidated financial statements.
The FASB did not issue any other ASUs during the first three months of 2019 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—REAL ESTATE AND IN-PLACE LEASE VALUE
The following table summarizes Kennedy Wilson's investment in consolidated real estate properties at March 31, 2019 and December 31, 2018:
|
| | | | | | | | |
| | March 31, | | December 31, |
(Dollars in millions) | | 2019 | | 2018 |
Land | | $ | 1,343.1 |
| | $ | 1,371.3 |
|
Buildings | | 4,097.8 |
| | 3,958.4 |
|
Building improvements | | 432.2 |
| | 652.0 |
|
In-place lease values | | 345.0 |
| | 344.4 |
|
| | 6,218.1 |
| | 6,326.1 |
|
Less accumulated depreciation and amortization | | (656.2 | ) | | (623.6 | ) |
Real estate and acquired in place lease values, net of accumulated depreciation and amortization | | $ | 5,561.9 |
| | $ | 5,702.5 |
|
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 9.0 years at March 31, 2019.
Gains on Sale of Real Estate, Net
During the three months ended March 31, 2019, Kennedy Wilson recognized gains on sale of real estate, net of $35.5 million of which $11.4 million was allocated to non-controlling interest. The net gains include the sale of 4 commercial properties in the United Kingdom, three retail properties in the Western United States, and the Ritz-Carlton, Lake Tahoe hotel.
Guarantees
Kennedy Wilson has certain guarantees associated with loans secured by consolidated assets. As of March 31, 2019, the maximum potential amount of future payments (undiscounted) Kennedy Wilson could be required to make under the guarantees was approximately $26.5 million which was reduced by $5.7 million in Q1 2019 and is approximately 1% of the 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 upon liquidation if there is a shortfall 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, 2019 and December 31, 2018 were immaterial.
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Leases
The Company leases its operating properties to customers under agreements that are classified as operating leases. The total minimum lease payments provided for under the leases are recognized on a straight-line basis over the lease term. The majority of the Company's rental expenses, including common area maintenance, real estate taxes and insurance, are recovered from the Company's tenants. The Company records amounts reimbursed by customers in the period that the applicable expenses are incurred, which is generally ratably throughout the term of the lease. The reimbursements are recognized in rental income in the consolidated statements of operations as the Company is the primary obligor with respect to purchasing and selecting goods and services from third-party vendors and bearing the associated credit risk.
The following table summarizes the minimum lease payments due from the Company's tenants on leases with lease periods greater than one year at March 31, 2019:
|
| | | |
(Dollars in millions) | Minimum |
| Rental Revenues(1) |
2019 (remainder) | $ | 151.9 |
|
2020 | 199.6 |
|
2021 | 173.7 |
|
2022 | 158.6 |
|
2023 | 129.6 |
|
Thereafter | 609.9 |
|
Total | $ | 1,423.3 |
|
(1) These amounts do not reflect future rental revenues from the renewal or replacement of existing leases, rental increase that are not fixed and exclude reimbursements of rental expenses.
NOTE 4—UNCONSOLIDATED INVESTMENTS
Kennedy Wilson has a number of joint venture interests including commingled funds and separate accounts, generally ranging from 5% to 50%, that were formed to acquire, manage, develop, service and/or sell real estate. Kennedy Wilson has significant influence over these entities, but not control. Accordingly, these investments are accounted for under the equity method.
Joint Venture and Fund Holdings
The following table details Kennedy Wilson's investments in joint ventures by investment type and geographic location as of March 31, 2019:
|
| | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Multifamily | Commercial | Hotel | Funds | Residential and Other | Total |
Western U.S. | $ | 204.5 |
| $ | 56.3 |
| $ | 68.0 |
| $ | 106.2 |
| $ | 194.4 |
| $ | 629.4 |
|
Ireland | 225.3 |
| 41.3 |
| — |
| — |
| — |
| 266.6 |
|
United Kingdom | — |
| 11.3 |
| — |
| — |
| — |
| 11.3 |
|
Total | $ | 429.8 |
| $ | 108.9 |
| $ | 68.0 |
| $ | 106.2 |
| $ | 194.4 |
| $ | 907.3 |
|
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
The following table details Kennedy Wilson's investments in joint ventures by investment type and geographic location as of December 31, 2018:
|
| | | | | | | | | | | | | | | | | | |
(Dollars in millions) | Multifamily | Commercial | Hotel | Funds | Residential and Other | Total |
Western U.S. | $ | 184.1 |
| $ | 47.0 |
| $ | 70.9 |
| $ | 102.5 |
| $ | 193.8 |
| $ | 598.3 |
|
Ireland | 216.5 |
| 35.2 |
| — |
| — |
| — |
| 251.7 |
|
United Kingdom | — |
| 9.9 |
| — |
| — |
| — |
| 9.9 |
|
Total | $ | 400.6 |
| $ | 92.1 |
| $ | 70.9 |
| $ | 102.5 |
| $ | 193.8 |
| $ | 859.9 |
|
During the three months ended March 31, 2019, the change in unconsolidated investments primarily relates to $24.9 million of contributions to unconsolidated investments, $17.6 million of distributions to unconsolidated investments, and $41.7 million of income from unconsolidated investments as described in more detail below.
Contributions to Joint Ventures
During the three months ended March 31, 2019, Kennedy Wilson contributed $24.9 million to joint ventures, primarily for the acquisition of two office properties in the Western United States and contributions to existing development projects in Ireland and Hawaii.
Distributions from Joint Ventures
During the three months ended March 31, 2019, Kennedy Wilson received $17.6 million in operating and investing distributions from its joint ventures.
The following table details cash distributions by investment type and geographic location for the three months ended March 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Multifamily | Commercial | Funds | Residential and Other | Total |
(Dollars in millions) | Operating | Investing | Operating | Investing | Operating | Investing | Operating | Investing | Operating | Investing |
Western U.S. | $ | 9.1 |
| $ | 3.1 |
| $ | 0.7 |
| $ | — |
| $ | 0.9 |
| $ | 0.2 |
| $ | 0.2 |
| $ | 2.3 |
| $ | 10.9 |
| $ | 5.6 |
|
Ireland | 1.1 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1.1 |
| — |
|
Total | $ | 10.2 |
| $ | 3.1 |
| $ | 0.7 |
| $ | — |
| $ | 0.9 |
| $ | 0.2 |
| $ | 0.2 |
| $ | 2.3 |
| $ | 12.0 |
| $ | 5.6 |
|
Investing distributions resulted primarily from the sale of a multifamily property and residential lots in the Western United States. Operating distributions resulted from sales distributions in excess of invested basis and operating cash flow generated by the joint venture investments.
Income from Unconsolidated Investments
The following table presents income from unconsolidated investments recognized by Kennedy Wilson during the three months ended March 31, 2019 and 2018:
|
| | | | | | | | |
| | Three Months Ended March 31, |
(Dollars in millions) | | 2019 | | 2018 |
Income from unconsolidated investments - operating performance | | $ | 8.8 |
| | $ | 2.7 |
|
Income from unconsolidated investments - realized gains | | 2.4 |
| | 0.3 |
|
Income from unconsolidated investments - fair value | | 28.3 |
| | 12.7 |
|
Income from unconsolidated investments - performance fees | | 2.2 |
| | 10.3 |
|
| | $ | 41.7 |
| | $ | 26.0 |
|
Income from unconsolidated investments during the three months ended March 31, 2019 primarily relates to $8.8 million of operating distributions and $2.4 million of realized gain on sale of a multifamily property in the Western United States. Income from unconsolidated investments during the three months ended March 31, 2018 primarily relates to operating distributions. During the three months ended March 31, 2019, the Company recognized fair value gains and performance fees of $28.3 million and $2.2 million, respectively, related primarily to cap rate compression, asset sales, and improved property performance by its fair value
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
option ("FV Option") investments and investments held within the funds managed by the Company. These gains were partially offset by foreign exchange fair value losses on multifamily and development joint ventures in Ireland. During the three months ended March 31, 2018, the Company recognized fair value gains and performance fees of $12.7 million and $10.3 million, respectively, related primarily to resyndications under the Company's VHH partnership, asset sales, and improved property performance by its FV Option investments and investments held within the funds managed by the Company.
See Note 5 for additional details regarding fair value measurements and the fair value option.
Vintage Housing Holdings ("VHH")
As of March 31, 2019 and December 31, 2018, the carrying value of the Company's investment in VHH was $121.6 million and $101.5 million, respectively. The total income from unconsolidated investments recognized was $21.8 million and $11.7 million during the three months ended March 31, 2019 and 2018, respectively, and was comprised of operating distributions and fair value gains. Since the investment is accounted for under the fair value option, operating distributions are recorded as income from unconsolidated investments. Operating distributions recognized through income from unconsolidated investments were $1.8 million and $1.9 million for the three months ended March 31, 2019 and 2018, respectively, and are included in the $8.8 million and $2.7 million of income from unconsolidated investments in the table above. Fair value gains recognized were $20.0 million and $9.8 million for the three months ended March 31, 2019 and 2018, respectively, and are included in the $28.3 million and $12.7 million of income from unconsolidated investments - fair value in the table above. Fair value gains in the current period primarily relate to cap rate compression, as a result of declines in borrowing rates. Prior period fair value gains are due to resyndications in which VHH dissolves an existing partnership and recapitalizes into a new partnership with tax exempt bonds and tax credits that are sold to a new tax credit partner and, in many cases, yields cash back to VHH. Upon resyndication, VHH retains a GP interest in the partnership and receives various future streams of cash flows including: development fees, asset management fees, other GP management fees and distributions from operations.
Capital Commitments
As of March 31, 2019, Kennedy Wilson had unfulfilled capital commitments totaling $97.6 million to four of its joint ventures, primarily closed-end funds managed by Kennedy Wilson, under the respective operating agreements. The Company may be called upon to contribute additional capital to joint ventures in satisfaction of such capital commitment obligations.
NOTE 5—FAIR VALUE MEASUREMENTS AND THE FAIR VALUE OPTION
Kennedy Wilson records certain assets and liabilities at fair value in its consolidated financial statements, with changes
therein recognized in current period earnings. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an exit price) at a particular measurement date. Fair value measurements are categorized into a hierarchy that distinguishes between inputs based on market data from independent sources (“observable inputs”) and a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (“unobservable inputs”). Quoted prices in active markets for identical assets have the highest priority (“Level 1”), followed by observable inputs other than quoted prices including prices for similar but not identical assets or liabilities (“Level 2”), and unobservable inputs, including the reporting entity’s estimates of the assumptions that market participants would use, having the lowest priority (“Level 3”).
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, 2019:
|
| | | | | | | | | | | | | | | |
(Dollars in millions) | Level 1 | | Level 2 | | Level 3 | | Total |
Unconsolidated investments | $ | — |
| | $ | — |
| | $ | 710.0 |
| | $ | 710.0 |
|
Net currency derivative contracts | — |
| | (9.1 | ) | | — |
| | (9.1 | ) |
Total | $ | — |
| | $ | (9.1 | ) | | $ | 710.0 |
| | $ | 700.9 |
|
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
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, 2018:
|
| | | | | | | | | | | | | | | |
(Dollars in millions) | Level 1 | | Level 2 | | Level 3 | | Total |
Unconsolidated investments | $ | — |
| | $ | — |
| | $ | 662.2 |
| | $ | 662.2 |
|
Net currency derivative contracts | — |
| | (15.8 | ) | | — |
| | (15.8 | ) |
Total | $ | — |
| | $ | (15.8 | ) | | $ | 662.2 |
| | $ | 646.4 |
|
Unconsolidated Investments
Kennedy Wilson elected to use the FV Option for 22 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 $603.9 million and $559.7 million at March 31, 2019 and December 31, 2018, respectively, which is included in unconsolidated investments in the accompanying balance sheets.
Additionally, Kennedy Wilson records its investments in managed commingled funds (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 $106.1 million and $102.5 million at March 31, 2019 and December 31, 2018, respectively, which is included in unconsolidated investments in the accompanying consolidated balance sheets. As of March 31, 2019, Kennedy Wilson had unfunded capital commitments to the Funds in the amount of $33.0 million. See Note 4 for more information on the fluctuations for these investments.
In estimating fair value of real estate held by the Funds and the 22 FV Option investments, the Company considers significant unobservable inputs such as capitalization and discount rates.
The following table summarizes the Company's investments in unconsolidated investments held at fair value by type:
|
| | | | | | | |
(Dollars in millions) | March 31, 2019 | | December 31, 2018 |
FV Option | $ | 603.9 |
| | $ | 559.7 |
|
Funds | 106.1 |
| | 102.5 |
|
Total | $ | 710.0 |
| | $ | 662.2 |
|
The following table presents changes in Level 3 investments in Funds and FV Options for the three months ended March 31, 2019 and 2018:
|
| | | | | | | |
| Three Months Ended March 31, |
(Dollars in millions) | 2019 | | 2018 |
Beginning balance | $ | 662.2 |
| | $ | 380.7 |
|
Unrealized and realized gains | 41.2 |
| | 29.3 |
|
Unrealized and realized losses | (6.0 | ) | | (2.8 | ) |
Contributions | 19.6 |
| | 14.6 |
|
Distributions | (7.4 | ) | | (14.7 | ) |
Non-cash contributions (distributions) | 0.4 |
| | (0.2 | ) |
Ending Balance | $ | 710.0 |
| | $ | 406.9 |
|
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 |
Multifamily | 4.50% — 7.75% | | 7.75% — 9.75% |
Office | 4.75% — 6.50% | | 7.00% — 8.00% |
Retail | 6.50% — 10.00% | | 8.00% — 11.75% |
Hotel | 6.00% — 7.75% | | 8.25% — 10.00% |
Residential | N/A | | 12.00% |
In valuing indebtedness, the Company considers significant inputs such as the term of the debt, value of collateral, market loan-to-value ratios, market interest rates and spreads, and credit quality of investment entities. The credit spreads used by Kennedy Wilson for these types of investments range from 1.35% to 3.40%.
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 and 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
Kennedy Wilson 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 the Company has 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, 2019, Kennedy Wilson assessed the significance of the impact of the counterparty valuation adjustments on the overall valuation of its derivative positions and determined that the counterparty valuation adjustments are not significant to the overall valuation of its derivative. As a result, the Company has determined that its derivative valuation in its entirety be classified in Level 2 of the fair value hierarchy.
Changes in fair value are recorded in accumulated other comprehensive income (loss) in the accompanying consolidated statements of comprehensive income (loss) as the portion of the currency forward and option contracts used to hedge currency exposure of its certain consolidated subsidiaries qualifies as a net investment hedge under FASB ASC Topic 815.
The fair value of the currency derivative contracts held as of March 31, 2019 and December 31, 2018 are reported in other assets for hedge assets and included in accrued expenses and other liabilities for hedge liabilities on the accompanying balance sheet.
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
The table below details the currency derivative contracts Kennedy Wilson held as of March 31, 2019 and the activity during the three months ended March 31, 2019. For the three months ended March 31, 2019, Kennedy Wilson had a gross foreign currency translation loss on its net assets of $18.6 million. See Note 10 for a complete discussion on other comprehensive income including currency derivative contracts and foreign currency translations.
|
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars, Euros and British Pound Sterlings in millions) | | March 31, 2019 | | Three Months Ended March 31, 2019 |
Currency Hedged | Underlying Currency | Notional | Hedge Asset | | Hedge Liability | | Change in Unrealized Gains (Losses) | | Realized Gains (Losses) | | Cash Received (Paid) |
Outstanding | | | | | | | | | | | |
EUR | USD | € | 175.0 |
| $ | 8.3 |
| | $ | — |
| | $ | 3.6 |
| | $ | 3.1 |
| | $ | — |
|
EUR(1) | GBP | € | 240.8 |
| — |
| | (46.0 | ) | | 14.5 |
| | — |
| | — |
|
EUR(1)(2) | GBP | | — |
| | — |
| | 26.4 |
| | — |
| | — |
|
GBP | USD | £ | 630.0 |
| 30.6 |
| | (2.0 | ) | | (13.6 | ) | | — |
| | — |
|
Total Outstanding | | 38.9 |
| | (48.0 | ) | | 30.9 |
| | 3.1 |
| | — |
|
| | | | | | | | | | | |
Settled | | | | | | | | | | | |
GBP | USD | | — |
| | — |
| | (0.5 | ) | | — |
| | — |
|
Total Settled | | | — |
| | — |
| | (0.5 | ) | | — |
| | — |
|
Total | | $ | 38.9 |
| | $ | (48.0 | ) | | $ | 30.4 |
| (3) | $ | 3.1 |
| | $ | — |
|
(1) Hedge is held by KWE on its wholly-owned subsidiaries.
(2) Relates to KWE's Euro Medium Term Note. See discussion in Note 7.
(3) Excludes deferred tax benefit of $2.5 million.
The gains recognized through other comprehensive income will remain in accumulated other comprehensive income until the underlying investments that they were hedging are substantially liquidated by Kennedy Wilson.
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, 2019 and December 31, 2018 for the mortgages, Kennedy Wilson unsecured debt, and KWE unsecured bonds were estimated to be approximately $5.5 billion and $5.3 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 the Company's credit risk to the current yield of a similar security, compared to their carrying value of $5.5 billion and $5.4 billion at March 31, 2019 and December 31, 2018, respectively. The inputs used to value the Company's mortgages, Kennedy Wilson unsecured debt, and KWE unsecured bonds 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.
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 6—OTHER ASSETS, NET
Other assets consist of the following:
|
| | | | | | | | |
(Dollars in millions) | | March 31, 2019 | | December 31, 2018 |
Hedge assets | | $ | 38.8 |
| | $ | 43.7 |
|
Above-market leases, net of accumulated amortization of $50.6 and $48.3 at March 31, 2019 and December 31, 2018, respectively | | 34.1 |
| | 37.2 |
|
Straight line rent | | 36.5 |
| | 34.6 |
|
Loan purchases and originations | | 27.7 |
| | 27.8 |
|
Furniture and equipment net of accumulated depreciation of $34.5 and $37.9 at March 31, 2019 and December 31, 2018, respectively | | 27.1 |
| | 31.4 |
|
Deferred taxes | | 26.1 |
| | 24.7 |
|
Goodwill | | 23.9 |
| | 23.9 |
|
Right of use asset | | 13.6 |
| | — |
|
Prepaid expenses | | 13.4 |
| | 13.7 |
|
Leasing commissions, net of accumulated amortization of $3.7 and $3.3 at March 31, 2019 and December 31, 2018, respectively | | 12.9 |
| | 11.5 |
|
Other, net of accumulated amortization of $2.9 and $2.8 at March 31, 2019 and December 31, 2018, respectively | | 11.5 |
| | 10.9 |
|
Deposits | | 6.5 |
| | 6.5 |
|
VAT receivable | | 6.0 |
| | 2.3 |
|
Development project asset | | 5.9 |
| | 6.6 |
|
Other Assets, net | | $ | 284.0 |
| | $ | 274.8 |
|
Right of use asset
The Company, as a lessee, has two office leases and four ground leases, which qualify as operating leases, with remaining lease terms of 5 to 239 years. The payments associated with office space leases have been discounted using the Company's incremental borrowing rate which is based on collateralized interest rates in the market and risk profile of the associated lease. For ground leases the rate implicit in the lease was used to determine the right of use asset.
The following table summarizes the fixed, future minimum rental payments, excluding variable costs, which are discounted to calculate the lease liabilities for its operating leases in which we are the lessee:
|
| | | |
(Dollars in millions) | Minimum |
| Rental Payments |
2019 (remainder) | $ | 1.0 |
|
2020 | 1.4 |
|
2021 | 1.4 |
|
2022 | 1.4 |
|
2023 | 0.7 |
|
Thereafter | 34.0 |
|
Total undiscounted rental payments | 39.9 |
|
Less imputed interest | (26.3 | ) |
Total lease liabilities | $ | 13.6 |
|
NOTE 7—MORTGAGE DEBT
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
The following table details mortgage debt secured by Kennedy Wilson's consolidated properties as of March 31, 2019 and December 31, 2018:
|
| | | | | | | | | | |
(Dollars in millions) | | | | Carrying amount of mortgage debt as of (1) |
Mortgage Debt by Product Type | | Region | | March 31, 2019 | | December 31, 2018 |
Multifamily(1) | | Western U.S. | | $ | 1,285.3 |
| | $ | 1,286.2 |
|
Commercial(1) | | United Kingdom | | 426.2 |
| | 499.6 |
|
Commercial(1) | | Ireland | | 513.7 |
| | 438.9 |
|
Commercial | | Western U.S. | | 356.4 |
| | 385.3 |
|
Multifamily(1) | | Ireland | | 259.2 |
| | 147.8 |
|
Commercial | | Spain | | 88.0 |
| | 90.1 |
|
Hotel | | Ireland | | 80.8 |
| | 82.5 |
|
Hotel | | Western U.S. | | — |
| | 37.9 |
|
Mortgage debt (excluding loan fees)(1) | | | | 3,009.6 |
| | 2,968.3 |
|
Unamortized loan fees | | | | (20.8 | ) | | (18.0 | ) |
Total Investment Debt | | | | $ | 2,988.8 |
| | $ | 2,950.3 |
|
(1) The mortgage debt payable balances include unamortized debt premiums (discounts). Debt premiums (discounts) represent the difference between the fair value of debt and 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, 2019 and December 31, 2018 was $1.8 million and $1.9 million, respectively.
The Company's mortgage debt had a weighted average interest rate of 3.22% and 3.40% per annum as of March 31, 2019 and December 31, 2018, respectively. As of March 31, 2019, 70% of Kennedy Wilson's property level debt was fixed rate, 13% was floating rate with interest caps and 17% was floating rate without interest caps, compared to 73% of Kennedy Wilson's consolidated property level debt was fixed rate, 17% was floating rate with interest caps and 10% was floating rate without interest caps, as of December 31, 2018. The weighted average strike price on caps of Kennedy Wilson's variable rate mortgages is 3.18% as of March 31, 2019.
Mortgage Loan Transactions and Maturities
During the three months ended March 31, 2019, one existing mortgage was refinanced.
The aggregate maturities of mortgage loans subsequent to March 31, 2019 are as follows:
|
| | | | |
(Dollars in millions) | | Aggregate Maturities |
2019 | | $ | 67.8 |
|
2020 | | 109.9 |
|
2021 | | 105.8 |
|
2022 | | 300.7 |
|
2023 | | 380.2 |
|
Thereafter | | 2,043.4 |
|
| | 3,007.8 |
|
Debt premium | | 1.8 |
|
Unamortized loan fees | | (20.8 | ) |
Total Mortgage Debt
| | $ | 2,988.8 |
|
NOTE 8—KW UNSECURED DEBT
The following table details KW unsecured debt as of March 31, 2019 and December 31, 2018:
|
| | | | | | | | |
(Dollars in millions) | | March 31, 2019 | | December 31, 2018 |
Credit facility | | $ | 75.0 |
| | $ | 75.0 |
|
Senior notes(1) | | 1,145.5 |
| | 1,145.3 |
|
KW unsecured debt | | 1,220.5 |
| | 1,220.3 |
|
Unamortized loan fees | | (17.2 | ) | | (18.3 | ) |
Total KW Unsecured Debt | | $ | 1,203.3 |
| | $ | 1,202.0 |
|
(1) The senior notes balances include unamortized debt discounts. Debt discounts represent the difference between the fair value of debt and 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 discount as of March 31, 2019 and December 31, 2018 was $4.5 million and $4.7 million, respectively.
Borrowings Under Credit Facilities
The Company, through a wholly-owned subsidiary, has a $700 million unsecured revolving credit and term loan facility (the "A&R Facility"). The A&R Facility is comprised of a $500 million revolving line of credit and a $200 million term loan facility. Loans under the revolving line of credit bear interest at a rate equal to LIBOR plus between 1.75% and 2.75%, depending on the consolidated leverage ratio as of the applicable measurement date. Loans under the term loan facility bear interest at a rate equal to LIBOR plus between 1.65% and 2.65%, depending on the consolidated leverage ratio as of the applicable measurement date. The A&R Facility has a maturity date of March 31, 2021. Subject to certain conditions precedent and at Kennedy-Wilson, Inc.’s ("the Borrower") option, the maturity date of the A&R Facility may be extended by one year.
The A&R Facility has certain covenants as defined within its Amended and Restated Credit Agreement, dated as of October 20, 2017 (the "Credit Agreement") that, among other things, limit the Company and certain of its subsidiaries’ ability to incur additional indebtedness, repurchase capital stock or debt, sell assets or subsidiary stock, create or 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 requires the Company 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 1.70 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 $1,066,775,300 plus an amount equal to fifty percent (50%) of net equity proceeds received by the Company after the date of the most recent financial statements that are available as of the Closing Date, 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 3.5% of consolidated total asset value (as defined in the Credit Agreement) and $300,351,000, (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 $75.0 million. As of March 31, 2019, the Company was in compliance with these covenants.
The maximum amount drawn on the A&R Facility at any one point during the three months ended March 31, 2019 was $75.0 million. As of March 31, 2019, the Company had an outstanding balance of $75.0 million on the A&R Facility with the full $500 million available to be drawn under the revolving credit facility.
The average outstanding borrowings under credit facilities was $75.0 million during the three months ended March 31, 2019.
Senior Notes
On March 2, 2018, Kennedy Wilson, Inc., (the "Issuer") completed an additional private offering of $250 million aggregate principal amount of 5.875% Senior Notes due 2024 (the "Notes"). The Notes were issued as additional notes under the indenture pursuant to which the Issuer previously issued $900 million aggregate principal amount of its 5.875% Senior Notes due 2024 (the "Initial Notes"). The Notes have substantially identical terms as the Initial Notes and will be treated as a single series with the
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Initial Notes under the indenture. The Notes were issued and sold at a cash offering price of 98.625% of their principal amount, plus accrued and unpaid interest from, and including, October 1, 2017.
The indenture governing the Notes contains various restrictive covenants, including, among others, limitations on the Company's ability and the ability of certain of the Company's subsidiaries to incur or guarantee additional indebtedness, make restricted payments, pay dividends or make any other distributions from restricted subsidiaries, redeem or repurchase capital stock, sell assets or subsidiary stocks, engage in transactions with affiliates, create or permit liens on assets, enter into sale/leaseback transactions, and enter into consolidations or mergers. The indenture governing the Notes limits 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, subject to certain exceptions. As of March 31, 2019, the maximum balance sheet leverage ratio was 1.04 to 1.00. See Note 14 for the guarantor and non-guarantor financial statements.
NOTE 9—KWE UNSECURED BONDS
The following table details KWE unsecured bonds as of March 31, 2019 and December 31, 2018:
|
| | | | | | | | |
(Dollars in millions) | | March 31, 2019 | | December 31, 2018 |
KWE Bonds | | $ | 651.5 |
| | $ | 637.3 |
|
KWE Euro Medium Term Note Programme | | 614.6 |
| | 627.4 |
|
KWE Unsecured Bonds (excluding loan fees)(1) | | 1,266.1 |
| | 1,264.7 |
|
Unamortized loan fees | | (4.1 | ) | | (4.2 | ) |
Total KWE Unsecured Bonds | | $ | 1,262.0 |
| | $ | 1,260.5 |
|
(1) The KWE unsecured bonds balances include unamortized debt premiums (discounts). Debt premiums (discounts) represent the difference between the fair value of debt and 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 premium (discount) as of March 31, 2019 and December 31, 2018 was $(3.5) million and $(3.7) million, respectively.
KWE has £500 million of 3.95% fixed-rate senior unsecured bonds due 2022 ("KWE Bonds") that have a carrying value of $651.5 million and $637.3 million as of March 31, 2019 and December 31, 2018, respectively. 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, KWE has a £2.0 billion (approximately $2.6 billion based on March 31, 2019 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. KWE issued senior unsecured notes for an aggregate principal amount of approximately $617.0 million (based on March 31, 2019 rates) (€550 million) (the "KWE Notes"). The KWE Notes were issued at a discount and have a carrying value of $614.6 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, KWE 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, 2019, Kennedy Wilson recognized a gain of $26.4 million in accumulated other comprehensive income due to the weakening of the euro against the GBP during the period. The KWE Notes rank pari passu with the KWE Bonds 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, 2019, KWE was in compliance with these covenants.
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 10—EQUITY
Common Stock Repurchase Program
On March 20, 2018, the Company announced a $250.0 million stock repurchase plan authorized by its board of directors. Repurchases under the program may be made in the open market, in privately negotiated transactions, through the net settlement of the Company’s restricted stock grants or otherwise, with the amount and timing of repurchases dependent on market conditions and subject to the company’s discretion. Kennedy Wilson also had a $100 million stock repurchase program that expired on February 25, 2018.
During the three months ended March 31, 2019, Kennedy Wilson repurchased and retired 152,252 shares for $2.8 million under the stock repurchase program. During the three months ended March 31, 2018, Kennedy Wilson repurchased and retired 1,132,018 shares for $20.0 million under the previous stock repurchase program.
Dividend Distributions
During the following periods, Kennedy Wilson declared and paid the following cash distributions on its common stock:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 | | Three Months Ended March 31, 2018 |
(Dollars in millions) | | Declared | | Paid | | Declared | | Paid |
Common Stock(1) | | $ | 30.3 |
| | $ | 30.3 |
| | $ | 28.6 |
| | $ | 29.3 |
|
(1) 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, 2019 and 2018, Kennedy Wilson recognized $10.4 million and $9.9 million of compensation expense related to the vesting of restricted stock grants.
Generally, upon vesting, the restricted stock granted to employees is net share-settled such that the Company will withhold shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remit the cash to the appropriate taxing authorities. Only a certain amount of the restricted shares that vested during the three months ended March 31, 2018 were net share settled. The employees' minimum statutory obligation for the restricted shares that were not net share-settled were funded by the employees and remitted to the appropriate taxing authorities. However, all of the restricted shares that vested during the three months ended March 31, 2019 were net-share settled. The total shares withheld during the three months ended March 31, 2019 and 2018 were 250,287 shares and 112,115 shares, respectively. During the three months ended March 31, 2019 and 2018, total payments for the employees’ tax obligations to the taxing authorities for the shares which were net-share settled were $5.1 million and $1.9 million, respectively. These activities are reflected as a financing activity within Kennedy Wilson's consolidated statements of cash flows.
Accumulated Other Comprehensive Income
The following table summarizes the changes in each component of accumulated other comprehensive loss, net of taxes: |
| | | | | | | | | | | | |
(Dollars in millions) | | Foreign Currency Translation | | Currency Derivative Contracts | | Total Accumulated Other Comprehensive Loss(1) |
Balance at December 31, 2018 | | $ | (94.1 | ) | | $ | 11.0 |
| | $ | (83.1 | ) |
Unrealized (losses) gains, arising during the period | | (18.6 | ) | | 30.4 |
| | 11.8 |
|
Noncontrolling interest | | 2.3 |
| | — |
| | 2.3 |
|
Deferred taxes on unrealized gains, arising during the period | | 0.3 |
| | 2.5 |
| | 2.8 |
|
Balance at March 31, 2019 | | $ | (110.1 | ) | | $ | 43.9 |
| | $ | (66.2 | ) |
(1) As a result of our acquisition of KWE in October 2017, the Company was required to record inception to date accumulated other comprehensive losses of $358.4 million associated with noncontrolling interest holders of KWE. This amount has been excluded from the beginning and ending balances of the table to give a more appropriate depiction of the Company's accumulated other comprehensive loss activity. If this amount is included, the accumulated other comprehensive loss would be $424.6 million and $441.5 million as of March 31, 2019 and December 31, 2018, respectively.
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
The local currencies for the Company's interests in foreign operations include the euro and the British pound sterling. The related amounts on Kennedy Wilson'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 Company experienced net unrealized gains on foreign currency through other comprehensive income for the period due to the strengthening of the GBP against both U.S. dollar and the Euro. This was offset by the weakening of the Euro against the U.S. Dollar. Unrealized hedge gains were driven by hedges that KWE holds on its euro denominated investments which includes the $26.4 million gain on the KWE Notes as discussed in Note 9.
In order to manage currency fluctuations, Kennedy Wilson entered into currency derivative contracts to manage its exposure to currency fluctuations between its functional currency (U.S. dollar) and the functional currency (euro and the British pound) of certain of its wholly-owned and consolidated subsidiaries. See Note 5 for a more detailed discussion of Kennedy Wilson's currency derivative contracts.
Noncontrolling Interests
Noncontrolling interests consist of the ownership interests of noncontrolling shareholders in consolidated subsidiaries and are presented separately on Kennedy Wilson's balance sheet. As of March 31, 2019 and December 31, 2018, Kennedy Wilson had noncontrolling interest of $71.7 million and $184.5 million, respectively. The decrease in noncontrolling interest for the period is primarily due to the sale of the Ritz Carlton hotel in Lake Tahoe and the distribution to noncontrolling interest holders in Capital Dock from the mortgage proceeds from the refinancing completed this period. See Note 3 for additional details.
NOTE 11—EARNINGS PER SHARE
In accordance with 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. The Company only presents 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, 2019 and 2018:
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
|
| | | | | | | |
| Three Months Ended March 31, |
(Dollars in millions, except share and per share amounts) | 2019 | | 2018 |
Net loss attributable to Kennedy-Wilson Holdings, Inc. common shareholders | $ | (5.3 | ) | | $ | (2.4 | ) |
Dividends allocated to participating securities | — |
| | (0.2 | ) |
Net loss attributable to Kennedy-Wilson Holdings, Inc. common shareholders, net of allocation to participating securities | (5.3 | ) | | (2.6 | ) |
Dividends declared on common shares | (30.4 | ) | | (28.4 | ) |
Undistributed losses attributable to Kennedy-Wilson Holdings, Inc. common shareholders, net of allocation to participating securities | $ | (35.7 | ) | | $ | (31.0 | ) |
| | | |
Distributed earnings per share | $ | 0.21 |
|
| $ | 0.19 |
|
Undistributed losses per share | (0.25 | ) | | (0.21 | ) |
Income per basic and diluted share | (0.04 | ) | | (0.02 | ) |
| | | |
Weighted average shares outstanding for basic and diluted(1) | 139,756,358 |
| | 147,941,982 |
|
Dividends declared per common share | $ | 0.21 |
| | $ | 0.19 |
|
(1) For the three months ended March 31, 2019, a total of 2,039,710 potentially dilutive securities have not been included in the diluted weighted average shares as they are anti-dilutive. For the three months ended March 31, 2018, a total of 1,139,460 potentially dilutive securities have not been included in the diluted weighted average shares as they are anti-dilutive. Potentially anti-dilutive securities include unvested restricted stock grants.
NOTE 12—SEGMENT INFORMATION
Kennedy Wilson is a global real estate investment company. The Company owns, operates, and invests in real estate both on its own and through its investment management platform. To complement its 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
KW Investments invests in multifamily, office, retail, and residential properties as well as loans secured by real estate in the Western U.S., United Kingdom, Ireland, Spain and Italy. The Company has an average ownership interest across all investments of approximately 59% as of March 31, 2019.
When it has partners, those partners include financial institutions, foundations, endowments, high net worth individuals and other institutional investors. In these instances, the Company is typically the general partner in the arrangement with a promoted interest in the profits of its investments beyond the Company's ownership percentage. These promoted interests are typically fees recorded within income from unconsolidated investments and earned by IMRES as described below.
KW Investment Management and Real Estate Services (IMRES)
IMRES encompasses the Company's fee generating businesses that includes both the Company's investment management platform as well as the Company's third-party services business. The Company's clients include financial institutions, institutional investors, insurance companies, developers, builders and government agencies. IMRES has four main lines of business: investment management, property services, brokerage, and auction and conventional sales. These four business lines generate revenue for the Company through fees and commissions.
The Company manages approximately 53 million square feet of properties for the Company and its investment partners in the United States and Europe, which includes assets the Company has ownership interests in, as well as third-party owned assets. With 17 offices throughout the United States, the United Kingdom, Ireland, Jersey, Spain and Japan, the Company has the capabilities and resources to provide investment management and property services to real estate owners and 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.
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Additionally, IMRES 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.
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, 2019 and 2018 and balance sheet data as of March 31, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 |
| | | | | | | |
(Dollars in millions) | | Investments | | Investment Management and Real Estate Services | | Corporate | | Total |
Revenue | | | | | | | | |
Rental | | $ | 115.8 |
| | $ | — |
| | $ | — |
| | $ | 115.8 |
|
Hotel | | 15.0 |
| | — |
| | — |
| | 15.0 |
|
Sale of real estate | | 1.1 |
| | — |
| | — |
| | 1.1 |
|
Investment management, property services and research fees | | — |
| | 8.8 |
| | — |
| | 8.8 |
|
Total revenue | | 131.9 |
| | 8.8 |
| | — |
| | 140.7 |
|
Expenses | | | | | | | | |
Rental | | 41.0 |
| | — |
| | — |
| | 41.0 |
|
Hotel | | 14.6 |
| | — |
| | — |
| | 14.6 |
|
Cost of real estate sold | | 1.2 |
| | — |
| | — |
| | 1.2 |
|
Commission and marketing | | — |
| | 1.0 |
| | — |
| | 1.0 |
|
Compensation and related | | 15.1 |
| | 5.1 |
| | 15.1 |
| | 35.3 |
|
General and administrative | | 7.5 |
| | 1.7 |
| | 1.7 |
| | 10.9 |
|
Depreciation and amortization | | 49.1 |
| | — |
| | — |
| | 49.1 |
|
Total expenses | | 128.5 |
| | 7.8 |
| | 16.8 |
| | 153.1 |
|
Income from unconsolidated investments, net of depreciation and amortization | | 39.5 |
| | 2.2 |
| | — |
| | 41.7 |
|
Gain on sale of real estate, net | | 34.9 |
| | — |
| | — |
| | 34.9 |
|
Acquisition-related expenses | | (0.8 | ) | | — |
| | — |
| | (0.8 | ) |
Interest expense | | (37.1 | ) | | — |
| | (18.2 | ) | | (55.3 | ) |
Other income | | 0.5 |
| | — |
| | (3.0 | ) | | (2.5 | ) |
Provision for income taxes | | (2.1 | ) | | — |
| | (1.9 | ) | | (4.0 | ) |
Net income (loss) | | 38.3 |
| | 3.2 |
| | (39.9 | ) | | 1.6 |
|
Net (income) attributable to noncontrolling interests | | (6.9 | ) | | — |
| | — |
| | (6.9 | ) |
Net income (loss) attributable to Kennedy-Wilson Holdings, Inc. common shareholders | | $ | 31.4 |
| | $ | 3.2 |
| | $ | (39.9 | ) | | $ | (5.3 | ) |
Kennedy-Wilson Holdings, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2018 |
| | | | | | | |
(Dollars in millions) | | Investments | | Investment Management and Real Estate Services | | Corporate | | Total |
Revenue | | | | | | | | |
Rental | | $ | 134.3 |
| | $ | — |
| | $ | — |
| | $ | 134.3 |
|
Hotel | | 36.3 |
| | — |
| | — |
| | 36.3 |
|
Sale of real estate | | 9.4 |
| | — |
| | — |
| | 9.4 |
|
Investment management, property services and research fees | | — |
| | 10.1 |
| | — |
| | 10.1 |
|
Total revenue | | 180.0 |
| | 10.1 |
| | — |
|