FAIR VALUE MEASUREMENTS AND THE FAIR VALUE OPTION

FAIR VALUE MEASUREMENTS—Fair Value Measurements and Disclosures ASC Subtopic 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1—Valuations based on unadjusted quoted market prices in active markets for identical securities.

Level 2—Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets and quoted prices in markets that are not active.

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement, and involve management judgment.

The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

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, 2013:



(Dollars in millions)	Level 1		Level 2			Level 3		Total
Marketable securities⁽¹⁾	$	4.0	$	—		$	—	$	4.0
Investments in joint ventures	—		—			81.1		81.1
Currency forward contract ⁽²⁾	—		(9.6		)	—		(9.6		)
	$	4.0	$	(9.6	)	$	81.1	$	75.5

⁽¹⁾ Included in other assets.

⁽²⁾ See further discussion of currency forward contracts.



(Dollars in millions)	Level 1		Level 2			Level 3		Total
Short term investments	$	—	$	10.0		$	—	$	10.0
Investments in joint ventures	—		—			68.4		$	68.4
Currency forward contract	—		(1.2		)	—		(1.2		)
	$	—	$	8.8		$	68.4	$	77.2

Marketable Securities

The carrying value of marketable securities is a level 1 valuation as the fair value is based off of unadjusted quoted market prices in active markets for identical securities.

Short-term investments

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

Investments in joint ventures

Kennedy Wilson records its investments in KW Property Fund III, L.P., Kennedy Wilson Real Estate Fund IV, and SG KW Venture I, LLC (the "Funds") based upon the net assets that would be allocated to its interests in the Funds assuming the Funds were to liquidate their investments at fair value as of the reporting date. The Company’s investment balance in the Funds was $33.5 million and $25.8 million at December 31, 2013 and 2012, respectively, which is included in investments in joint ventures in the accompanying consolidated balance sheets. As of December 31, 2013, the Company had unfunded capital commitments to the Funds in the amount of $6.6 million.

Kennedy Wilson elected to use the fair value option ("FV Option") for two investments in joint venture entities to more accurately reflect the timing of the value created in the underlying investments and report those results in current operations. The Company's investment balance in the FV Option investments was $47.6 million and $42.6 million at December 31, 2013 2012, respectively, which are included in investments in joint ventures in the accompanying balance sheets.

The following table summarizes our investments in joint ventures held at fair value by type:



(Dollars in millions)	December 31, 2013		December 31, 2012
Funds	$	33.5	$	25.8
FV Option	47.6		42.6
Total	$	81.1	$	68.4

The following table presents changes in Level 3 investments, investments in investment companies and investments in joint ventures that elected the fair value option, for the years ended December 31:



(Dollars in millions)	2013			2012			2011
Beginning balance	$	68.4		$	51.4		$	34.7
Unrealized and realized gains	5.3			10.0			5.7
Unrealized and realized losses	(0.3		)	(0.4		)	(1.4		)
Contributions	10.8			11.6			14.0
Distributions	(3.1		)	(4.2		)	(1.6		)
Ending Balance	$	81.1		$	68.4		$	51.4

The change in unrealized and realized gains and losses are included in equity in joint venture (loss) income in the accompanying consolidated statements of operations.

The change in unrealized gains on level 3 investments during 2013 and 2012 for investments still held as of December 31, 2013 and 2012 were $4.0 million and $8.6 million, respectively.

In estimating fair value of real estate held by the Funds, two joint ventures that elected the fair value option investments and the value of the real estate consolidated (as further described in Note 4), the Company considers significant inputs such as capitalization and discount rates. The table below describes the range of inputs used as of December 31, 2013 for real estate assets:



	Estimated rates used for
	Capitalization rates	Discount Rates
Office	6.00% — 7.50%	7.00% — 9.75%
Retail	6.00% — 10.00%	9.00% — 12.00%
Hotel	6.50%	8.00%
Multifamily	5.75% — 7.00%	7.50% — 9.00%
Loan	n/a	1.75% — 12.00%
Land and condominium units	n/a	8.00% — 12.00%

In valuing real estate related assets and indebtedness, Kennedy Wilson considers significant inputs such as the term of the debt, value of collateral, market loan-to-value ratios, market interest rates and spreads, and credit quality of investment entities. The credit spreads used by Kennedy Wilson for these types of investments range from 1.75% to 12.00%.

The accuracy of estimating fair value for investments utilizing unobservable inputs cannot be determined with precision, 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 cap rates, discount rates, liquidity risks, and estimates of future cash flows, could significantly affect the fair value measurement amounts.

Currency forward contracts

Kennedy Wilson has currency forward contracts to manage its exposure to currency fluctuations between its functional currency (U.S. dollars) and the functional currency (Euros and GBP) of certain of its wholly owned subsidiaries. To accomplish this objective, Kennedy Wilson hedged these exposures by entering into currency forward contracts to partially hedge Kennedy Wilson's exposure to its net investment in certain foreign operations caused by currency fluctuations. The currency forward contracts are valued based on the difference between the contract rate and the forward rate at maturity of the foreign currency applied to the notional value in that foreign currency discounted at a market rate for similar risks. Although Kennedy Wilson has determined that the majority of the inputs used to value its derivative fall within Level 2 of the fair value hierarchy, the counterparty risk adjustments associated with the derivative utilize Level 3 inputs. However, as of December 31, 2013, Kennedy Wilson assessed the significance of the impact of the counterparty valuation adjustments on the overall valuation of its derivative positions and determined that the counterparty valuation adjustments are not significant to the overall valuation of its derivative. As a result, Kennedy Wilson has determined that its derivative valuation in its entirety be classified in Level 2 of the fair value hierarchy.

Changes in fair value are recorded in other comprehensive income in the accompanying consolidated statements of comprehensive income (loss) as the portion of the currency forward contract used to hedge currency exposure of its certain wholly owned subsidiaries qualifies as a net investment hedge under ASC Topic 815. The fair value of the derivative instruments held as of December 31, 2013 are included in accrued expenses and other liabilities on the balance sheet.

The table below details the currency forward contracts Kennedy Wilson had as of December 31, 2013 and 2012:



(Dollars in millions)					Fair Value Liabilities				Change in Unrealized Losses
					December 31,				Year Ended December 31,
Currency	Notional Amount	Trade Date	Settlement Date	Exchange Rate	2013		2012		2013			2012
Euro	€96.0	5/31/2012 - 12/17/2013	6/4/2015 - 12/19/2016	1.2400 - 1.3816	$	7.0	$	1.2	$	(5.3	)	$	(1.2	)
GBP	£25.5	8/9/2013 - 8/23/2013	2/13/2014 - 8/28/2014	1.5479 - 1.5522	2.6		—		(2.6		)	—
Total					$	9.6	$	1.2	$	(7.9	)	$	(1.2	)

In order to manage currency fluctuations between the Company's functional currency (U.S. dollar) and the functional currency of KWR's functional currency (Japanese yen), the Company entered into forward foreign currency contracts to hedge a portion of its net investment in KWR. During the years ended December 31, 2013 and 2012, the Company recognized $12.9 million and $10.5 million of gross unrealized gains related to these hedges.

FAIR VALUE OF FINANCIAL INSTRUMENTS—The carrying amounts of cash and cash equivalents, accounts receivable including related party, accounts payable, accrued expenses and other liabilities, accrued salaries and benefits, deferred and accrued income taxes, and income tax receivable approximate fair value due to their short-term maturities. The carrying value of notes receivable (excluding related party notes receivable as they are presumed not to be an arm’s length transaction) approximates fair value as the terms are similar to loans with similar characteristics available in the market. As of December 31, 2013 and December 31, 2012, senior notes payable, borrowings under lines of credit, mortgage loans payable and junior subordinated debentures was estimated to be approximately $884.2 million and $708.2 million, respectively, based on a comparison of the yield that would be required in a current transaction, taking into consideration the risk of the underlying collateral and our credit risk to the current yield of a similar security, compared to their carrying value of $856.7 million and $686.2 million at December 31, 2013 and December 31, 2012, respectively. The inputs used to value our senior notes payable, borrowings under lines of credit, mortgage loans payable and junior subordinated debentures are based on observable inputs for similar assets and quoted prices in markets that are not active and are therefore determined to be level 2 inputs.