FAIR VALUE MEASUREMENTS AND THE FAIR VALUE OPTION

The following table presents fair value measurements (including items that are required to be measured at fair value and items for which the fair value option has been elected) as of June 30, 2018:



(Dollars in millions)	Level 1		Level 2			Level 3		Total
Unconsolidated investments	$	—	$	—		$	478.3	$	478.3
Net currency derivative contracts	—		(51.6		)	—		(51.6		)
Total	$	—	$	(51.6	)	$	478.3	$	426.7

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, 2017:



(Dollars in millions)	Level 1		Level 2			Level 3		Total
Unconsolidated investments	$	—	$	—		$	380.7	$	380.7
Marketable securities	7.5		—			—		7.5
Net currency derivative contracts	—		(100.9		)	—		(100.9		)
Total	$	7.5	$	(100.9	)	$	380.7	$	287.3

Unconsolidated Investments

Kennedy Wilson elected to use the fair value option ("FV Option") for nineteen 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 $369.8 million and $295.4 million at June 30, 2018 and December 31, 2017, respectively, which is included in unconsolidated investments in the accompanying balance sheets.

As noted in Note 4, the Company entered into a joint venture agreement targeting multifamily assets in Ireland with AXA. The Company has elected the fair value option on its interest in the joint venture agreement and will record the investment at fair value going forward. There were no changes recorded in the current period.

Additionally, Kennedy Wilson records its investments in Kennedy Wilson Real Estate Fund IV, Kennedy Wilson Real Estate Fund V, LP and Kennedy Wilson Real Estate Fund VI, LP (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 $108.5 million and $85.3 million at June 30, 2018 and December 31, 2017, respectively, which is included in unconsolidated investments in the accompanying consolidated balance sheets. As of June 30, 2018, Kennedy Wilson had unfunded capital commitments to the Funds in the amount of $40.5 million.

In estimating fair value of real estate held by the Funds and the nineteen 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)	June 30, 2018		December 31, 2017
FV Option	$	369.8	$	295.4
Funds	108.5		85.3
Total	$	478.3	$	380.7

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 three and six months ended June 30, 2018 and 2017:



	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in millions)	2018			2017			2018			2017
Beginning balance	$	406.9		$	409.7		$	380.7		$	356.7
Unrealized and realized gains	10.9			5.7			39.7			31.6
Unrealized and realized losses	(5.3		)	(2.7		)	(7.7		)	(1.0		)
Contributions	101.3			5.0			115.9			25.2
Distributions	(35.5		)	(55.4		)	(50.2		)	(74.5		)
Other	—			(0.4		)	(0.1		)	23.9
Ending balance	$	478.3		$	361.9		$	478.3		$	361.9

Unobservable Inputs for Real Estate

The table below describes the range of unobservable inputs for real estate assets:



	Estimated Rates Used for
	Capitalization Rates	Discount Rates
Office	4.50% - 7.25%	7.00% - 9.00%
Retail	5.75% - 9.50%	7.25% - 11.50%
Multifamily	4.75% - 7.75%	8.00% - 9.75%
Residential	N/A	6.00% - 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 1.43% to 3.46%.

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.

Marketable Securities

Marketable securities include Kennedy Wilson's investment in publicly traded equity securities and fixed income investments. During the six months ended June 30, 2018 the Company liquidated its marketable security portfolio. The fixed income portfolio consisted mainly of U.S. government and investment grade corporate bonds. The carrying value of marketable securities was a Level 1 valuation as the fair value was based off of unadjusted quoted market prices in active markets for identical securities.

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 June 30, 2018, 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 June 30, 2018 and December 31, 2017 are reported in other assets for hedge assets and included in accrued expenses and other liabilities for hedge liabilities on the accompanying balance sheet.

The table below details the currency derivative contracts Kennedy Wilson held as of June 30, 2018 and the activity during the six months ended June 30, 2018. For the six months ended June 30, 2018 Kennedy Wilson had a gross foreign currency translation loss on its net assets of $39.6 million. See Note 11 for a complete discussion on other comprehensive income including currency derivative contracts and foreign currency translations.



(Dollars in millions)				June 30, 2018					Six Months Ended June 30, 2018
Currency Hedged	Underlying Currency	Notional		Hedge Asset		Hedge Liability			Change in Unrealized Gains (Losses)				Realized Gains (Losses)⁽⁵⁾		Cash Received (Paid)
Outstanding
EUR	USD	€	293.3	$	15.6	$	(9.3	)	$	1.4			$	12.0	$	—
EUR⁽¹⁾	GBP	€	310.8	—		(67.5		)	3.6				—		—
EUR⁽¹⁾⁽²⁾	GBP			—		—			2.4				—		—
GBP	USD	£	600.3	13.8		(4.2		)	15.0				—		(0.8		)
Total Outstanding				29.4		(81.0		)	22.4				12.0		(0.8		)

Settled
EUR⁽⁴⁾	USD			—		—			(5.8		)		5.8		—
GBP	USD			—		—			3.5				—		(7.3		)
Total Settled				—		—			(2.3		)		5.8		(7.3		)
Total				$	29.4	$	(81.0	)	$	20.1		⁽³⁾	$	17.8	$	(8.1	)

⁽¹⁾ Hedge is held by KWE on its wholly-owned subsidiaries.

⁽²⁾ Relates to KWE's Euro Medium Term Note. See discussion in Note 8.

⁽³⁾ Excludes deferred tax benefit of $5.9 million

⁽⁴⁾ Amounts associated with investments that were part of AXA transaction. Amounts reclassified out of OCI to gain on sale of real estate.

⁽⁵⁾Includes $7.9 million of realized gains (losses) associated with hedges related to AXA transaction that are included as part of gain on sale of real estate.

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 June 30, 2018 and December 31, 2017 for the mortgage, KW unsecured debt, and KWE unsecured bonds were estimated to be approximately $5.6 billion and $5.8 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 $5.7 billion at June 30, 2018 and December 31, 2017, respectively. The inputs used to value the Company's mortgage, KW 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.