INVESTMENTS IN JOINT VENTURES

The Company has a number of joint venture interests, generally ranging from 5% to approximately 50% ownership, that were formed to acquire, manage, develop, and/or sell real estate and invest in discounted loan purchases and loan originations. The Company has significant influence over these entities, but not control, and accordingly, these investments are accounted for under the equity method.

Joint Venture Holdings

As of December 31, 2013 and 2012, the Company's equity investment in joint ventures totaled $751.4 million and $543.2 million, respectively.

The following table details our investments in joint ventures by investment type and geographic location as of December 31, 2013:



	Commercial		Multifamily		Loan		Residential and Hotel		Other		Total
(Dollars in millions)
Western U.S.	$	156.7	$	133.1	$	50.3	$	48.4	$	0.4	$	388.9
Japan	—		68.8		—		—		—		68.8
United Kingdom	104.5		—		6.3		—		—		110.8
Ireland	96.1		48.2		—		—		—		144.3
Spain	—		—		—		—		26.9		26.9
Other U.S.	3.6		0.2		—		0.3		7.6		11.7
Total	$	360.9	$	250.3	$	56.6	$	48.7	$	34.9	$	751.4

The following table details our investments in joint ventures by investment type and geographic location as of December 31, 2012:



	Commercial		Multifamily		Loan		Residential and Hotel		Other		Total
(Dollars in millions)
Western U.S.	$	141.6	$	126.9	$	41.8	$	51.8	$	0.4	$	362.5
Japan	—		102.7		—		—		—		102.7
Ireland	9.5		22.4		36.7		—		—		68.6
Other U.S.	3.5		0.4		—		0.2		5.3		9.4
Total	$	154.6	$	252.4	$	78.5	$	52.0	$	5.7	$	543.2

Equity in joint venture income

For the year ended December 31, 2013, 2012, and 2011 equity in joint venture income was $29.8 million, $21.5 million, and $12.5 million.

The increase in equity in joint venture income during 2013 compared to 2012 is primarily due to acquisition-related gains of $36.2 million on note conversions in European joint venture investments. See Note Conversion into Real Estate section below for a more detailed discussion. These gains were offset by acquisition-related expenses of $13.5 million relating to new joint ventures in the United Kingdom, Ireland and Spain which resulted in significant stamp duty taxes. The increase in equity in joint venture income during 2012 compared to 2011 relate to property sales and fair value gains.

KW Residential LLC

The Company's largest joint venture investment, KW Residential, LLC ("KWR"), had a balance of $68.8 million and $102.7 million as of December 31, 2013 and 2012. KWR is a joint venture investment in a portfolio of 50 apartment buildings comprised of approximately 2,400 units, located primarily in Tokyo and surrounding areas. The Company owns approximately 41% of KWR.

During the year ended December 31, 2013, 2012, and 2011, the Company recognized a loss of $6.9 million, and gains of $1.2 million and $2.5 million, respectively, from foreign currency translation adjustments, net of hedges from its investment in KWR.

During the years ended December 31, 2013, 2012, and 2011, the Company received the following cash distributions from its investment in KWR for the settlement of hedges, refinancing of property level debt, and operating distributions:



	Years Ended December 31,
	2013		2012		2011
(Dollars in millions)
Settlement of hedges	$	10.8	$	—	$	2.1
Refinancing of property level debt	5.8		1.8		5.8
Operating distributions	9.4		9.6		3.3
Total	$	26.0	$	11.4	$	11.2

The cash received as a result of unwinding KWR's hedges will not be realized in our statement of operations until the underlying investment is substantially liquidated.

Note Conversion into Real Estate

During the year, the Company and its equity partners converted three mortgage notes into real estate owned. As a result of the conversion, the joint ventures were required to consolidate the assets and liabilities at fair value under ASC 805 - Business Combinations. As the fair value of each of the assets was in excess of the basis of the previously held mortgage note, the Company recorded the following acquisition related gains:



(Amounts shown in millions)
Date	Description	Location	Total Joint Venture Acquisition Related Gain		The Company's Portion of Total Gain
Q2 2013	Class A Office building and Adjacent 3.5 acre site	Dublin, Ireland	$	30.1	$	15.0
Q3 2013	The Rock - a retail, residential, and entertainment center	Manchester, UK	32.3		16.2
Q4 2013	Class A Office Building	Glasgow, Scotland	10.1		5.0
Total			$	72.5	$	36.2

Changes in Control

On December 12, 2013, the Company and one of its equity partners amended the existing operating agreement governing its investments in the Ritz Carlton Hotel, Lake Tahoe which was accounted for on the equity method. As a result of obtaining control, the joint venture investment is now consolidated as of December 31, 2013 and not treated as an investment in joint venture. The investment is presented as an equity method investment for prior periods. See Note 4 for impact of consolidation.

On September 30, 2013, the Company and one of its equity partners amended existing operating agreements governing investments in three retail centers in the Western United States which were accounted for on the equity method. As a result of obtaining control, the joint venture investments were consolidated as of September 30, 2013 and not treated as investments in joint ventures. The investments are presented as an equity method investment for prior periods. See Note 4.

On November 30, 2012, due to a change of control, Kennedy Wilson began to consolidate Fund II, a limited partnership that had been previously accounted for using the equity method. See Note 4 for further discussion.

During the year ended December 31, 2012, the Company acquired 49.5% of the non-managing membership interests in Bay Area Smart Growth Fund II, LLC ("BASGF II"). Prior to the acquisition, the Company had a 5% managing member interest and served as the non-controlling managing member. The terms of the partnership agreement require a vote of the majority interest of the non-managing members, whose commitments are greater than 50% of the aggregate capital commitments, in order to direct and control key decision making over the partnership. Since the Company acquired only 49.5% of the non-managing member interests, the Company has concluded that it does not control BASGF II and will continue to account for its interest in the entity as an equity method investment. As of December 31, 2013 and 2012, the Company's investment in this joint venture was $13.3 million and $12.9 million.

Contributions to Joint Ventures

During the years ended December 31, 2013, 2012, and 2011, Kennedy Wilson made $322.7 million, $178.6 million, and $105.4 million in contributions to new and existing joint venture investments.

See the table below for a breakdown of contributions to new joint venture investments for the years ended December 31, 2013, 2012, and 2011:



		Years Ended December 31,
(Dollars in millions)		2013			2012			2011
Investment Type	Region	No. of Properties	Initial Contribution		No. of Properties	Initial Contribution		No. of Properties	Initial Contribution
Commercial	Western U.S.	4	$	30.3	9	$	26.9	5	$	25.8
Commercial	United Kingdom	42	92.2		—	—		—	—
Commercial	Ireland	14	38.7		2	45.8		—	—
Multifamily	Western U.S.	2	9.1		5	22.9		8	19.9
Multifamily	Ireland	1	58.0		2	34.3		—	—
Residential	Western U.S.	3	10.0		2	19.6		2	17.9
Other	Spain	1	27.2		—	—		—	—
Total		67	$	265.5	20	$	149.5	15	$	63.6

In addition to the capital contributions above to new joint venture investments, the Company contributed $57.2 million, $29.1 million and $41.8 million to existing joint ventures to pay off external debt, fund our share of a development project and for working capital needs, during the years ended December 31, 2013, 2012, and 2011, respectively.

Distributions from Joint Ventures

The following table details cash distributions by investment type and geographic location for the year ended December 31, 2013:



	Multifamily				Commercial				Loan				Residential				Total
(Dollars in millions)	Operating		Investing		Operating		Investing		Operating		Investing		Operating		Investing		Operating		Investing
Western U.S.	$	10.0	$	7.1	$	12.8	$	20.9	$	—	$	—	$	3.9	$	3.0	$	26.7	$	31.0
Japan	9.4		16.6		—		—		—		—		—		—		9.4		16.6
United Kingdom	—		—		9.2		4.4		4.0		0.3		—		—		13.2		4.7
Ireland	2.9		28.9		3.5		—		—		—		—		—		6.4		28.9
Other	0.4		0.2		—		—		—		—		—		0.1		0.4		0.3
Total	$	22.7	$	52.8	$	25.5	$	25.3	$	4.0	$	0.3	$	3.9	$	3.1	$	56.1	$	81.5

During the year ended December 31, 2013, the Company received $137.6 million in operating and investing distributions from its joint ventures. Investing distributions resulted from KWR's favorable settlement of Japanese yen-related hedges and refinancing a portion of its multifamily portfolio, the refinancing of property level debt, asset sales, and loan resolutions. Operating distributions resulted from operating cash flow generated by the joint venture investments.

Variable Interest Entities

Kennedy Wilson has determined that it has investments in five variable interest entities ("VIEs") as of December 31, 2013 and has concluded that Kennedy Wilson is not the primary beneficiary of any of the investments. As of December 31, 2013, the five VIEs had assets totaling $189.6 million with Kennedy Wilson’s exposure to loss as a result of its interests in these VIEs totaling $72.6 million related to its equity contributions.

The Company determines the appropriate accounting method with respect to all investments that are not VIEs based on the control-based framework (controlled entities are consolidated) provided by the consolidations guidance in ASC Topic 810. The Company's determination considers specific factors cited under ASC 810-20 "Control of Partnerships and Similar Entities" which presumes that control is held by the general partner (and managing member equivalents in limited liability companies). Limited partners' substantive participation rights may overcome this presumption of control. The Company accounts for joint ventures it is deemed not to control using the equity method of accounting while controlled entities are consolidated.

Cost Method

Investments in which Kennedy Wilson does not have significant influence are accounted for under the cost method of accounting. As of December 31, 2013 and 2012, Kennedy Wilson had three investments accounted for under the cost method with a carrying value totaling $7.6 million and $5.7 million.

Capital Commitments

As of December 31, 2013, the Company has unfulfilled capital commitments totaling $8.0 million to four of its joint ventures. The Company may be called upon to contribute additional capital to joint ventures in satisfaction of the Company's capital commitment obligations.

Guarantees

The Company has certain guarantees associated with loans secured by consolidated assets or assets held directly or in various joint ventures. As of December 31, 2013 the maximum potential amount of future payments (undiscounted) the Company could be required to make under the guarantees was approximately $51.1 million which is approximately 2% of the property level debt of the Company. The guarantees expire through 2017, and the Company’s performance under the guarantees would be required to the extent there is a shortfall upon liquidation between the principal amount of the loan and the net sale proceeds from the property. Based upon the Company’s evaluation of guarantees under ASC Subtopic 460-10 "Estimated Fair Value of Guarantees," the estimated fair value of guarantees made as of December 31, 2013 and 2012 is immaterial.

Summarized financial data of the joint ventures is as follows:



	December 31, 2013						December 31, 2012
(Dollars in millions)	Greater than 20% ⁽¹⁾		Other		Total		Greater than 20% ⁽¹⁾		Other		Total
Balance sheets for equity method investments:
Assets
Cash and restricted cash	$	74.0	$	40.9	$	114.9	$	7.7	$	75.7	$	83.4
Real estate	1,996.8		2,438.8		4,435.6		311.1		3,065.2		3,376.3
Loan pool participation ⁽²⁾	4.0		—		4.0		137.1		—		137.1
Other	466.8		150.7		617.5		11.6		210.7		222.3
Total assets ⁽³⁾	$	2,541.6	$	2,630.4	$	5,172.0	$	467.5	$	3,351.6	$	3,819.1

Liabilities
Debt	$	1,263.6	$	1,714.1	$	2,977.7	$	139.8	$	1,977.5	$	2,117.3
Other	75.5		64.7		140.2		4.2		61.6		65.8
Total liabilities	1,339.1		1,778.8		3,117.9		144.0		2,039.1		2,183.1
Partners’ capital
Kennedy Wilson - investments in joint ventures	379.5		344.7		724.2		35.2		483.7		518.9
Other partners	818.6		506.9		1,325.5		176.6		828.8		1,005.4
Total partners' capital-investments in joint ventures	1,198.1		851.6		2,049.7		211.8		1,312.5		1,524.3
Kennedy Wilson - investments in loan pool participation ⁽²⁾	2.2		—		2.2		60.3		—		60.3
Other partners	2.2		—		2.2		51.4		—		51.4
Total partners' capital - investments in loan pool participation	4.4		—		4.4		111.7		—		111.7
Total liabilities and partners’ capital	$	2,541.6	$	2,630.4	$	5,172.0	$	467.5	$	3,351.6	$	3,819.1

Total investments are comprised of the following:



	December 31, 2013						December 31, 2012
(Dollars in millions)	Greater than 20% ⁽¹⁾		Other		Total		Greater than 20% ⁽¹⁾		Other		Total
Equity method	$	379.5	$	344.7	$	724.2	$	35.2	$	483.7	$	518.9
Unrealized gain on fair value option	—		19.6		19.6		18.6		—		18.6
	379.5		364.3		743.8		53.8		483.7		537.5
Cost method	—		7.6		7.6		—		5.7		5.7
Total Investments in joint ventures	$	379.5	$	371.9	$	751.4	$	53.8	$	489.4	$	543.2

Loan pool participation ⁽²⁾	$	—	$	—			$	60.4	$	—

—————

⁽¹⁾ Equity in income from the joint venture or income from loan pool participation for the year ended December 31, 2013, 2012 or 2011 exceeds 20% of Kennedy Wilson's income from continuing operations before income taxes for the year ended December 31, 2013, 2012 or 2011. No individual investments in joint ventures or loan pool participation exceeds 20% of the total assets of Kennedy Wilson as of December 31, 2013 or 2012.

⁽²⁾ This loan pool has been included in the investment in joint ventures footnote greater than 20% column as this entity was determined to be a significant investment for purposes of S-X §210.3-09. See further discussion on this loan pool participation in note 6. The other investments in loan pool participation were excluded as they were determined to be not significant investments.

⁽³⁾ The balance sheets and income statements include all investments in joint ventures as well as an investment in a loan pool participation, which was determined to be significant investments for the purposes of S-X §210.3-09.

Equity in joint venture income for the years ended December 31:



(Dollars in millions)	2013		2012		2011
Net income allocation	$	28.8	$	13.7	$	9.1
Unrealized gain on fair value option	1.0		7.8		3.4
Total equity in joint venture income	$	29.8	$	21.5	$	12.5
Participation income allocation	$	8.7	$	7.9	$	1.4



	Year Ended December 31, 2013							Year Ended December 31, 2012
(Dollars in millions)	Greater than 20% ⁽¹⁾			Other		Total		Greater than 20% ⁽¹⁾			Other		Total
Statements of income:
Revenues	$	229.6		$	427.5	$	657.1	$	38.2		$	532.5	$	570.7
Depreciation	58.1			57.9		116.0		(4.1		)	72.6		68.5
Interest	42.3			86.8		129.1		22.0			87.9		109.9
Other expenses	83.6			271.7		355.3		(0.7		)	337.6		336.9
Total expenses	184.0			416.4		600.4		17.2			498.1		515.3
Net income ⁽³⁾	$	45.6		$	11.1	$	56.7	$	21.0		$	34.4	$	55.4
Net income allocation:
Kennedy Wilson - investments in joint ventures	$	28.6		$	0.2	$	28.8	$	(3.3	)	$	17.0	$	13.7
Kennedy Wilson - investments in loan pool participation ⁽²⁾	8.7			—		8.7		7.9			—		7.9
Other partners	(4.3		)	10.9		6.6		16.2			17.4		33.6
Other partners - investments in loan pool participation⁽²⁾	12.6			—		12.6		0.2			—		0.2
Net income ⁽³⁾	$	45.6		$	11.1	$	56.7	$	21.0		$	34.4	$	55.4



	Year Ended December 31, 2011
(Dollars in millions)	Greater than 20% ⁽¹⁾			Other		Total
Statements of income:
Revenues	$	45.8		$	249.1	$	294.9
Depreciation	10.2			48.3		58.5
Interest	14.0			69.3		83.3
Other expenses	16.5			127.8		144.3
Total expenses	40.7			245.4		286.1
Gains on extinguishment of debt	—			9.3		9.3
Net income	$	5.1		$	13.0	$	18.1
Net income allocation:
Kennedy Wilson - investments in joint ventures	$	1.3		$	7.8	$	9.1
Kennedy Wilson - investments in loan pool participation⁽²⁾	1.4			—		1.4
Other partners - investments in joint ventures	3.3			5.2		8.5
Other partners - investments in loan pool participation	(0.9		)	—		(0.9		)
Net income	$	5.1		$	13.0	$	18.1

—————

⁽¹⁾ See discussion above.

⁽²⁾ See discussion above.

⁽³⁾ See discussion above.