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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
| | | | | |
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2021
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-33824
Kennedy-Wilson Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
| | | | | | | | |
Delaware | | 26-0508760 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
151 S El Camino Drive
Beverly Hills, CA 90212
(Address of principal executive offices)
(310) 887-6400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
______________________________________________________________________
| | | | | | | | |
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on which Registered |
Common Stock, $.0001 par value | KW | NYSE |
Securities registered pursuant to Section 12(g) of the Act: None
______________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 ☒ No ☐
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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
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Large Accelerated Filer | | ☒ | | Accelerated Filer | | ☐ |
| | | |
Non-accelerated Filer | | ☐ | | Smaller Reporting Company | | ☐ |
| | | | | | |
Emerging Growth Company | | ☐ | | | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
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. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report ☒
Based on the last sale at the close of business on June 30, 2021, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $2,184,053,671.
The number of shares of common stock outstanding as of February 24, 2022 was 137,874,895.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates certain information by reference from the registrant’s definitive proxy statement for the annual meeting of stockholders to be held on or around June 9, 2022, which proxy statement will be filed no later than 120 days after the close of the registrant’s fiscal year ended December 31, 2021.
TABLE OF CONTENTS
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| | | | Page |
| | PART I | | |
Item 1. | | | | |
Item 1A. | | | | |
Item 1B. | | | | |
Item 2. | | | | |
Item 3. | | | | |
Item 4. | | | | |
| | | | |
| | PART II | | |
Item 5. | | | | |
Item 6. | | | | |
Item 7. | | | | |
Item 7A. | | | | |
Item 8. | | | | |
Item 9. | | | | |
Item 9A. | | | | |
Item 9B. | | | | |
Item 9C. | | | | |
| | | | |
| | PART III | | |
Item 10. | | | | |
Item 11. | | | | |
Item 12. | | | | |
Item 13. | | | | |
Item 14. | | | | |
| | | | |
| | PART IV | | |
Item 15. | | | | |
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 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. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by those forward-looking statements are reasonable, we do not guarantee that the transactions and events described will happen as described (or that they will happen at all). In addition, this report contains information and statistics regarding, among other things, the industry, markets, submarkets and sectors in which we operate. We obtained this information and these statistics from various third-party sources and our own internal estimates. We believe that these sources and estimates are reliable but have not independently verified them and cannot guarantee their accuracy or completeness.
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 Part I, Item IA of this Report. Except as required under the federal securities laws and the rules and regulations of the U.S. Securities and Exchange Commission (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. Please refer to "Non-GAAP Measures and Certain Definitions" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for definitions of certain terms used throughout this report.
PART I
Item 1. Business
Company Overview
Kennedy Wilson is a global real estate investment company. We own, operate and develop real estate with the objective of maximizing earnings over the long run for ourselves and our equity partners. We focus primarily on multifamily and office properties located in the Western United States, United Kingdom, and Ireland. As of December 31, 2021, we have 220 employees in 12 offices primarily located throughout the United States, the United Kingdom, Ireland and Spain. As of December 31, 2021, we had $21.6 billion in Real Estate Assets under Management" ("AUM"). The real estate that we hold in our global portfolio consists primarily of multifamily apartments (55%) and commercial properties (45%) based on Consolidated NOI and JV NOI. Geographically, we focus on the Western United States (60%), the United Kingdom (18%) and Ireland (19%).
Our investment activities in our Consolidated Portfolio (as defined below) involve ownership of multifamily units, office, retail and industrial space and one hotel. Our ownership interests in such consolidated properties make up our Consolidated Portfolio ("Consolidated Portfolio") business segment as discussed in detail throughout this report.
In addition to investing our shareholder's capital, we invest capital on behalf of our partners in real estate and real estate related assets through our Co-investment Portfolio ("Co-investments Portfolio"). This 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. As of December 31, 2021, our fee-bearing capital was $5.0 billion and we recognized $35.3 million in recurring investment management fees and $117.9 million of performance allocations (allocated amounts to us on co-investments we managed based on the cumulative performance of the underlying investment) during the year ended December 31, 2021. We generally invest our own capital alongside our equity partners in these joint ventures and commingled funds that we manage.
As of December 31, 2021, the following key metrics of our Consolidated and Co-investments Portfolio are as follows:
| | | | | | | | |
| Consolidated | Co-Investments |
Multifamily units - market rate | 10,460 | | 14,180 | |
Multifamily units - affordable | — | | 10,725 | |
Office feet square feet (millions) | 4.9 | | 7.1 | |
Retail and industrial square feet (millions) | 3.4 | | 8.5 | |
Hotels | 1 | 1 |
Real estate debt - 100% (billions) | $ | — | | $ | 1.7 | |
Real estate debt - KW Share (millions) | $ | — | | $ | 135.2 | |
Revenues (millions) | $ | 407.6 | | $ | 217.1 | |
NOI (millions) | $ | 255.8 | | $ | 124.4 | |
AUM (billions) | $ | 9.7 | | $ | 11.9 | |
In our Co-investments Portfolio, 92% of our carrying value is accounted for at fair value. Our interests in such joint ventures and commingled funds and the fees that we earn from such vehicles make up our Co-investments Portfolio segment as discussed in detail throughout this report.
In addition to our income-producing real estate, we also engage in development, redevelopment and value add initiatives through which we enhance cash flows or reposition assets to increase value. Our total share of development project costs with respect to these investments are estimated at $669.0 million over the next three years. These costs are generally financed by cash from our balance sheet, capital provided by partners (if applicable), cash flow from investment and construction loans. Cost overrun risks are reduced by detailed architectural plans, guaranteed price contracts and supervision by expert Company executives and personnel. When completed, the construction loans are generally replaced by long-term mortgage financing. See additional detail in the section titled Development and Redevelopment below.
Investment Approach
The following is our investment approach:
•Identify countries and markets with an attractive investment landscape
•Establish operating platforms in our target markets
•Develop local intelligence and create long-lasting relationships, primarily with financial institutions
•Leverage relationships and local knowledge to drive proprietary investment opportunities with a focus on off-market transactions that we expect will result in above average cash flows and returns over the long term
•Acquire high quality assets, either on our own or with strategic partners
•Reposition assets to enhance cash flows post-acquisition
•Explore development opportunities on underutilized portions of assets, or acquire development assets that fit within our overall investment strategy
•Continuously evaluate and selectively harvest asset and entity value through strategic realizations using both the public and private markets
The table below highlights some of the Company's key metrics over the past five years:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
($ in millions, except fee bearing capital which $ in billions) | 2021 | | 2020 | | 2019 | | 2018 | | 2017 |
Revenue | $ | 453.6 | | | $ | 450.9 | | | $ | 569.7 | | | $ | 773.5 | | | $ | 801.8 | |
Net income to Kennedy-Wilson Holdings Inc. common shareholders | 313.2 | | | 92.9 | | | 224.1 | | | 150.0 | | | 100.5 | |
Basic income per share | 2.26 | | | 0.66 | | | 1.60 | | | 1.04 | | | 0.83 | |
Dividends declared per share of common stock | 0.90 | | | 0.88 | | | 0.85 | | | 0.78 | | | 0.70 | |
Adjusted EBITDA(1) | 927.9 | | 608.0 | | 728.1 | | 712.7 | | 455.7 |
% change | 52.6 | % | | (16.5) | % | | 2.2 | % | | 56.4 | % | | — | % |
Adjusted Net Income(2) | 509.0 | | | 306.9 | | | 442.5 | | | 397.0 | | | 242.5 | |
Adjusted Net Income annual increase (decrease) | 65.9 | % | | (31.3) | % | | 11.5 | % | | 63.7 | % | | — | % |
Multifamily Occupancy | 95.4 | % | | 95.2 | % | | 94.4 | % | | 94.7 | % | | 93.8 | % |
% change | 0.2 | % | | 0.8 | % | | (0.3) | % | | 1.0 | % | | — | % |
Commercial Occupancy | 94.3 | % | | 93.4 | % | | 93.3 | % | | 94.2 | % | | 94.2 | % |
% change | 1.0 | % | | 0.1 | % | | (1.0) | % | | — | % | | — | % |
Consolidated NOI(1) | 255.8 | | 262.3 | | 305.2 | | 368.3 | | 242.0 |
% change | (2.5) | % | | (14.1) | % | | (17.1) | % | | 52.2 | % | | — | % |
JV NOI(1) | 124.4 | | 102.5 | | 77.8 | | 55.3 | | 48.1 |
% change | 21.4 | % | | 31.7 | % | | 40.7 | % | | 15.0 | % | | — | % |
Fee-bearing capital | 5.0 | | | 3.9 | | 3.0 | | 2.2 | | 1.8 |
% change | 28.2 | % | | 30.0 | % | | 36.4 | % | | 22.2 | % | | — | % |
(1) Please refer to "Certain Non-GAAP Measures and Reconciliations" for a reconciliation of certain non-GAAP items to U.S. GAAP.
The table below highlights some of the Company's balance sheet metrics over the past five years:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | As of December 31, |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 |
Balance sheet data: | | | | | | | | | |
Cash and cash equivalents | $ | 524.8 | | | $ | 965.1 | | | $ | 573.9 | | | $ | 488.0 | | | $ | 351.3 | |
Total assets | 7,876.5 | | | 7,329.0 | | | 7,304.5 | | | 7,381.8 | | | 7,724.8 | |
Mortgage debt | 2,959.8 | | | 2,589.8 | | | 2,641.0 | | | 2,950.3 | | | 3,156.6 | |
KW unsecured debt | 1,852.3 | | | 1,332.2 | | | 1,131.7 | | | 1,202.0 | | | 1,179.4 | |
KWE unsecured bonds | 622.8 | | | 1,172.5 | | | 1,274.2 | | | 1,260.5 | | | 1,325.9 | |
Kennedy Wilson equity | 1,777.6 | | | 1,644.5 | | | 1,678.7 | | | 1,246.7 | | | 1,365.6 | |
Noncontrolling interests | 26.3 | | | 28.2 | | | 40.5 | | | 184.5 | | | 211.9 | |
Total equity | 1,803.9 | | | 1,672.7 | | | 1,719.2 | | | 1,431.2 | | | 1,577.5 | |
Common shares outstanding | 138.0 | | | 141.4 | | | 151.6 | | | 143.2 | | | 151.6 | |
The following table shows the historical U.S. federal income tax treatment of the Company’s common stock dividend for the years ended December 31, 2021 through 2017:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 |
Taxable Dividend | — | % | | 27.14 | % | | 10.53 | % | | 23.43 | % | | — | % |
Non-Taxable Return of Capital | 100.00 | % | | 72.86 | % | | 89.47 | % | | 76.57 | % | | 100.00 | % |
Total | 100.00 | % | | 100.00 | % | | 100.00 | % | | 100.00 | % | | 100.00 | % |
Business Segments
Our operations are defined by two business segments: our consolidated investment portfolio (the "Consolidated Portfolio") and our co-investment portfolio (the "Co-Investment Portfolio")
•Our Consolidated Portfolio consists of the investments in real estate and real estate-related assets that we have made and consolidate on our balance sheet. We typically wholly-own the assets in our Consolidated Portfolio.
•Our Co-Investment Portfolio consists of (i) the co-investments in real estate and real estate-related assets, including loans secured by real estate, that we have made through the commingled funds and joint ventures that we manage; (ii) fees (including, without limitation, asset management fees and construction management fees); and (iii) performance allocations that we earn on our fee bearing capital. We typically have a 5% to 50% ownership interest in the assets in our Co-investment Portfolio. We have a weighted average ownership of 39% as of December 31, 2021.
In addition to our two primary business segments, our Corporate segment includes, among other things, our corporate overhead and, prior to the sale of the group in October 2020, our property services group.
Consolidated Portfolio
Our Consolidated Portfolio is a permanent capital vehicle focused on maximizing property cash flow. These assets are primarily wholly-owned and tend to have longer hold periods and we target investments with accretive asset management opportunities. We typically focus on office and multifamily assets in the Western United States and commercial assets in the United Kingdom and Ireland within this segment.
The non-GAAP table below represents a summarized balance sheet of our Consolidated Portfolio which is held at historical depreciated cost as of December 31, 2021 and 2020. This table does not include amounts from our corporate segment such as corporate cash and the KWH Senior Notes.
| | | | | | | | | | | |
($ in millions) | December 31, 2021 | | December 31, 2020 |
Cash(1) | $ | 362.3 | | | $ | 733.2 | |
Real estate | 5,059.8 | | | 4,720.5 | |
Accounts receivable and other assets | 111.7 | | | 146.5 | |
Total Assets | $ | 5,533.8 | | | $ | 5,600.2 | |
| | | |
Accounts payable | 17.4 | | | 28.9 | |
Accrued expenses | 126.8 | | | 184.5 | |
Mortgage debt | 2,959.8 | | | 2,589.8 | |
KWE bonds | 622.8 | | | 1,172.5 | |
Total Liabilities | 3,726.8 | | | 3,975.7 | |
| | | |
Equity | $ | 1,807.0 | | | $ | 1,624.5 | |
(1)Excludes $162.5 million and $236.4 million as of December 31, 2021 and December 31, 2020 of corporate non-property level cash.
Co-Investments Portfolio
We utilize different platforms in the Co-investment Portfolio segment depending on the asset and risk return profiles.
The table below represents the carrying value of our Co-Investment Portfolio balance sheet which is primarily at fair value, at our share of the underlying investments as of December 31, 2021 and December 31, 2020. The Co-Investment Portfolio consists of our unconsolidated investments as well as our loan purchases and originations.
| | | | | | | | | | | |
($ in millions) | December 31, 2021 | | December 31, 2020 |
Cash | $ | 103.7 | | | $ | 77.3 | |
Real estate | 3,667.9 | | | 2,654.4 | |
Loans | 143.4 | | | 107.1 | |
Accounts receivable and other assets | 311.9 | | | 205.0 | |
Total Assets | $ | 4,226.9 | | | $ | 3,043.8 | |
| | | |
Accounts payable and accrued expenses | 87.1 | | | 64.6 | |
Mortgage debt | 2,061.9 | | | 1,582.8 | |
Total Liabilities | 2,149.0 | | | 1,647.4 | |
| | | |
Equity | $ | 2,077.9 | | | $ | 1,396.4 | |
Separate accounts
We have several equity partners whereby we act as the general partner and receive investment management fees including acquisition, disposition, financing, construction management and other fees. We also can earn performance allocations if investments exceed certain return hurdles. In addition to acting as the asset manager and general partner of those joint ventures, we are also a co-investor in these investments. Our separate account platforms have defined investment parameters such as asset types, leverage and return profiles and expected hold periods. As of December 31, 2021, our weighted average ownership interest in the various joint ventures that we manage was 44%.
Commingled funds
We currently have three closed end funds that we manage and through which we receive investment management fees and potentially performance allocations. We focus on sourcing investors in the U.S., Europe and Middle East and target investments in the U.S. and Europe with respect to our commingled funds. Each of our funds have, among other things, defined investment guidelines, investment hold periods and target returns. Currently our U.S. based funds focus on value-add properties that have an expected hold period of 5 to 7 years. Our European fund focuses on value add commercial properties in the United Kingdom, Ireland and Spain that also have expected hold
periods of 5 to 7 years. As of December 31, 2021, our weighted average ownership interest in the commingled funds that we manage was 12%.
VHH
Through our Vintage Housing Holdings ("VHH") partnership we acquire and develop income and age restricted properties. See a detailed discussion of this business in the Multifamily section below.
Investment Types
The following are the product types we invest in through our Consolidated Portfolio and Co-Investment Portfolio segments:
Multifamily
We pursue multifamily acquisition opportunities where we can unlock value through a myriad of strategies, including institutional management, asset rehabilitation, repositioning and recapitalization. We focus primarily on apartments in supply-constrained, infill markets.
As of December 31, 2021, we held investments in 138 multifamily assets that include 10,460 consolidated multifamily apartment units and 14,180 units within our market rate Co-Investment Portfolio and 10,725 affordable units in our VHH platform. Our largest Western United States multifamily regions are the Mountain West region, which includes Utah, Idaho, Montana, Colorado, Arizona, New Mexico and Nevada and the Pacific Northwest, primarily the greater Seattle area and Portland, Oregon. The remainder of the Western United States portfolio is located in Northern and Southern California. In Ireland we focus on Dublin city center and the suburbs of the city.
Our asset management strategy is to install strong property management teams to drive leasing activity and upkeep of the properties. To complement this strategy, we seek to add amenities designed to promote health and wellness, celebrate local and cultural events and enhance the lives of residents living in our communities. We also incorporate spaces for rest and socialization across our global multifamily portfolio, including clubhouses, fitness centers, business suites, outdoor play areas, pools and dog parks. Lastly, we utilize real-time market data and artificial intelligence based applications to ensure we are attaining current market rents.
Multifamily - Affordable Housing
Through our VHH platform we focus on affordable units based on income or age restrictions. With homes reserved for residents that make 50% to 60% of the area’s median income, VHH provides an affordable long-term solution for qualifying working families and active senior citizens, coupled with modern amenities that are a hallmark of our traditional multifamily portfolio. Fundamental to our success is a shared commitment to delivering quality affordable homes and building communities that enrich residents’ lives, including providing programs such as social support groups, after-school programs, transportation assistance, computer training, and wellness classes.
VHH typically utilizes tax-exempt bond financing and the sale of federal tax credits to help finance its investments. We are entitled to 50% of the operating cash flows from the VHH partnership in addition to any investing distributions we receive from federal tax credits or refinancing activity at the property level.
When we acquired VHH in 2015, the portfolio consisted of 5,485 units. As of December 31, 2021, the VHH portfolio includes 8,595 stabilized rental units with another 2,130 units currently under stabilization, development or undergoing entitlements in the Western United States. We acquired our ownership interest in VHH in 2015 for approximately $80.0 million. As of December 31, 2021 we have contributed an additional $101.2 million into VHH and have received $240.7 million in cash distributions. VHH is an unconsolidated investment that we account for using the fair value option which had a carrying value of $157.9 million as of December 31, 2021. We have recorded $160.1 million worth of fair value gains on our investment in VHH including $29.3 million during the year ended December 31, 2021.
Commercial
Our investment approach for office acquisitions differs across our various investment platforms. For our Consolidated Portfolio we look to invest in large high quality properties with high replacement costs. In our separate account portfolios, our partners have certain characteristics that factor into our investment decision, including, without limitation, location, financing (unencumbered properties) or hold periods. In our commingled funds that we manage, we typically look for opportunities that have a value-add component that can benefit from our asset management expertise. We do not typically own high-rise buildings in city centers and we instead look to invest in mid-to-low rise buildings in areas adjacent to city centers and suburban markets. After acquisition, the properties are generally repositioned to enhance market value.
Our industrial portfolio consists mainly of distribution centers located in the United Kingdom, Ireland, Spain and Mountain West regions.
Our retail portfolio has different characteristics based on the geographic markets wherein the properties are located. In Europe, we have a mixture of high street retail, suburban shopping centers and leisure assets which are mainly located in the United Kingdom as well as Dublin and Madrid. In our Western United States retail portfolio, we invest in shopping centers that are generally grocery anchored.
As of December 31, 2021, we hold investments in 66 office properties totaling over 12.0 million square feet and 124 retail and industrial properties totaling 11.9 million square feet predominately in the United Kingdom and Ireland with additional investments in the Pacific Northwest, Southern California, Spain and Italy. Our Consolidated portfolio held over 4.9 million square feet of office space and 3.4 million square feet of retail and industrial space. Our Co-Investment portfolio has 7.1 million square feet of office space and 8.5 million square feet of retail and industrial space.
Development and redevelopment
We have a number of development, redevelopment and entitlement projects that are underway or in the planning stages. Unlike the residential projects that are held for sale and described in the Residential and Other section below, these initiatives may ultimately result in income-producing assets. As of December 31, 2021, we are actively developing 2,279 multifamily units, 0.5 million commercial rentable square feet and 150 hotel rooms. If these projects are brought to completion, the Company’s estimated share of the total capitalization of these projects would be approximately $1.2 billion (approximately 46% of which has already been funded), which we expect would be funded through our existing equity, third party equity, project sales, tax credit financing and secured debt financing. This represents total capital over the life of the projects and is not a representation of peak capital and does not take into account any distributions over the course of the investment. We and our equity partners are under no obligation to complete these projects and may dispose of any such assets after adding value through the entitlement process. Please also see the section titled “Liquidity and Capital Resources - Development and redevelopment” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional detail on these investments.
Real Estate Debt Investment
We have a global real estate debt investment platform with multiple partners. In July 2021, we announced the expansion of our debt platform to over $3 billion, including the launch of a new European partnership with a global institutional investor to target loans secured by high-quality real estate in the United Kingdom and Europe. Our global debt platform, which includes capital partners across insurance and sovereign wealth, targets loans, across the entire real estate debt capital structure, secured by high-quality real estate located in the United States, United Kingdom and Europe. In our role as asset manager, we earn customary fees under our platform. The current investments in these platforms have been made without the use of any leverage.
As of December 31, 2021, we held interests in 30 loans with an average interest rate of 6.9% per annum and an unpaid principal balance ("UPB") of $1.7 billion (of which our share was a UPB of $135.2 million) located in the Western United States and the United Kingdom and are primarily invested through our Co-investment Portfolio. Some of our loans contain additional funding commitments that will increase our loan balances if they are utilized. All of the loans in our global debt platform are performing in line with expectations and making payments as contractually agreed. In addition to interest income (which includes origination, exit and extension fees), we also earn customary asset management fees from our partners for managing these loan investments.
Our current loan portfolio is focused on performing loans. However, if market conditions deteriorate, we expect more opportunities to arise in acquiring loan portfolios at a discount to their contractual balance due as a result of deteriorated credit quality of the borrower. Such loans are underwritten by us based on the value of the underlying real estate collateral. Due to the discounted purchase price for such loans, we seek, and are generally able to, accomplish near term realization of the loan in a cash settlement or by obtaining title to the property. Accordingly, the credit quality of the borrower is not of substantial importance to our evaluation of the risk of recovery from such investments.
Hotel
We acquire hotels in certain opportunistic situations in which we are able to purchase at a discount to replacement cost or can implement our value-add investment approach. As of December 31, 2021, we owned one consolidated operating hotel with 265 hotel rooms located in Dublin, Ireland. Additionally, in our Co-investment Portfolio, we have a five-star resort development that will consist of 150 rooms in Kona, Hawaii.
Residential and Other
In certain cases, we may pursue for-sale housing acquisition opportunities, including land for entitlements, finished lots, urban infill housing sites and partially finished and finished housing projects. On certain income-producing acquisitions,
there are adjacent land parcels for which we may pursue entitlement activities or, in some cases, development or re-development opportunities.
This product type also includes our investment in liquid non-real estate investments which include investment funds that hold marketable securities and private equity investments.
As of December 31, 2021, we held 19 investments primarily comprised of 223 residential units/lots and 3,778 acres of land located in Hawaii and the Western United States. As of December 31, 2021, these investments had a Gross Asset Value of $276.7 million and the Company had a weighted average ownership in such of investments of 76%. These investments are in various stages of completion, ranging from securing the proper entitlements on land positions to sales of units/lots.
Fair Value Investments
As of December 31, 2021, $1.8 billion or 92% of our investments in unconsolidated investments (23% of total assets) were held at estimated fair value. As of December 31, 2021, there were cumulative fair value gains of $588.3 million which comprises 33% of the $1.8 billion carrying value of fair value unconsolidated investments that are currently held. Our investment in VHH is our largest unconsolidated investment held at estimated fair value and was held at $157.9 million and $142.9 million as of December 31, 2021 and 2020, respectively. Fair value changes consist of changes in the underlying value of properties and associated mortgage debt as well as foreign currency fluctuations (net of any hedges) for non-dollar denominated investments. During the year ended December 31, 2021, we recognized $331.4 million of fair value gains and performance allocations on unconsolidated investments.
In determining these estimated fair market values, we use discounted cash flow models that estimate future cash flows (including terminal values) and discount those cash flows back to the current period. The accuracy of estimating fair value for investments 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. As such, below are ranges of the key metrics included in determining these estimated values.
| | | | | | | | | | | | | | |
| | Estimated Rates Used For |
| | Terminal Capitalization Rates | | Discount Rates |
Multifamily | | 3.70% — 5.25% | | 5.35% — 7.40% |
Office | | 4.00% — 7.75% | | 5.10% — 9.25% |
Industrial | | 3.50% —7.40% | | 4.40% — 8.40% |
Retail | | 5.00% — 7.00% | | 7.50% — 9.00% |
Hotel | | 6.00% | | 8.25% |
Residential | | N/A | | N/A |
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 0.25% to 4.90%.
There is no active secondary market for our development projects and no readily available market value given the uncertainty of the amount and timing of future cash flows. Accordingly, our determination of fair value of our development projects requires judgment and extensive use of estimates. Therefore, we typically use investment cost as the estimated fair value until future cash flows become more predictable. Additionally, the fair value of our development projects may differ significantly from the values that would have been used had a market existed for such investments and may differ materially from the values that we may ultimately realize. If we were required to liquidate an investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized or incurred on these investments to be different than the unrealized gains or losses reflected in the currently assigned valuations.
Value Creation
Our differentiated and unique approach to investing is the cornerstone of how we create value for our shareholders. Our investment philosophy is based on three core fundamentals:
•Leverage our global footprint and complementary investment and investment management businesses to identify attractive investment markets across the world.
•Selectively invest in opportunities across many real estate product types with a goal of maximizing cash flow and risk-adjusted return on capital.
•Actively manage assets and finance our assets in a manner designed to generate stable, predictable and growing cash flows for shareholders and clients.
Kennedy Wilson is able to create value for its shareholders in the following ways:
•We are able to identify and acquire attractive real estate assets across many markets, in part due to the significant proprietary deal flow driven from an established global network of industry relationships, particularly with financial institutions. This can create value by allowing us to maintain and develop a large pipeline of attractive opportunities.
•Our operating expertise allows us to focus on opportunistic investments where we believe we can increase the value of assets and cash flows and include transactions with distressed real estate owners or lenders seeking liquidity, or purchases of under-managed or under-leased assets, and repositioning opportunities.
•We have been able to create place-making areas in our investment locations where we are able to make multiple investments in a particular city either through direct investments or development initiatives that further drives interest in the area.
•Many times, these investments are acquired at a discount to replacement cost or recent comparative sales, thereby offering opportunities to achieve above average total returns. In many cases, this may lead to significant additional returns, such as a carried interest (where we have partners), based on the performance of the assets.
•Our long-lasting and deep relationships with financial institutions allow us to refinance loans (generally after we implement our value-add initiatives) to reduce interest rates and/or increase borrowings due to property appreciation and thereby obtain cash flow to use for new investments.
•We have been able to attract third party capital due to our ability to generate above-market returns for our partners, diversity of geographic markets and investment product types as well as our flexibility in structuring deals through funds, separate accounts and equity partner arrangements.
•We understand that real estate is cyclical. Our management team employs a multi-cyclical approach that has resulted in our AUM being globally diversified across many sectors of real estate while maintaining a healthy liquidity position and adequate access to capital.
Competitive Strengths
We have a unique platform from which to execute our investment and investment management strategy. The combination of an investment and investment management platform provides several competitive strengths when compared to other real estate buyers and asset managers operating stand-alone or investment-focused firms and may allow us to generate superior risk-adjusted returns. Our investment strategy focuses on investments that offer significant appreciation potential through intensive asset management, leasing, repositioning, redevelopment and the opportunistic use of capital. We differentiate ourselves from other firms in the industry with our full service, investment-oriented structure.
Our competitive strengths include:
•Transaction experience: Our senior management team has an average of 25 years of real estate experience and has been working and investing together on average for over 10 years. Members of the senior management team have collectively acquired, developed and managed in excess of $30 billion of real estate investments in the United States, the United Kingdom, Ireland, Spain, Italy and Japan throughout various economic cycles, both at our Company and throughout their careers.
•Extensive relationship and sourcing network: We leverage our relationships in order to source off-market deals. In addition, the senior management team and our acquisition team have transacted deals in nearly every major metropolitan market on the West Coast of the United States, as well as in the United Kingdom, Ireland, Spain, Italy and Japan. Their local presence and reputation in these markets have enabled them to cultivate key relationships with major holders of property inventory, in particularly financial institutions, throughout the real estate community.
•Structuring expertise and speed of execution: Prior acquisitions completed by us have taken a variety of forms, including direct property investments, joint ventures, exchanges involving stock or operating partnership units, participating loans and investments in performing and non-performing mortgages at various capital stack positions with the objective of long-term ownership. We believe we have developed a reputation of being able to quickly execute, as well as originate and creatively structure acquisitions, dispositions and financing transactions.
•Strategic partnerships: Through our relationships and transaction experience we have been able to establish various strategic partnerships with a variety of different companies and institutions in which we are highly collaborative and aligned with our partners in the deals. Coupled with our ability to structure acquisitions in a variety of ways that fit the
needs of our strategic partners we have been able to access various forms of capital due to our experience and versatility.
•Vertically integrated platform for operational enhancement: We have 220 employees in 12 offices throughout the United States, the United Kingdom, Ireland, Spain and Jersey. We have a hands-on approach to real estate investing and possess the local expertise in property and asset management, leasing, construction management, development and investment sales, which we believe enable us to invest successfully in selected submarkets.
•Calculated risk taking: We underwrite our investments based upon a thorough examination of property economics and a critical understanding of market dynamics and risk management strategies. We conduct an in-depth sensitivity analysis on each of our acquisitions. This analysis applies various economic scenarios that include changes to rental rates, absorption periods, operating expenses, interest rates, exit values and holding periods. We use this analysis to develop our disciplined acquisition strategies.
•Management's alignment with shareholders: As of December 31, 2021, our directors and executive officers and their respective affiliates owned an aggregate of approximately 15% of the outstanding shares of our common stock. Due to management team's ownership interest in the Company its interests are in alignment with common shareholders of the Company and gives us an owner's mentality on the investments we own and manage.
The real estate business is cyclical. Real estate cycles are generally impacted by many factors, including availability of equity and debt capital, borrowing cost, rent levels, and asset values. Our strategy has resulted in a strong track record of creating both asset and entity value for the benefit of our shareholders and partners over these various real estate cycles.
Industry Overview
Key Investment Markets
Western United States
In 2021, the U.S. economy experienced a broad economic recovery from the effects felt in 2020 due to the onset of the COVID-19 pandemic. GDP accelerated at a 6.9% annualized pace in the fourth quarter of 2021, and national unemployment improved to 3.9% from 6.7% at the beginning of the year. The real estate transaction market in the U.S. recovered sharply, with transactions reaching a record annual total according to Real Capital Analytics. The US equity markets also experienced a very strong year, supported by stimulus packages, vaccine rollouts, and accommodative Fed policy.
The multifamily sector experienced a strong rebound in 2021, with occupancy and rent levels recovering to above pre-pandemic levels. The pandemic created new domestic migration patterns, which drove many renters to lower cost, more affordable suburban cities throughout the U.S. and outside of city centers. Suburban markets are expected to continue to perform strongly in 2022 due to a number of factors, including the continuing ability to work remotely and renters’ desire for more space. According to CBRE, investment volume in multifamily is expected to increase in 2022, supported by liquid multifamily debt markets and an expected resurgence in foreign capital targeting multifamily assets. Kennedy Wilson's U.S. multifamily portfolio is largely comprised of garden style communities with approximately 88% of our portfolio located in suburban markets. In addition to our meaningful portfolio in the surrounding Seattle region, the Company has shifted its market-rate portfolio to the Mountain states, which now is the largest market-rate region by unit count and primarily consists of its assets in Utah, Idaho, and Nevada.
The outlook for office continued to be impacted by COVID variants and the ability for workers to return to the office in 2021. Office demand ended 2021 on a high note, with net absorption recorded in Q4 of 2021, its first month of positive net absorption since the onset of the pandemic. It is expected that demand for office will continue to improve in 2022, supported by the creation of an estimated 1 million new office-using jobs. Hybrid working arrangements continues to an important factor for many occupiers, as many occupiers focus on energy-efficient workplaces that offer a variety of amenities, new desirable technology, and flexible configurations. Kennedy Wilson's U.S. office portfolio is primarily located in Southern California and the Greater Seattle market. The majority of the U.S. office is owned with partners through the Company’s co-investment segment.
Hawaii
The Hawaiian economy continued to rebound from the impacts of COVID-19. There were an estimated 6.8 million visitors to Hawaii in 2021, an increase of 153% from 2020. The luxury real estate market in Hawaii grew at an unprecedented pace in 2021, with total sales and transactions seeing triple digit growth. The outlook for the continued recovery of the Hawaiian economy in 2022 remains positive, as pent-up travel demand is expected to bring almost 9 million visitors in 2022.
United Kingdom
The U.K. economy showed increased recovery in 2021, despite the continued challenges of withdrawal from the European Union and impact of the COVID-19 global pandemic which resulted in a strict national lockdown during the first half of the year followed by easing of restrictions. The U.K.'s gross domestic product ("GDP") surpassed its February 2020, pre-pandemic level for the first time in November 2021 by 0.7% and saw an annual rise of 7.3% for 2021. Positive signs can also be seen in the U.K. unemployment rate which decreased by 0.4 percentage points quarter-on-quarter to 4.1% as of quarter ended December 31, 2021, just 0.1 percentage points higher than pre-pandemic levels. The labor market has tightened following the end of the U.K. government's furlough program, with a record high of 1.2 million job vacancies in the three months ended December 2021 due to strong demand for labor and limited supply.
U.K. real estate investment volumes finished the year strong with £60 billion invested in 2021, 6% higher than the ten-year average. Foreign and domestic investment were evenly split for the year with domestic investment making up 51% of total investment volume.
Central London office absorption was 9.1 million square feet for 2021, representing an increase of 63% when compared to 2020, though still below the 10-year average by 24%. The creative industries sector was the most active over 2021, accounting for 21% of absorption, followed by banking and finance at 19%. Investment volumes saw a strong end to the year with a total of £3.7 billion invested, across 53 transactions in the fourth quarter of 2021. Capital transactions for the full year totaled £10 billion, significantly higher than the 2020 total of £7.6 billion, with foreign investment making up 62% of the total capital invested.
Southeast office investment volumes reached £4.3 billion in 2021, a 26% increase on the five-year annual average of £3.42 billion. Vacancy of 6.8% at the end of 2021 remains unchanged from the end of 2020 and still below the 10-year average of 7.0%, with new and grade A vacancies sitting at 4.5%.
The industrial and logistics sectors remained the strongest performers, with total investment volumes for 2021 reaching £10.4 billion, breaking the previously established record set in 2020. The occupier market reflected strong demand-supply dynamics with absorption totaling a record-high 55.1 million square feet in 2021, an increase in the long-term annual average by 86%. Whilst online retailers accounted for 35% of take-up third-party logistics, automotive, manufacturing and High Street retail companies all increased the amount of space taken in 2021, demonstrating a wider breadth of demand when compared to recent averages.
The U.K. retail sector saw positive momentum towards recovery in 2021. Outside of restrictions, footfall continued to improve, with retail parks outperforming as a result of their differentiated convenience and purpose-driven tenant mix and yields for prime shopping centers remained stable at 7.75%.
Ireland
Ireland’s economy had the strongest GDP growth across the EU at 16.1% in 2021 and the Organisation for Economic Co-operation and Development is forecasting Ireland to have the highest GDP growth of any major European economy over the next two years.
As of December 31, 2021, Industrial Development Agency total Foreign Direct Investment ("FDI") employment stands at 275,384 with more than 29,000 new jobs created throughout 2021 which is the highest level of Irish employment creation through FDI ever in a single year despite the continued impact of COVID-19.
Real estate investment volumes reached approximately €5.5 billion for 2021, almost doubling the 10-year average of €2.9 billion, a strong figure given the impact of COVID-19 and associated government restrictions during the first half of the year. Demonstrating Ireland’s position as an attractive global real estate market, 67% of investments were from institutional investors, and foreign investors accounted for 68% of the volume.
Dublin office absorption was more than 1.65 million square feet in 2021 with 85% occurring in the second half of the year demonstrating a renewed level of employer confidence in the future of physical offices. Prime headline city center rents remained stable at €57.50 per square foot but are expected to increase over 2022 due to more deal activity.
The Irish multifamily sector remains the dominant investment sector accounting for 41% of all transactions in 2021. Due to a scarcity of core operational assets, forward funded deals accounted for most of the transactions in the market. Prime yields remain stable at 3.60%, as rent collection and occupancy remained strong. As a result of increasing investor interest, PRS yields are expected to be further tightened in 2022.
The retail investment sector is still recovering from the impact of the pandemic, as transactional liquidity improves and more assets are trading. Additionally, online sales volume fell to 4% of total volume from a high of 16% in 2020, signaling a potential return to in-store retail shopping.
Despite the continued impact of the pandemic on the hospitality sector through the first half of 2021, the Irish hotel property market saw higher than expected volume of sales from a diverse group of buyers and transaction types with €383 million spent in 2021. Further improvement is expected with the sale of individual properties as well as some hotel portfolios in 2022. October was an important milestone in the Dublin hotel market as it was the first month in which occupancy surpassed 50% since the first quarter of 2020 and the rate is expected to rise in 2022 as international travel to Dublin is expected to strengthen.
Environmental, Social and Governance (ESG)
Kennedy Wilson’s approach to ESG aligns with its business strategy to maximize the inherent value of our assets and by striving to deliver long-term social, environmental, and economic value across our portfolio and to our key stakeholders. We aim to integrate ESG factors into key business processes, underpinned by a measure, manage, and monitor approach framed by our four ESG pillars most relevant to our business: Optimizing Resources, Creating Great Places, Building Communities and Operating Responsibly. Details of this framework can be found on our corporate website (https://www.kennedywilson.com/corporate-responsibility) (this website address is not intended to function as a hyperlink, and the information contained in, or accessible from, our website is not intended to be a part of this filing).
Our Global ESG Committee (“Committee”) oversees the Company’s ESG responsibilities and commitments, including Kennedy Wilson’s ambition to have a positive impact across its business, communities, and stakeholders. The Committee is responsible for formulating and implementing procedures, including setting appropriate global ESG priorities that align across target markets. We focus on the following principles:
•Comply with relevant ESG related laws and regulations, material to our business
•Improve our measure, manage, and monitor programs relating to energy and carbon, water, and waste
•Deliver green buildings and programs emphasizing wellness and communities, through our development and asset management expertise and campus ownership of office and multifamily properties
•Integrate ESG factors into decision-making across the firm, including key investment processes and by ensuring appropriate resources are provided to deliver on our commitments
•Promote equality, diversity and inclusion by providing healthy environments for our employees, stakeholders and building users
It is our intention to manage ESG factors, both opportunities and risks, at the corporate, fund, partnership and individual asset level, with the goal of integrating procedures across all stages of our investment process.
We have in place a robust governance framework. Our policies can be viewed on our corporate website (https://www.kennedywilson.com/corporate-responsibility) (this website address is not intended to function as a hyperlink, and the information contained in, or accessible from, our website is not intended to be a part of this filing) and cover guidelines and rules regarding anti-discrimination, anti-harassment, non-retaliation, human trafficking and slavery, fraud prevention, data security and data privacy.
Human Capital Management
Company Overview and Values
We operate as a non-bureaucratic, teamwork-oriented, and nimble organization. We promote an entrepreneurial culture, and at our core, we are powered by a team of focused, high-performance people who thrive on excellence in the workplace and a shared desire to make an impact.
Workplace Diversity
We strive to maintain a diverse corporate culture, celebrating and promoting equality across gender, socio-economic backgrounds, education, and ethnicity. This allows for better representation of different viewpoints, historical perspective and can bring fresh ideas to all levels of the Company. Women hold 27% of the board of director positions. In 2021, we launched the Kennedy Wilson Woman speaker series as a first step in a broader program to advance women in real estate and finance and deepen our industry’s talent pool.
Training and Development
Kennedy Wilson would not exist without our most important asset: our people. We strive to maintain a culture that fosters collaboration and innovation, and we take great pride in building and maintaining a driven, results-oriented workforce.
Our talent development program includes access to formal and informal mentorships, tuition reimbursement, where we are supporting employees who are seeking advanced certificates in areas of specialty that pertain to their role at Kennedy Wilson, and "Lunch and Learn" sessions. These alongside our regular global senior management calls continue to develop our managers to become more effective leaders. A dynamic internship and internal transfer program also helps promote personal development and improves leadership skills across all departments.
Through our annual summer internship program, we continue to find ways to better support our equality, diversity, and inclusion aspirations by building a diverse pipeline of talented individuals in the real estate industry with the intention to introduce our business to those who may not have considered a career in real estate.
Competition
We compete with a range of global, national and local real estate firms, individual investors and other corporations, both private and public. Our investment business competes with real estate investment partnerships, real estate investments trusts, private equity firms and other investment companies and regional investors and developers. We believe that our relationships with the sellers and our ability to close an investment transaction in a short time period at competitive pricing provide us a competitive advantage.
Foreign Currency
Approximately 44% of our investment account is invested through our foreign platforms in their local currencies. Investment level debt is generally incurred in local currencies and we consider our equity investment as the appropriate exposure to evaluate for balance sheet hedging purposes. We typically do not hedge future operations or cash flows of operations in foreign exchanges rates which may have a significant impact on the results of our operations. In order to manage the effect of these fluctuations, we generally hedge our book equity exposure to foreign currencies through currency forward contracts and options.
We wholly-own Kennedy Wilson Europe Real Estate Limited ("KWE") which is domiciled in the United Kingdom and has GBP as its functional currency. KWE has investments in assets that have functional currencies of GBP and euros. Kennedy-Wilson Holdings, Inc. does not have a direct interest in the euro denominated investments but has indirect ownership through its interest in KWE. We cannot directly hedge the foreign currency movements in these euro denominated assets but hedge foreign currency movements in euro assets at the KWE level through GBP/EUR hedging instruments. We then can hedge the USD/GBP foreign currency exposure through our direct interest in KWE.
Within KWE we have utilized three types of contracts to hedge our GBP/EUR exposure: foreign forward currency contracts, a cross currency swap (until its settlement in September 2021) on the KWE Bonds (swapped GBP to EUR) and the KWE Euro Medium Term Notes ("KWE Notes"). The KWE Notes were issued in euros and held by KWE but we have elected to treat the foreign currency movements as a net investment hedge on our euro denominated investments in KWE. The foreign currency movements on these hedge items above are recorded to unrealized foreign currency derivative contract gains/losses within other comprehensive income for GBP/EUR movements. However, when we translate our investment in KWE from USD/GBP the foreign currency movements on these items go through unrealized foreign currency translation gains/losses within other comprehensive income.
Please refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation for a discussion regarding foreign currency and currency derivative instruments.
Transaction-Based Results
A significant portion of our cash flow is tied to transaction activity which can affect an investor’s ability to compare our financial condition and results of operations on a quarter-by-quarter basis or to easily evaluate the breadth of our operation. Historically, this variability has caused our revenue, net income and cash flows to be tied to transaction activity, which is not necessarily concentrated in any one quarter.
Employees
As of December 31, 2021, we have 220 employees in 12 offices throughout the United States, the United Kingdom, Ireland, Spain and Jersey. We believe that we have been able to attract and maintain high quality employees. There are no employees subject to collective bargaining agreements. In addition, we believe we have a good relationship with our employees.
Available Information
Information about us is available on our website (http://www.kennedywilson.com) (this website address is not intended to function as a hyperlink, and the information contained in, or accessible from, our website is not intended to be a part of this filing). We make available on our website, free of charge, copies of our Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A and amendments to those reports and other statements filed or furnished pursuant to Section 13(a), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after filing or submitting such material electronically or otherwise furnishing it to the SEC. In addition, we have previously filed registration statements and other documents with the SEC. Any document we file is available at the SEC's internet address at http://www.sec.gov (this website address is not intended to function as a hyperlink, and the information contained in, or accessible from, the SEC's website is not intended to be a part of this filing).
Item 1A. Risk Factors
Our results of operations and financial condition can be adversely affected by numerous risks. You should carefully consider the risk factors detailed below in conjunction with the other information contained in this report. If any of the following risks actually occur, our business, financial condition, operating results, cash flows and future prospects could be materially adversely affected. In addition to the effects of the COVID-19 pandemic and resulting global disruptions on our business and operations discussed in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in the risk factors below, additional or unforeseen effects from the COVID-19 pandemic and the global economic climate may give rise to or amplify many of the risks discussed below.
Risks Related to Our Business
The success of our business is significantly related to general economic conditions and the real estate industry, and, accordingly, our business could be harmed by an economic slowdown and downturn in real estate asset values, property sales and leasing activities.
Our business is closely tied to general economic conditions in the real estate industry. As a result, our economic performance, the value of our real estate and our ability to implement our business strategies may be significantly and adversely affected by changes in national and local economic conditions. The condition of the real estate markets in which we operate is cyclical and depends on the condition of the economy in the United States, United Kingdom, Ireland, and to a lesser extent, Spain and Italy as a whole and to the perceptions of investors of the overall economic outlook. Rising interest rates, declining employment levels, declining demand for real estate, declining real estate values, periods of general economic slowdown, or recession or the perception that any of these events may occur have negatively impacted the real estate market in the past and may in the future negatively impact our operating performance. The economic condition of each local market where we operate may depend on one or more key industries within that market, which, in turn, makes our business sensitive to the performance of those industries. We have only a limited ability to change our portfolio promptly in response to economic or other conditions. Certain significant expenditures, such as debt service costs, real estate taxes, and operating and maintenance costs, are generally not reduced when market conditions are poor. These factors impede us from responding quickly to changes in the performance of our investments and could adversely impact our business, financial condition and results of operations. We have experienced in past years and expect in the future to be negatively impacted by, periods of economic slowdown or recession, increase in interest rates and corresponding declines in the demand for real estate and related services, within the markets in which we operate. Previous recessions and downturns in the real estate market have resulted in and may result in:
•a general decline in rents due to defaulting tenants or less favorable terms for renewed or new leases;
•a decline in actual and projected sale prices of our properties, resulting in lower returns on the properties in which we have invested;
•higher interest rates, higher loan costs, less desirable loan terms and a reduction in the availability of mortgage loans, all of which could increase costs and limit our ability to acquire additional real estate assets; and
•a decrease in the availability of lines of credit and the capital markets and other sources of capital used to grow, operate and maintain our business.
If our business performance and profitability deteriorate, we could fail to comply with certain financial covenants in our unsecured bond and revolving credit facility, which would force us to seek an amendment with our lenders. We may be unable to obtain any necessary waivers or amendments on satisfactory terms, if at all, which could result in the principal and interest of the debt to become immediately due. Please also see “Our debt obligations impose significant operating and financial restrictions, which may prevent us from pursuing certain business opportunities and taking certain actions.” In addition, in an extreme deterioration of our business, we could have insufficient liquidity to meet our debt service obligations when they come due in future years or maintain our common stock or preferred stock dividends.
Our business and those of our tenants may be adversely affected by epidemics, pandemics or other outbreaks.
Epidemics, pandemics or other outbreaks of an illness, disease or virus (including COVID-19) that affect countries or regions in which our tenants or their parent companies, as applicable, operate or in which our properties or corporate offices are located, and actions taken to contain or prevent their further spread, may have a material and adverse impact on general commercial activity, the financial condition, results of operations, liquidity and creditworthiness of our tenants and our ability to lease properties on favorable terms and/or collect owed rents on a timely basis or at all. In addition, numerous state, local, federal and industry-initiated efforts may also affect our ability to collect rent and enforce remedies for the failure to pay rent, including eviction moratoriums. Epidemics, pandemics or other outbreaks of an illness, disease or virus could also cause the on-site employees of our tenants to avoid our properties, which could adversely affect our tenants’ ability to adequately manage their businesses. Risks related to epidemics, pandemics or other outbreaks of an illness, disease or virus could also lead to the complete or partial closure of one or more of our tenants’ distribution centers, temporary or long-term disruption in our tenants’ supply chains from local and international suppliers and/or delays in the delivery of our tenants’ inventory. Such events could adversely impact our tenants’ sales and/or cause the temporary closure of our tenants’ businesses, which could severely disrupt their operations and the rental revenue we generate from our leases with them.
The profitability of our office and industrial/retail portfolio (which makes up 12.0 million square feet and 11.9 million square feet, respectively, of our total commercial portfolio) depends, in part, on the willingness and ability of customers to visit our tenants' businesses and demand for office space. The risk, public perception of the risk and measures taken to limit the impact of epidemics, pandemics or other outbreaks of an illness, disease or virus, (including COVID-19), including social distancing and other restrictions, could adversely impact tenant’s sales and/or cause the temporary closure or slowdown of our tenants' businesses, and severely disrupt their operations and have a material adverse effect on our business, financial condition and results of operations, which may impact our ability to collect owed rents on a timely basis or at all. The short and long term impact of the COVID-19 pandemic on the use of office space is unknown as companies continue to consider the pandemic’s impact on their business and their demand for labor, while, at the same time, considering the space requirements associated with social distancing and the practical implications of pivoting to a work from home environment. A decrease in demand for office space from our current or prospective tenants could adversely affect the profitability of our office and retail portfolio.
The profitability of our hotel properties (which consists of one consolidated hotel and one Co-Investment hotel that is undergoing development) depends, in part, on the willingness and ability of customers to visit these properties The risk, public perception of the risk and measures taken to limit the impact of epidemics, pandemics or other outbreaks of an illness, disease or virus, (including COVID-19), including social distancing measures and travel and other restrictions, could result in a sustained, significant drop in demand for our hotels. The interference with the operations of our hotel properties, including the Shelbourne Hotel in Dublin, resulted in significantly less levels of Net Operating Income from these properties in 2020 and 2021 compared to prior years. It is not currently known when the operations at our hotel properties will return to normalized levels, if at all, once the effects of the pandemic subside. There can also be no guarantee that the demand for lodging, and consumer confidence in travel generally, will recover as quickly as other industries.
Moreover, as of December 31, 2021, we hold investments in 35,365 multifamily apartment units across 138 assets primarily located in the Western United States and Ireland. Our Western U.S. multifamily assets are primarily located in the Mountain West region of Utah, Idaho, Montana, Colorado, Arizona, New Mexico and Nevada and in the Pacific Northwest, mostly in suburbs of Seattle and Portland, Oregon. The rest of the Western U.S. portfolio is in Northern and Southern California. Epidemics, pandemics or other outbreaks of an illness, disease or virus could cause our tenants to fail to make rent payments, limit our ability to increase rents or otherwise affect our leases with them and/or cause us to make rent concessions.
Additionally, we engage in development activities and, from time to time, acquire development assets to the extent attractive projects become available in various locations across the globe. In many cases, these development activities are significant and limit or entirely eliminate our ability to lease the related assets until the development is substantially completed. Epidemics, pandemics or other outbreaks of an illness may also delay our development activities and increase construction and carrying costs relating to development projects, among other things.
Through our debt platforms, we also pursue first-mortgage loans secured by high-quality real estate in the Western U.S., Ireland and the U.K. and stabilized, income producing, high-quality real estate investment opportunities in the Western U.S. that may include the origination or acquisition of mezzanine loans, construction loans, preferred equity investments and other types of investments. Epidemics, pandemics or other health crisis, including the COVID-19 pandemic and measures to prevent its spread, could adversely affect the businesses and financial condition of our counterparties, including our equity partners, borrowers under our first-mortgage loans, construction loans and mezzanine loans, companies in which we and our equity partners have invested in, and general contractors and their subcontractors, and their ability to satisfy their obligations to borrowers of our construction loans and to complete transactions or projects with borrowers of our construction loans as intended. In addition, a significant number of retail tenants have been forced to temporarily close or operate on a limited basis
as a result of the COVID-19 pandemic and related government actions, which has resulted in, and could continue to result in, delays in rent payments, rent concessions, early lease terminations or tenant bankruptcies, and which in turn could adversely affect our borrowers’ ability to service our loans or a company’s ability to pay us dividends on the preferred stock we hold in such company. All of the above listed risks could adversely affect our business, financial condition, liquidity, results of operations and prospects. See “Our real estate development and redevelopment strategies may not be successful.” below.
Epidemics, pandemics or other outbreaks of illness, disease or virus (including COVID-19) has severely impacted global economic activity and caused significant volatility and negative pressure in the financial markets and the overall global economy. This slowdown could impact our ability to complete opportunistic and/or planned acquisitions or dispositions of property. Lower levels of transactional activity can also mean lower gains on sales that may have an impact on our financial condition and results of operations. Additionally, the financial impact of the COVID-19 pandemic could impact our future compliance with operational and financial debt covenants contained in the agreements that govern the Second A&R Facility, our 4.750% Senior Notes due 2029 (the "2029 Notes"), 4.750% Senior Notes due 2030 (the "2030 Notes"), and 5.000% Senior Notes due 2031 (the "2031 Notes"), together with the 2029 Notes, 2030 Notes and the 2031 Notes, the "KWI Notes") and the KWE Notes and certain of our property-level non-recourse financings. Our failure to comply with such covenants could result in an event of default that, if not cured or waived, could result in a foreclosure on the underlying assets. In addition, certain of our debt instruments also contain cross-default and/or cross-acceleration provisions, including, but not limited to, the documents governing our KWI Notes and the KWE Notes. Please also see “We have in the past incurred and may continue in the future to incur significant amounts of debt and, to a lesser extent, preferred stock, to finance acquisitions, which could negatively affect our cash flows and subject our properties or other assets to the risk of foreclosure.”
Additionally, the COVID-19 pandemic has caused, and could continue to cause, substantial disruption to our employees due to the implementation of restrictions by federal, state and local authorities to slow the spread of COVID-19, including self-isolation, travel limitations and business restrictions, among other things, which could result in significant disruptions to our business operations. Although most of our employees are able to work remotely, there can be no assurance that we will adequately mitigate the risks of business disruptions and interruptions due to cyber security and data accessibility or communications issues as a result of our employees working remotely, which could adversely impact our business operations. These effects, individually or in the aggregate, could adversely impact our business, financial condition, operating results and cash flows, and such adverse impacts may be material.
The ultimate extent of the impact of any epidemic, pandemic or other outbreak of an illness, disease or virus on our business, financial condition, liquidity, results of operations and prospects will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of such epidemics, pandemics or other outbreaks of an illness, disease or virus and actions taken to contain or prevent their further spread, among others. These and other potential impacts of epidemics, pandemics or other outbreaks of an illness, disease or virus could therefore materially and adversely affect our business, financial condition, liquidity, results of operations and prospects.
Adverse developments in the credit markets and rising interest rates may harm our business, results of operations and financial condition.
The credit markets may experience significant price volatility, dislocations and liquidity disruptions. These circumstances may materially impact liquidity in the financial markets, making terms for certain financings less attractive, and, in some cases, unavailable, even for companies that are otherwise qualified to obtain financing. Volatility and uncertainty in the credit markets, including increasing interest rates, may negatively impact our ability to access additional financing for our capital needs or refinance or extend our existing debt on favorable terms, if at all. A prolonged downturn in the financial markets may cause us to seek alternative sources of potentially less attractive financing and may require us to adjust our business plan. Disruptions in the credit markets may also adversely affect our business of providing investment management services to our limited partners in our commingled funds and joint venture partners, which would lead to a decrease in the performance allocations we generate.
Additionally, our primary market risk exposure relates to fluctuations in market interest rates on investment mortgages and debt obligations, specifically short-term borrowings. To attempt to minimize our overall cost of debt, we have established an interest rate management policy to maintain a combination of variable and fixed rate debt and as of December 31, 2021, 79% of our consolidated debt was fixed rate, 12% was floating rate with interest caps and 9% was floating rate without interest caps and 51% of our unconsolidated mortgages was fixed rate, 27% was floating rate with interest caps and 22% was floating rate. We also hold variable rate debt on some of our consolidated and unconsolidated properties that are subject to interest rate fluctuations and we have purchased interest rate caps to limit the amount that interest expense can increase with rate increases. However, if there was a 100-basis point increase, during 2021 we would have a $7.4 million increase in interest expense on our
current consolidated mortgages and a $6.5 million increase (at our share) in interest expense on our current unconsolidated mortgages. The weighted average strike price on caps and maturity of our variable rate mortgages is 1.91% and approximately 2.5 years, respectively, as of December 31, 2021. If the market interest rates increase, our cash flow and results of operations may be adversely affected and we may need to adjust our interest rate management policy, either or both of which may adversely affect our business, financial condition, liquidity and results of operations.
Inflation may adversely affect our financial condition and results of operations.
An increase in inflation could, among other things, have an adverse impact on our floating rate mortgages and general and administrative expenses, as these costs could increase at a rate higher than our rental and other revenue. During times where inflation is increasing at a greater rate than the increases in rent provided by our leases, our rent levels will not keep up with the costs associated with rising inflation. Inflation could also have an adverse effect on consumer spending, which could impact our tenants’ revenues and, in turn, our percentage rents, where applicable. In addition, substantial inflationary pressures could have a negative impact on certain real estate assets, including, without limitation, development projects that do not have guaranteed, or fixed price contracts and real estate assets with long-term leases that do not provide for short-term rent increases. Although we continue to seek investments in markets where we see opportunities for stronger relative growth, including multifamily assets with leases that have an initial term of 12 months or less, and continue to work to manage cost overrun risks for our development and redevelopment projects with detailed architectural plans, guaranteed, or fixed price contracts and close supervision by expert Company executives and personnel, if we are unable to execute our business strategy or if there is a substantial increase in inflation, such circumstances could adversely affect our financial condition, liquidity, results of operations and prospects.
We could lose part or all of our investments in real estate assets, which could have a material adverse effect on our financial condition and results of operations.
There is the inherent possibility in all of our real estate investments that we could lose all or part of our investment. Real estate investments are generally illiquid, which may affect our ability to change our portfolio in response to changes in economic and other conditions. Moreover, we may not be able to unilaterally decide the timing of the disposition of an investment under certain joint venture arrangements, and as a result, we may not control when and whether any gain will be realized, or loss avoided. The value of our investments can also be diminished by:
•civil unrest, acts of war and terrorism, pandemics and acts of God, including earthquakes, hurricanes, volcanic eruptions and other natural disasters (which may result in uninsured or under insured losses);
•the impact of present or future legislation in the United States, United Kingdom, Ireland, and to a lesser extent, Spain and Italy (including, without limitation, rent-control legislation, environmental regulation, changes in laws concerning foreign investments, changes in tax rates, tariff regimes and changes in zoning laws) and the cost of compliance with these types of legislation; and
•liabilities relating to claims, to the extent insurance is not available or is inadequate.
Our real estate development and redevelopment strategies may not be successful.
We acquire development assets to the extent attractive projects become available. When we engage in development activities, we are subject to risks associated with those activities that could adversely affect our financial condition, results of operations, cash flows and the market price of, our common stock, including, but not limited to:
•we may not be able to obtain, or may experience delays in obtaining, all necessary zoning, land-use, building, occupancy and other governmental permits and authorizations;
•we may not be able to obtain financing for development projects, or obtain financing on favorable terms;
•construction costs of a project may exceed the original estimates or construction may not be concluded on schedule, making the project less profitable than originally estimated or not profitable at all (including the possibility of errors or omissions in the project's design, contract default, contractor or subcontractor default, performance bond surety default, the effects of local weather conditions, natural disasters and pandemics, the possibility of local or national strikes and the possibility of shortages in materials, building supplies or energy and fuel for equipment);
•tenants which pre-lease space or contract with us for a build-to-suit project may default prior to occupying the project;
•upon completion of construction, we may not be able to obtain, or obtain on advantageous terms, permanent financing for activities that we financed through construction loans;
•we may not achieve sufficient occupancy levels, sales levels and/or obtain sufficient rents to ensure the profitability of a completed project; and
•development projects in which we have invested may be abandoned and the related investment will be impaired.
Moreover, substantial renovation and development activities, regardless of their ultimate success, typically require a significant amount of management’s time and attention, diverting their attention from our other operations.
Furthermore, part of our investment strategy is to locate and acquire real estate assets that we believe are undervalued and to improve them to increase their resale value. Acquiring properties that are not yet fully developed or in need of substantial renovation or redevelopment entails several risks, particularly the risk that we overestimate the value of the property or that the cost or time to complete the renovation or redevelopment will exceed the budgeted amount. Any failure to complete a redevelopment project in a timely manner and within budget or to sell or lease the project after completion could have a material adverse effect upon our business, results of operation and financial condition.
Our significant operations in the United Kingdom and Ireland and to a lesser extent, Spain and Italy expose our business to risks inherent in conducting business in foreign markets.
As of December 31, 2021, approximately 38% of our revenues were sourced from our foreign operations in the United Kingdom, Ireland, Spain and Italy, 90% of which was sourced from our operations in the United Kingdom and Ireland. Accordingly, our firm-wide results of operations depend significantly on our foreign operations. Conducting business abroad carries significant risks, including:
•restrictions and problems relating to the repatriation of capital;
•global pandemics and the different impact of such pandemic on each country and different response to the same by governments
•difficulties and costs of staffing and managing international operations;
•the burden of complying with multiple and potentially conflicting laws;
•laws restricting foreign companies from conducting business;
•political instability and civil unrest;
•greater difficulty in perfecting our security interests, collecting accounts receivable, foreclosing on secured assets and protecting our interests as a creditor in bankruptcies in certain geographic regions;
•potentially adverse tax consequences;
•share ownership restrictions on foreign operations; and
•tariff regimes of the countries in which we do business.
Poor performance of our commingled funds would cause a decline in our revenue and results of operations and could adversely affect our ability to raise capital for future funds.
When any of our commingled closed-end funds perform poorly, our investment record suffers. As a result, our management fees and performance allocations and our ability to raise additional capital from our partners may be adversely affected. If a fund performs poorly, we will receive little or no performance allocations with regard to the fund and little income or possibly losses from our own principal investment in such fund. As the fair value of underlying investments varies between reporting periods, if we were to have negative performance in a period that causes the amount due to us to be less than the amount previously recognized, this could result in a negative adjustment to performance allocations to the general partner or asset manager. Our fund investors and potential fund investors continually assess our funds' performance independently and relative to market benchmarks and our competitors, and our ability to raise capital for existing and future funds depends on our funds' performance. Alternatively, in the face of poor fund performance, investors could demand lower fees or significant fee concessions for existing or future funds which would likewise decrease our revenue or decide not to invest with us.
Our joint venture activities subject us to third-party risks, including risks that other participants may become bankrupt or take action contrary to our best interests.
We have used joint ventures for large real estate investments and developments. We plan to continue to acquire interests in additional joint ventures formed to own or develop real property or interests in real property. Although, we generally serve as the general partner or managing member of such joint venture, we have acquired and may acquire non-controlling interests in joint ventures, and we may, from time-to-time, also acquire interests as a passive investor without rights to actively participate in the management of the joint ventures. Investments in joint ventures involve additional risks, including the possibility that the other participants may become bankrupt or have economic or other business interests or goals that are inconsistent with ours, that we will not have the right or power to direct the management and policies of the joint ventures and that other participants may take action contrary to our instructions or requests and against our policies and objectives. Should a participant in a material joint venture investment act contrary to our interests, our business, results of operations and financial
condition could significantly suffer. Moreover, we cannot be certain that we will continue to identify suitable joint venture partners and form new joint ventures in the future.
If we are unable to identify, acquire and integrate suitable investment opportunities and acquisition targets, our future growth will be impeded.
Acquisitions and expansion have been, and will continue to be, a significant component of our growth strategy. While maintaining our existing business lines, we intend to continue to pursue a sustained growth strategy by increasing revenues from seeking selective investment and co-investment opportunities and pursuing strategic acquisitions. Our ability to manage our growth will require us to effectively integrate new acquisitions into our existing operations while managing development of principal properties. We expect that significant growth in several business lines occurring simultaneously will place substantial demands on our managerial, administrative, operational and financial resources. We may be unable to successfully manage all factors necessary for a successful expansion of our business. Moreover, our strategy of growth depends on the existence of and our ability to identify attractive investment opportunities and synergistic acquisition targets. The unavailability of suitable investment opportunities and acquisition targets, or our inability to find or be successful in competing for them, may result in a decline in business, financial condition and results of operations.
We own real estate properties located in Hawaii, which subjects us to unique risks relating to, among other things, Hawaii’s economic dependence on fluctuating tourism, the isolated location of Hawaii and the potential for natural disasters.
We conduct operations and own properties in Hawaii. The gross asset value of our investments in Hawaii is $386.5 million and $326.1 million as of December 31, 2021 and 2020, respectively. The success of our investments in Hawaii depends on and is affected by general trends in Hawaii’s economy and real estate market. Hawaii’s economy largely depends on tourism, which is subject to fluctuation based on a number of factors that we do not control. In addition, Hawaii has historically been vulnerable to certain natural disaster risks, such as tsunamis, volcanoes, hurricanes and earthquakes, which could cause damage to properties owned by us or property values to decline in general.
Our three largest investments in Hawaii are a hotel development project on the Big Island and two residential assets (one located on the Big Island and the other located on the island of Oahu) as discussed in our description of our residential and development and redevelopment investments in Item 1 - “Business” of this annual report on Form 10-K. Please also see the section titled "Industry Overview - Hawaii" in Item 1 of this annual report on form 10-K. In addition to the general risks with respect to development and redevelopment projects as discussed above, Hawaii’s remote and isolated location may create additional operational costs and expenses (general operating and development-related costs), which could have a material adverse impact on our financial results. If any or all of the factors discussed above were to occur and result in our inability or materially limit our ability to sell or lease our residential and commercial properties, a significant delay in or a significant increase costs to complete our development assets, it would likely have a material adverse effect on our business, financial condition and results of operations.
Our real estate debt investment business operates in a highly competitive market for lending and investment opportunities through our debt platforms, including originating and investing in senior loans, mezzanine loans, B- and C-Notes and preferred equity, which may limit our ability to originate or acquire desirable loans and investments in our target assets and are subject to increased risks.
Our real estate debt investment business (“Debt Platform”) operates in a highly competitive market for lending and investment opportunities. A number of entities compete with us to make the types of loans and investments that we seek to make, including originating and investing in senior loans, mezzanine loans, B-and C-Notes and preferred equity. The profitability of our debt platform depends, in large part, on our ability to originate or acquire target assets at attractive prices for ourselves and our partners. In addition, some of our competitors may have a lower cost of funds and access to funding sources that may not be available to us. Furthermore, competition for originations of, and investments in, our target assets may lead to the yield of such assets decreasing, which may further limit our ability to generate desired returns for ourselves and our partners. Also, as a result of this competition, desirable loans and investments in specific types of target assets may be limited in the future.
In addition to originating and acquiring senior loans, we also originate and invest in mezzanine loans, B-and C-Notes and preferred equity and these types of investments generally involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property. For example, if a borrower defaults, there may not be sufficient funds remaining for a B-Note holder after payment to the A-Note holder. Similarly, if a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt and may become unsecured as a result of foreclosure by the senior lender. Further, preferred equity investments involve a
higher degree of risk than conventional debt financing due to a variety of factors, including their non-collateralized nature and subordinated ranking to other loans and liabilities of the entity in which such preferred equity is held. As a result, we may not recover some or all of our investment. Significant losses related to our mezzanine loans, B-Notes or preferred equity interests would result in operating losses for us and our partners. In addition, in the event a borrower defaults on a loan, there is no guarantee or assurance that we will be able to successfully foreclose and take control of the underlying collateral (to the extent available).
Any distressed loans and loan portfolios that we may purchase, or investments that may become "sub-performing" or "non-performing" following our origination or acquisition thereof, may have a higher risk of default and delinquencies than newly originated loans, and, as a result, we may lose part or all of our investment in such loans and loan portfolios.
While our loans and investments focus primarily on "performing" real estate-related interests, our loans and investments may also include making distressed investments from time to time (e.g., investments in defaulted, out-of-favor or distressed loans and debt securities) or may involve loans and loan portfolios in some cases that may be non-performing or sub-performing and may be in default at the time of purchase or may become "sub-performing" or "non-performing" following our origination or acquisition thereof. In general, the distressed loans and loan portfolios we may acquire are speculative investments and have a greater than normal risk of future defaults and delinquencies as compared to newly originated loans. Returns on loan investments depend on the borrower’s ability to make required payments or, in the event of default, our security interests and our ability to foreclose and liquidate whatever property that secures the loans and loan portfolios. We may be unable to collect on a defaulted loan or foreclose on security successfully or in a timely fashion. There may also be instances when we are able to acquire title to an underlying property and sell it but not make a profit on its investment.
In addition, in the event of a decline in real estate values, the likelihood that we will incur losses on our loans in the event of default because the value of our collateral may be insufficient to cover our cost on the loan significantly increases.
Our reliance on third-parties to operate certain of our properties may harm our business.
We rely on third party property managers and hotel operators to manage the daily operations of our properties. These third parties are directly responsible for the day-to-day operation of our properties with limited supervision by us, and they often have potentially significant decision-making authority with respect to those properties. Thus, the success of our business may depend in large part on the ability of our third-party property managers to manage the day-to-day operations, and any adversity experienced by our property managers could adversely impact the operation and profitability of our properties
These third parties may fail to manage our properties effectively or in accordance with their agreements with us, may be negligent in their performance and may engage in criminal or fraudulent activity. If any of these events occur, we could incur losses or face liabilities from the loss or injury to our property or to persons at our properties. In addition, disputes may arise between us and these third-party managers and operators, and we may incur significant expenses to resolve those disputes or terminate the relevant agreement with these third parties and locate and engage competent and cost-effective service providers to operate and manage the relevant properties.
We are also parties to hotel management agreements under which unaffiliated third-party property managers manage our hotels. In addition, from time to time, disputes may arise between us and our third-party managers regarding their performance or compliance with the terms of the hotel management agreements, which in turn could adversely affect us, including damage to our relationships with such franchisers or we may be in breach of our franchise agreement. If we are unable to resolve such disputes through discussions and negotiations, we may choose to terminate our management agreement, litigate the dispute or submit the matter to third party dispute resolution, the expense and outcome of which may harm our business, operating results or prospects.
Our leasing activities depend on various factors, including tenant occupancy and rental rates, which, if adversely affected, could cause our operating results to suffer.
Our business, financial condition and results of operations may be adversely affected if we fail to promptly find suitable tenants for substantial amounts of vacant space at our properties, if rental rates on new or renewal leases are significantly lower than expected, or if reserves for costs of re-leasing prove inadequate.
Our ability to lease properties also depends on:
•the attractiveness of our properties to tenants;
•competition from other available space;
•our ability to provide adequate maintenance and obtain insurance and to pay increased operating expenses, which may not be passed through to tenants; and
•the availability of capital to periodically renovate, repair and maintain the properties, as well as for other operating expenses
Increasing scrutiny and changing expectations from stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
Companies across all industries are facing increasing scrutiny from stakeholders related to their environmental, social and governance (“ESG”) practices. Investor advocacy groups, certain institutional investors, investment funds and other influential investors are also increasingly focused on ESG practices and in recent years have placed increasing importance on the implications and social cost of their investments. Regardless of the industry, investors’ increased focus related to ESG and similar matters may hinder access to capital, as investors may decide to reallocate capital or to not commit capital as a result of their assessment of a company’s ESG practices. Companies which do not adapt to or comply with investor or other stakeholder expectations and standards, which are evolving, or which are perceived to have not responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, may suffer from reputational damage and the business, financial condition, and/or stock price of such a company could be materially and adversely affected.
We have adopted certain practices and policies to align our ESG approach with our business strategy by maximizing the inherent value of our assets and delivering long-term social, environmental and economic values across our portfolio. However, our stakeholders may look to us to implement more or different ESG procedures, standards or goals in order to continue engaging with us, to remain invested in us, or before they make further investments in us. Additionally, we may face reputational challenges in the event our ESG procedures or standards do not meet the standards set by certain constituencies or such constituencies might not be satisfied with our efforts or the speed of adoption of ESG practices or polices. If we do not meet our stakeholders’ expectations or we are not effective in addressing social and environmental responsibility matters or achieving relevant sustainability goals, trust in our brand may suffer and our business and/or our ability to access capital could be harmed.
The occurrence of any of the foregoing could have a material adverse effect on our business and financial condition and expose us to market, operational and execution costs or risks.
Rent control or rent stabilization legislation and other regulatory restrictions may limit our ability to increase rents and pass through new or increased operating costs to our tenants.
We presently expect to continue operating and acquiring properties in areas that have adopted laws and regulations imposing restrictions on the timing or amount of rent increases. The state of California has implemented a statewide rent control imitative that limits rental increases to 5% + the consumer price index (CPI). The state of Oregon has also implemented a statewide rent control program that caps annual increases to 7% + CPI with the city of Portland, Oregon limiting increases to 9.2%. In addition to the statewide rent control programs, various municipalities, including certain cities where our properties are located, have enacted rent control or rent stabilization legislation. Furthermore, enactment of similar regulations have been and are being considered in other jurisdictions where we hold investments. Although, we are able to increase rents to market rates once a tenant vacates a rent-controlled or stabilized unit, increases in rental rates for renewing tenants are limited by such regulations.
Similarly, under current Irish law, for rent controlled properties we are restricted from increasing rents to market rates for renewing tenants or replacement tenants, and any rent increases in these circumstances are generally capped, save in certain limited circumstances. These laws and regulations can (i) limit our ability to charge market rents, increase rents, evict tenants or recover increases in our operating expenses, (ii) negatively impact our ability to attract higher-paying tenants, (iii) require us to expend money for reporting and compliance, and (iv) make it more difficult for us to dispose of properties in certain circumstances. Any failure to comply with these regulations could result in fines and/or other penalties.
We may be subject to potential environmental liability.
Under various foreign, federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be liable for the cleanup of hazardous or toxic substances and may be liable to a governmental entity or to third parties for property damage and for investigation and clean-up costs incurred by governmental entities or third parties in connection with the contamination. Such laws typically impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances, even when the contaminants were associated with previous owners or operators. The costs of investigation, remediation or removal of hazardous or toxic substances may be substantial, and the presence of those substances, or the failure to properly remediate those substances, may
adversely affect the owner’s or operator’s ability to sell or rent the affected property or to borrow using the property as collateral. The presence of contamination at a property can impair the value of the property even if the contamination is migrating onto the property from an adjoining property. Additionally, the owner of a site may be subject to claims by parties who have no relation to the property based on damages and costs resulting from environmental contamination emanating from the site. In connection with the direct or indirect ownership, operation, management and development of real properties, we may be considered an owner or operator of those properties or as having arranged for the disposal or treatment of hazardous or toxic substances. Therefore, we may be potentially liable for removal or remediation costs.
Before consummating the acquisition of a particular piece of real property, it is our policy to retain independent environmental consultants to conduct an environmental review of the real property, including performing a Phase I environmental review. These assessments have included, among other things, a visual inspection of the real properties and the surrounding area and a review of relevant federal, state and historical documents. It is possible that the assessments we commission do not reveal all environmental liabilities or that there are material environmental liabilities of which we are currently unaware. Future laws, ordinances or regulations may impose material environmental liability and the current environmental condition of our properties may be affected by tenants, by the condition of land or operations in the vicinity of those properties, or by unrelated third parties. Federal, state, local and foreign agencies or private plaintiffs may bring actions against us in the future, and those actions, if adversely resolved, may have a material adverse effect on our business, financial condition and results of operations.
We may incur significant costs complying with laws, regulations and covenants that are applicable to our properties and operations.
The properties in our portfolio and our operations are subject to various covenants and federal, state, local and foreign laws and regulatory requirements, including permitting and licensing requirements. Such laws and regulations, including municipal or local ordinances, zoning restrictions and restrictive covenants imposed by community developers, may restrict our use of our properties and may require us to obtain approval from local officials or community standards organizations at any time with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties. Among other things, these restrictions may relate to fire and safety, seismic, asbestos-cleanup, hazardous material abatement requirements or accessibility of our properties, such as those required by the Americans with Disabilities Act. Existing laws and regulations may adversely affect us, the timing or cost of our future acquisitions or renovations may be uncertain, and additional regulations may be adopted that increase such delays or result in additional costs. Our failure to obtain required permits, licenses and zoning relief or to comply with applicable laws could, among other things, result in monetary fines, private litigation and have a material adverse effect on our business, financial condition and results of operations.
Our property insurance coverage is limited, and any uninsured losses could cause us to lose part or all of our investment in our insured properties.
We carry commercial general liability coverage and umbrella coverage on all of our properties with limits of liability that we deem adequate and appropriate under the circumstances (certain policies subject to deductibles) to insure against liability claims and provide for the cost of legal defense. There are, however, certain types of extraordinary losses that either may be uninsurable or are not generally insured because it is not economically feasible to insure against those losses. Should any uninsured loss occur, we could lose our investment in, and anticipated revenues from, a property, and these losses could have a material adverse effect on our operations. Currently, we also insure some of our properties for loss caused by earthquakes in levels we deem appropriate and, where we believe necessary, for loss caused by flood. The occurrence of an earthquake, flood or other natural disaster may materially and adversely affect our business, financial condition and results of operations.
Our business could be adversely affected by security breaches through cyber-attacks, cyber intrusions or otherwise.
We face risks associated with security breaches, whether through cyber-attacks or cyber intrusions over the internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our information technology networks and related systems. These risks include operational interruption, private data exposure and damage to our relationship with our customers, among others. A security breach involving our networks and related systems could disrupt our operations in numerous ways that could ultimately have an adverse effect on our financial condition and results of operations.
It is possible that our business, financial and other systems could be compromised, which might not be noticed for some period of time. Although we utilize various procedures and controls to mitigate our exposure to such risk, cybersecurity
attacks are evolving and unpredictable. The occurrence of such an attack could lead to financial losses and have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Company
If we are unable to raise additional debt and equity capital, our growth prospects may suffer.
We depend on the capital markets to grow our balance sheet along with third-party equity and debt financings to acquire properties through our investment business, which is a key driver of future growth. We currently intend to raise a significant amount of third-party equity and debt to acquire assets in the ordinary course of our business. We depend on debt financing from a combination of financial institutions, the assumption of existing loans, government agencies and seller financing. We depend on equity financing from equity partners, which include public companies, pension funds, family offices, financial institutions, endowments, sovereign wealth and money managers. Our access to capital funding is uncertain. Our inability to raise additional capital on terms reasonably acceptable to us could jeopardize the future growth of our business.
The loss of one or more key personnel, particularly our CEO, could have a material adverse effect on our operations.
Our continued success depends to a significant degree on the efforts of our senior executives, particularly our chief executive officer, or CEO, who have each been essential to our business. The departure of all or any of our executives for whatever reason or the inability of all or any of them to continue to serve in their present capacities or our inability to attract and retain other qualified personnel could have a material adverse effect upon our business, financial condition and results of operations. Our executives attract business opportunities and assist both in negotiations with lenders and potential joint venture partners and in the representation of large and institutional clients. If we lost their services, our relationships with lenders, joint venture partners and clients would diminish significantly.
As we continue to grow, our success will largely depend on our ability to attract and retain qualified personnel in all areas of business. We may be unable to continue to hire and retain a sufficient number of qualified personnel to support or keep pace with our planned growth.
Some of our portfolio investments may be recorded at fair value, and, as a result, there will be uncertainty as to the value of these investments.
As of December 31, 2021, $1.8 billion, or approximately 92% of our unconsolidated investments and approximately 23% of our total assets, were recorded on our financial statements at estimated fair value. These include our investments in the commingled funds that we manage and unconsolidated investments in which we have elected the fair value option under U.S. generally accepted principles (U.S. GAAP). At the end of each reporting period, the fair value of these investments is recalculated, and any change from the fair value as of the end of the prior reporting period is reflected in our consolidated statement of income as a gain or loss included in income (loss) from unconsolidated investments. Accordingly, fair value accounting could result in significant non-cash volatility in our financial position and our results of operation, which, in turn, could adversely affect the trading price of our common stock and other securities.
We utilize a mix of independent third party appraisals and discounted cash flows to estimate fair market value. The discounted cash flow models estimate future cash flows (including terminal values) and discount those cash flows back to the current period. Estimating fair values using any valuation methodology is inherently uncertain and involves a significant number of assumptions. Furthermore, any changes in the underlying assumptions for any reason, including capitalization rates, discount rates, liquidity risks, and estimates of future cash flows or as a result of the impact to the global economy due to an epidemic, pandemic or other outbreak of an illness, disease or virus (including COVID-19), including capitalization rates, discount rates, liquidity risks, and estimates of future cash flows, could significantly affect the fair value estimates. For example, small changes in the inputs and assumptions that we use from period to period to estimate these fair values may result in large changes in the carrying value of these investments and could materially and adversely impact our reported earnings. Moreover, the estimated fair values used in preparing our financial statements may not represent amounts that could be realized in a current sale or an immediate settlement of the related asset or liability, nor would those estimated fair values necessarily reflect the returns we may actually realize.
Our revenues and earnings may be materially and adversely affected by fluctuations in foreign currency exchange rates due to our international operations.
Our revenues from foreign operations have been primarily denominated in the local currency where the associated revenues were earned. Thus, we may experience significant fluctuations in revenues and earnings because of corresponding
fluctuations in foreign currency exchange rates. To date, our foreign currency exposure has been limited to the Pound Sterling and the Euro. Due to the constantly changing currency exposures to which we will be subject and the volatility of currency exchange rates, we may experience currency losses in the future, and we cannot predict the effect of exchange rate fluctuations on future operating results. Our management uses currency hedging instruments from time to time, including foreign currency forward contracts, purchased currency options (where applicable) and foreign currency borrowings. The economic risks associated with these hedging instruments include unexpected fluctuations in foreign currency rates, which could lead to hedging losses or the requirement to post collateral, along with unexpected changes in our underlying net asset position. Our hedging activities may not be effective.
Our results are subject to significant volatility from quarter to quarter due to the varied timing and magnitude of our strategic acquisitions and dispositions, the incurrence of any impairment losses and other transactions.
We have experienced a fluctuation in our financial performance from quarter to quarter due in part to the significance of revenues from the sales of real estate on overall performance. The timing of purchases and sales of our real estate investments has varied, and will continue to vary, widely from quarter to quarter due to variability in market opportunities, changes in interest rates, and the overall demand for multifamily and commercial real estate, among other things. While these factors have contributed to our increased operating income and earnings in past years, we may be unable to continue to perform well due to the significant variability in these factors.
Additionally, if our future undiscounted net cash flow evaluation indicates that we are unable to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. These losses have a direct impact on our net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods.
We have in the past incurred and may continue in the future to incur significant amounts of debt and, to a lesser extent, preferred stock, to finance acquisitions, which could negatively affect our cash flows and subject our properties or other assets to the risk of foreclosure.
We have historically financed new acquisitions with cash derived from secured and unsecured loans and lines of credit and, to a lesser extent, preferred stock. For instance, we typically purchase real property with loans secured by a mortgage on the property acquired. We anticipate continuing this trend. We do not have a policy limiting the amount of debt that we may incur. Accordingly, our management and board of directors have discretion to increase the amount of our outstanding debt at any time. We could become more highly leveraged, resulting in an increase in debt service costs that could adversely affect our results of operations and increase the risk of default on debt. We may incur additional debt from time to time to finance strategic acquisitions, investments, joint ventures or for other purposes, subject to the restrictions contained in the documents governing our indebtedness. If we are required to seek an amendment to our credit agreement, our debt service obligations may be substantially increased.
Some of our debt bears interest at variable rates. As a result, we are subject to fluctuating interest rates that may impact, adversely or otherwise, results of operations and cash flows. We may be subject to risks normally associated with debt financing, including the risks that:
•a decrease in the availability of lines of credit and the public equity and debt markets and other sources of capital used to operate and maintain our business;
•cash flow may be insufficient to make required payments of principal and interest;
•existing indebtedness on our properties may not be refinanced and our leverage could increase our vulnerability to general economic downturns and adverse competitive and industry conditions, placing us at a disadvantage compared to those of our competitors that are less leveraged;
•our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and in the commercial real estate services industry;
•our failure to comply with the financial and other restrictive covenants in the documents governing our indebtedness could result in an event of default that, if not cured or waived, results in foreclosure on substantially all of our assets; and
•the terms of available new financing may not be as favorable as the terms of existing indebtedness.
If we are unable to satisfy the obligations owed to any lender with a lien on one of our properties, including the compliance with any operational or financial covenants, the lender could foreclose on the real property or other assets securing the loan and we would lose that property or asset. The loss of any property or asset to foreclosure could have a material adverse effect on our business, financial condition and results of operations. In addition, agreements governing certain of our financings contain cross-default and/or cross-acceleration provisions, including, without limitation, the indentures governing our 2029 Notes, 2030 Notes and 2031 Notes and the documents governing the Second A&R Facility and the KWE Notes. For example, the indenture governing the 2029 Notes, 2030 Notes and 2031 Notes provide that recourse debt that is not paid within any applicable grace period after final maturity or is accelerated by the applicable lender because of a default and the total amount of such recourse debt unpaid or accelerated exceeds seventy-five million dollars, may constitute a default which could lead to the entire principal amount of the 2029 Notes, 2030 Notes and 2031 Notes to become immediately due and payable. The documents governing the Second A&R Facility and KWE Notes contain similar provisions.
From time to time, Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., rate our significant outstanding debt. These ratings and any downgrades thereof may impact our ability to borrow under any new agreements in the future, and could increase the interest rates of, and require more onerous terms for, any future borrowings, and could also cause a decline in the market price of our common stock. Our earnings may not be sufficient to allow us to pay principal and interest on our debt and meet our other obligations. If we do not have sufficient earnings, we may be required to seek to refinance all or part of our existing debt, sell assets at terms that are not attractive, borrow more money or sell more securities, which we may be unable to do, and our stock price may be adversely affected.
Our debt obligations impose significant operating and financial restrictions, which may prevent us from pursuing certain business opportunities and taking certain actions.
Our existing debt obligations impose, and future debt obligations may impose, significant operating and financial restrictions on us. These restrictions limit or prohibit, among other things, our ability to:
•incur additional indebtedness;
•repay indebtedness (including our 2029 Notes, 2030 Notes and 2031 Notes) prior to stated maturities;
•pay dividends on, redeem or repurchase our stock or make other distributions;
•make acquisitions or investments;
•create or incur liens;
•transfer or sell certain assets or merge or consolidate with or into other companies;
•enter into certain transactions with affiliates; and
•restrict dividends, distributions or other payments from our subsidiaries.
Our unsecured revolving credit facility and the indentures governing our 2029 Notes, 2030 Notes and 2031 Notes, and the KWE Notes require us to maintain compliance with specified financial covenants, including maximum balance sheet leverage and fixed charge coverage ratios. In addition, loan agreements governing the mortgages that are secured by our properties may contain operational and financial covenants, including but not limited to, debt service coverage ratio covenants and, with respect to mortgages secured by certain properties in Europe, loan-to-value ratio covenants. Mortgages with such loan-to-value covenants require that the underlying properties be valued on a periodic basis (at least annually) and as such, adverse market conditions (which are influenced by factors that are outside of the Company’s control) could result in a reduction in the fair value of the subject properties and a breach of the applicable covenant.
As of December 31, 2021, we received waivers on certain debt covenants in loan agreements governing a total of $71.9 million or 2% of our consolidated mortgage balance. These mortgages are secured by certain retail assets in the United Kingdom. All of these loans are non-recourse loans and the waivers are through the end of first quarter 2022 and typically cover interest cover and loan-to-value covenants. We expect to be in compliance with these covenants subsequent to the fourth quarter of 2021, or will seek additional waivers and/or extensions as, and if needed. In the event we are required to seek such additional waivers and/or extensions, we are currently confident that we will be able to secure the same. We are current on all payments (principal and interest) for our consolidated mortgages including the loans discussed above. As of December 31, 2021, we were in compliance with or had received waivers on all financial mortgage debt and unsecured debt covenants. These covenants could adversely affect our ability to finance our future operations or capital needs and pursue available business opportunities. A breach of any of these covenants could result in a default in respect of the related indebtedness. If a default occurs, the relevant lenders could elect to declare the indebtedness, together with accrued interest and other fees, to be immediately due and payable and proceed against any collateral securing that indebtedness. In addition, a default under one series of our indebtedness may also constitute a default under another series of our indebtedness.
We have guaranteed a number of loans in connection with various real estate investments, which may result in us being obligated to make certain payments.
We have provided recourse guarantees associated with loans secured by real estate. The maximum potential undiscounted amount of future payments that we could be required to make under these guarantees was approximately $186.0 million at December 31, 2021. The guarantees expire through 2031, and our 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 sales proceeds of the property. If we were to become obligated to perform on these guarantees, our financial condition could suffer.
We are subject to certain “non-recourse carve out” guarantees that may be triggered in the future.
Most of our real estate properties are encumbered by traditional non-recourse debt obligations. In connection with most of these loans, however, we entered into certain “non-recourse carve out” guarantees, which provide for the loans to become partially or fully recourse against us if certain triggering events occur. Although these events are different for each guarantee, some of the common events include:
•the special purpose property-owning subsidiary’s filing a voluntary petition for bankruptcy;
•the special purpose property-owning subsidiary’s failure to maintain its status as a special purpose entity; and
•subject to certain conditions, the special purpose property-owning subsidiary’s failure to obtain lender’s written consent prior to obtaining any subordinate financing or encumbering the associated property.
In the event that any of these triggering events occur and the loans become partially or fully recourse against us, our business, financial condition, results of operations and common stock price could be materially adversely affected.
Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021 may adversely affect us.
The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, stopped publishing one week and 2-month U.S. Dollar LIBOR rates after 2021 with remaining U.S. Dollar LIBOR rates ceasing to be published on June 30, 2023. In the United States, the Alternative Reference Rates Committee (the “ARCC”) has confirmed that, in its opinion, the March 5, 2021 announcements by the IBA and the FCA on future cessation and loss of representativeness of the LIBOR benchmarks constituted a “Benchmark Transition Event” with respect to all U.S. Dollar LIBOR settings under ARRC-recommended fallback language and has recommended the Secured Overnight Financing Rate (“SOFR”), plus a recommended spread adjustment as LIBOR’s replacement. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. At this time, however, no consensus exists as to what rate or rates may become accepted alternatives to LIBOR, and it is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR, or whether any additional reforms to LIBOR may be enacted in the United Kingdom, the United States or elsewhere. Any changes in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in LIBOR. If a published LIBOR rate is unavailable prior to June 30, 2023, the interest rates on certain of the Company’s debt obligations could change. Any of these proposals or consequences could have a material adverse effect on our financing costs, and as a result, our financial condition and results of operations.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2021, we had approximately $89.7 million and $108.2 million of federal and California net operating loss carryforwards, respectively, as well as approximately $78.0 million of foreign tax credits, which generally can be used to offset future taxable income or taxes, as applicable. However, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the "Code"), if a corporation undergoes an “ownership change," the corporation’s ability to use its pre-change net operating loss carryforwards and foreign tax credits to offset its post-change federal taxable income or taxes, as applicable, may be limited. Generally, a corporation experiences such an ownership change if the percentage of its stock owned by its “5-percent shareholders,” as defined in Section 382 of the Code, increases by more than 50 percentage points (by value) over a rolling three-year period. Based on our analysis, no ownership changes as defined under Section 382 have occurred which would result in limitations on the utilization of our domestic net operating loss and foreign tax credit carryovers. We may experience ownership change in the future as a result of subsequent shifts in our stock ownership (some of which shifts are outside of our control). Similar provisions of state tax law may also apply. Federal net operating loss carryforwards generated after December 31, 2017 may be carried forward indefinitely, but they may only be used to offset 80% of taxable income in a given year. Of the $89.7 million of federal net operating loss carryforwards, $30.0 million was generated during 2017, and the remaining balance was generated after December 31, 2017.
As of December 31, 2021, we also had $205.7 million of foreign net operating loss carryforwards which could be subject to similar limitations in foreign jurisdictions based upon changes in equity ownership.
We may fail to comply with section 404 of the Sarbanes-Oxley Act of 2002.
We are subject to section 404 of The Sarbanes-Oxley Act of 2002 and the related rules of the SEC, which generally require our management and independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting. Although our management has concluded that our internal control over financial reporting was effective as of December 31, 2021 and our independent registered public accounting firm has issued an unqualified report as to the same, our management or our independent registered public accounting firm may not be able to come to the same conclusion in future periods. During the course of the review and testing of our internal controls, we may identify deficiencies and weaknesses and be unable to remediate them before we must provide the required reports. If our management or our independent registered public accounting firm is unable to conclude on an ongoing basis that we have effective internal control over financial reporting, our operating results may suffer, investors may lose confidence in our reported financial information and the trading price of our stock may fall.
Risks Related to Ownership of Our Common Stock
Our directors and officers and their affiliates are significant stockholders, which makes it possible for them to have significant influence over the outcome of all matters submitted to stockholders for approval and which influence may be in conflict with our interests and the interests of our other stockholders.
As of December 31, 2021, our directors and executive officers and their respective affiliates owned an aggregate of approximately 15% of the outstanding shares of our common stock. These stockholders will have significant influence over the outcome of all matters submitted for stockholder approval, including the election of our directors and other corporate actions. In addition, such influence by one or more of these stockholders could discourage others from attempting to purchase or take us over in a transaction that would be favorable to our other stockholders or reduce the market price offered for our common stock in such an event.
We may issue additional equity securities, which may dilute your interest in us.
In order to expand our business, we may consider offering and issuing additional equity or equity-based securities. If we issue and sell additional shares of our common stock, or convertible securities, the ownership interests of our existing stockholders will be diluted to the extent they do not participate in the offering. The number of shares that we may issue for cash in non-public offerings without stockholder approval will be limited by the rules of the NYSE or other exchange on which our securities are listed. However, we may issue and sell shares of our common stock in public offerings, and there generally are exceptions that allow companies to issue a limited number of equity securities in private offerings without stockholder approval, which could dilute your ownership.
The price of our common stock may be volatile.
The trading price of our common stock has historically been and may in the future continue to be volatile due to factors such as:
•changes in real estate prices;
•actual or anticipated fluctuations in our quarterly and annual results and those of our publicly held competitors;
•mergers and strategic alliances among any real estate companies;
•market conditions in the industry;
•changes in government regulation and taxes;
•shortfalls in our operating results from levels forecasted by securities analysts;
•investor sentiment toward the stock of real estate companies in general;
•announcements concerning us or our competitors; and
•the general state of the securities markets.
Our common stock may be delisted, which could limit your ability to trade our common stock and subject us to additional trading restrictions.
Our common stock is listed on the NYSE, a national securities exchange. However, our common stock may not continue to be listed on the NYSE in the future. If the NYSE delists our common stock from trading on its exchange, we could face significant material adverse consequences, including:
•a limited availability of market quotations for our common stock;
•a limited amount of news and analyst coverage for our company;
•a decreased ability for us to issue additional securities or obtain additional financing in the future; and
•limited liquidity for our stockholders due to thin trading.
Our staggered board may entrench management and discourage unsolicited stockholder proposals that may be in the best interests of stockholders, and certain anti-takeover provisions in our organizational documents may discourage a change in control.
Our amended and restated certificate of incorporation provides for our board of directors to be divided into three classes, each of which generally serves for a term of three years with only one class of directors being elected in each year. As a result, at any annual meeting only a minority of the board of directors will be considered for election. Since this “staggered board” would prevent our stockholders from replacing a majority of our board of directors at any annual meeting, it may entrench management and discourage unsolicited stockholder proposals that may be in the best interests of stockholders. Additionally, certain provisions of our amended and restated certificate of incorporation and our amended and restated bylaws may have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including those attempts that might result in the payment of a premium over the market price for the shares held by stockholders.
In addition, Section 203 of the Delaware General Corporation Law may, under certain circumstances, make it more difficult for a person who would be an “interested stockholder” to effect a “business combination” with us for a three-year period. An “interested stockholder” generally is defined as any entity or person that beneficially owns 15% or more of our outstanding voting stock or any entity or person that is an affiliate or associate of such entity or person. A “business combination” generally is defined to include, among other transactions, mergers, consolidations and certain other transactions, including sales, leases or other dispositions of assets with an aggregate market value equal to 10% or more of the aggregate market value of the corporation.
These anti-takeover provisions could make it more difficult for a third party to acquire us, even if the third party’s offer may be considered beneficial by many stockholders. As a result, stockholders may be limited in their ability to obtain a premium for their shares.
We may change our dividend policy.
Future distributions will be declared and paid at the discretion of our board of directors and the amount and timing of distributions will depend upon cash generated by operating activities, our financial condition, capital requirements, restrictions in the agreements governing our indebtedness, the certificate of designations governing our outstanding preferred stock and such other factors as our board of directors deems relevant. Our board of directors may change our dividend policy at any time, and there can be no assurance as to the manner in which future dividends will be paid or that the current dividend level will be maintained in future periods.
Our amended and restated bylaws designate the Court of Chancery within the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a different judicial forum for disputes with us.
Our amended and restated bylaws provide that unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by the law, be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our current or former directors, officers, other employees or our stockholders to us or our stockholders, (3) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws or to which the Delaware General Corporation Law confers jurisdiction on the Court of Chancery of the State of Delaware, or (4) any action asserting a claim governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder finds favorable for disputes with us or any of our directors, officers, other employees or other stockholders, which may discourage lawsuits against us and our directors, officers, other employees and other stockholders. Additionally, this exclusive forum provision will not apply to claims that are vested in the exclusive or concurrent jurisdiction of a court or forum other than the Court of Chancery of the State of Delaware, or for which the Court of Chancery of the State of Delaware does not have subject matter jurisdiction. For instance, the provision would not preclude the filing of claims brought to enforce any
liability or duty created by the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, or the rules and regulations thereunder, in federal court.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
The following table sets forth certain information regarding our consolidated properties at December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated Properties by Region(a) | | | | | | | | | | |
Commercial(2) | | Square Feet | | Ending % Occupancy | | Annualized Base Rent(1) | | Annualized Effective Rent(3) | | KW Ownership % | | # of Assets |
Western U.S. | | 1.9 | | | 89 | % | | $ | 49.1 | | | $ | 48.4 | | | 91 | % | | 13 | |
Europe | | 5.1 | | | 93 | | | 128.2 | | | 118.5 | | | 95 | | | 67 | |
Total Commercial | | 7.0 | | | 92 | % | | $ | 177.3 | | | $ | 166.9 | | | 94 | % | | 80 | |
| | | | | | | | | | | | |
Multifamily(4) | | Units | | Ending % Leased | | Annualized Base Rent(1) | | Average Effective Rent(3) | | KW Ownership % | | # of Assets |
Western U.S. | | 9,439 | | | 95 | % | | $ | 178.3 | | | $ | 178.3 | | | 98 | % | | 32 | |
Total Multifamily | | 9,439 | | | 95 | % | | $ | 178.3 | | | $ | 178.3 | | | 98 | % | | 32 | |
(a) Dollars and square footage in millions.
(1) Represents annualized cash base rent (excludes tenant reimbursements and other revenue).
(2) Excludes properties that are under development or undergoing lease up, which includes 14 properties totaling 1.2 million square feet.
(3) Annualized effective rent represents annualized base rent net of rental concessions and abatements.
(4) Excludes properties that are under development or undergoing lease up, which includes 5 properties totaling 1,021 units.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated Properties by Region | | | | | | | | |
Residential and Land | | Units/Lots | | Acres | | KW Ownership % | | # of Investments |
Western U.S. | | 73 | | | 2,708 | | | 100 | % | | 3 | |
Europe | | — | | | 1 | | | 100 | % | | 1 | |
Total Residential and Land | | 73 | | | 2,708 | | | 100 | % | | 4 | |
| | | | | | | | | | | | | | | | | | | | |
Consolidated Properties by Region | | | | | | |
Hotel | | Rooms | | KW Ownership % | | # of Investments |
Europe | | 265 | | | 100 | % | | 1 | |
Total Hotel | | 265 | | | 100 | % | | 1 | |
The following table sets forth a summary schedule of commercial lease expirations for leases in place as of December 31, 2021, plus available space, in our consolidated commercial portfolio assuming non-exercise of renewal options and early termination rights (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Year of Lease Expiration | | Number of Leases Expiring | | Rentable Square Feet(1) | | Annualized Base Rent(1) | | Expiring Annualized Base Rent as a Percent of Total |
2022 | | 293 | | | 1.5 | | | $ | 24.5 | | | 14 | % |
2023 | | 103 | | | 1.1 | | | 28.0 | | | 16 | % |
2024 | | 88 | | | 0.6 | | | 20.3 | | | 11 | % |
2025 | | 57 | | | 0.6 | | | 20.0 | | | 11 | % |
2026 | | 73 | | | 0.5 | | | 19.4 | | | 11 | % |
2027 | | 50 | | | 0.4 | | | 10.5 | | | 6 | % |
2028 | | 18 | | | 0.2 | | | 8.0 | | | 5 | % |
2029 | | 32 | | | 0.4 | | | 19.2 | | | 11 | % |
2030 | | 27 | | | 0.1 | | | 3.7 | | | 2 | % |
2031 | | 30 | | | 0.4 | | | 12.1 | | | 7 | % |
Thereafter | | 56 | | | 1.0 | | | 11.6 | | | 6 | % |
Total | | 827 | | | 6.8 | | | $ | 177.3 | | | 100 | % |
(1) Dollars and square footage in millions.
Our corporate headquarters are located in Beverly Hills, California. We also have eleven other offices throughout the United States, one office in London, UK, one office in Dublin, Ireland, one office in Madrid, Spain, one office in Jersey and one office in Luxembourg. The Beverly Hills office operates as the main investment and asset management center for us in the United States, while the UK, Ireland, Jersey, Luxembourg and Spain offices are the main investment and asset management centers for our European operations. We own our corporate headquarters and our office in Dublin, Ireland and lease all of our remaining offices. In addition, we have on-site property management offices located within properties that we manage. The most significant terms of the leasing arrangements for our offices are the length of the lease and the rent. Our leases have terms varying in duration. The rent payable under our office leases vary significantly from location to location as a result of differences in prevailing commercial real estate rates in different geographic locations. Our management believes that except as provided below, no single office lease is material to our business, results of operations or financial condition. In addition, our management believes there is adequate alternative office space available at acceptable rental rates to meet our needs, although adverse movements in rental rates in some markets may negatively affect our profits in those markets when we enter into new leases.
The following table sets forth certain information regarding our corporate headquarters and regional offices.
| | | | | | | | | | | | | | | | | | | | |
Location | | Use | | Approximate Square Footage | | Lease Expiration |
Beverly Hills, CA | | Corporate Headquarters | | 60,000 | | | N/A* |
London, England | | Regional Office | | 8,147 | | | 3/3/2023 |
Dublin, Ireland | | Regional Office | | 17,000 | | | N/A* |
*Building is owned by a wholly-owned subsidiary of the Company.
Item 3. Legal Proceedings
We may be involved in various legal proceedings arising in the ordinary course of business, none of which we currently believe is material to our business. From time to time, our real estate management division is named in “slip and fall” type litigation relating to buildings we manage. Our standard management agreement contains an indemnity provision whereby the building owner agrees to indemnify us and defend our real estate management division against such claims. In such cases, we are defended by the building owner’s liability insurer.
Item 4. Mine Safety Disclosures
Not Applicable
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Stock Price Information
Our common stock trades on the NYSE under the symbol “KW.”
Holders
As of February 18, 2022, we had approximately 86 holders of record of our common stock.
Dividends
We declared and paid quarterly dividends of $0.22 per share for the first three quarters of 2021 and $0.24 per share for the fourth quarter of 2021. We declared and paid quarterly dividends of $0.22 per share each quarters of 2020.
Recent Sales of Unregistered Securities
None
Equity Compensation Plan Information
See Item 12—“Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
Performance Graph
The graph below compares the cumulative total return of our common stock from December 31, 2016 through December 31, 2021, with the comparable cumulative return of companies comprising the S&P 500 Index and the MSCI World Real Estate Index. The graph plots the growth in value of an initial investment of $100 in each of our common stock, the S&P 500 Index, and the MSCI World Real Estate Index for the five-year period ended December 31, 2021, and assumes reinvestment of all dividends, if any, paid on the securities. The stock price performance shown on the graph is not necessarily indicative of future price performance.

Kennedy Wilson uses the MSCI World Real Estate Index, which includes international real estate companies as a comparable benchmark. The information under this caption, “Performance Graph,” is deemed not to be incorporated by reference into any filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that such filing specifically states otherwise.
Purchases of Equity Securities by the Company
| | | | | | | | | | | | | | |
Months | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan(1) | Maximum Amount that May Yet be Purchased Under the Plan(1) |
October 1 - October 31, 2021 | 610,265 | | $ | 22.20 | | 20,964,502 | | $ | 199,830,469 | |
November 1 - November 30, 2021 | 472,897 | | 23.15 | | 21,437,399 | | 188,882,633 | |
December 1 - December 31, 2021 | 564,602 | | 22.78 | | 22,002,001 | | 176,019,980 | |
Total | 1,647,764 | | $ | 22.67 | | 22,002,001 | | $ | 176,019,980 | |
(1) On March 20, 2018, our board of directors authorized us to repurchase up to $250 million of our common shares, from time to time, subject to market conditions. On November 4, 2020, our board of directors authorized us to repurchase an additional $250 million of our common shares, from time to time, subject to market conditions.
During the year ended December 31, 2021, the Company repurchased and retired a total of 2.8 million shares of its common stock at a weighted average price of $22.20.
In addition to the repurchases of the Company’s common stock made above, the Company also withheld shares with respect to the vesting of restricted stock that the Company made to its employees. Shares that vested during the year ended December 31, 2021 and 2020 were net-share settled such that the Company withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes and remitted the cash to the appropriate taxing authorities. During the year ended December 31, 2021 and 2020, total payments for the employees’ tax obligations to the taxing authorities were $20.5 million (967,536 shares withheld) and $11.6 million (571,983 shares withheld), respectively.
Real Estate Assets Under Management (AUM)
AUM generally refers to the properties and other assets with respect to which we provide (or participate in) oversight, investment management services and other advice, and which generally consist of real estate properties or loans, and investments in joint ventures. Our AUM is principally intended to reflect the extent of our presence in the real estate market, not the basis for determining our management fees. Our AUM consists of the total estimated fair value of the real estate properties and other real estate related assets either owned by third parties, wholly-owned by us or held by joint ventures and other entities in which our sponsored funds or investment vehicles and client accounts have invested. Committed (but unfunded) capital from investors in our sponsored funds is not included in our AUM. The estimated value of development properties is included at estimated completion cost.
The table below details the changes in the Company's AUM for the twelve months ended December 31, 2021:
| | | | | | | | | | | | | | |
(in millions) | December 31, 2020 | Increases | Decreases | December 31, 2021 |
AUM | $ | 17,569.3 | | $ | 6,681.3 | | $ | 2,681.4 | | $ | 21,569.2 | |
AUM increased 23% to approximately $21.6 billion as of December 31, 2021. The increase is primarily due acquisitions and fair value increases on our Western U.S. multifamily properties and European industrial assets. These were offset by dispositions of non core retail assets and foreign exchange translation losses primarily on Euro denominated assets.
Foreign currency and currency derivative instruments
Please refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation for a discussion regarding foreign currency and currency derivative instruments.
Item 6. Reserved
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the financial statements and related notes and the other financial information appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See the section titled "Forward-Looking Statements" for more information. Actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including those discussed in the section titled “Risk Factors” and elsewhere in this report.
Unless specifically noted otherwise, as used throughout this Management’s Discussion and Analysis section, “we,” “our,” "us," "the Company" or “Kennedy Wilson” refers to Kennedy-Wilson Holdings, Inc. and its wholly-owned subsidiaries. “Equity partners” refers to the subsidiaries that we consolidate in our financial statements under U.S. GAAP (other than wholly-owned subsidiaries) and third-party equity providers. Please refer to “Non-GAAP Measures and Certain Definitions” for definitions of certain terms used throughout this report.
Overview
Kennedy Wilson is a global real estate investment company. We own, operate and develop real estate with the objective of maximizing earnings over the long run for ourselves and our equity partners. We focus primarily on multifamily and office properties located in the Western United States, United Kingdom, and Ireland. As of December 31, 2021, we have 220 employees in 12 offices primarily located throughout the United States, the United Kingdom, Ireland and Spain. As of December 31, 2021, our AUM stood at $21.6 billion. The real estate that we hold in our global portfolio consists primarily of multifamily apartments (55%) and commercial (45%) based on Consolidated NOI and JV NOI. Geographically, we focus on the Western United States (60%), the United Kingdom (18%) and Ireland (19%).
COVID-19 Impact and Business Update
The following discussion is intended to provide shareholders with certain information regarding the Company's operations and the impact of the COVID-19 pandemic on our business and management’s efforts to respond to the same. The pandemic commenced during the first quarter of 2020 and the duration and magnitude of it still remain uncertain at this time. Unless otherwise specified, the statistical and other information regarding our portfolio and tenants are estimates based on information available to us as of February 16, 2022. As a result of the rapid development, fluidity and uncertainty surrounding this situation, we expect that such statistical and other information may change, potentially significantly, going forward and may not be indicative of the actual impact of the COVID-19 pandemic on our business, operations, cash flows and financial condition for 2022 and future periods.
Health and Safety of our Employees and Tenants
Our primary objective during the COVID-19 pandemic has been to protect the health and safety of our employees as well as the tenants and service providers across our portfolio. We have reopened all of our offices across the globe. Prior to reopening any office, we strictly followed applicable laws in preparing and maintaining the space to be as safe as possible and providing an environment that encourages the following of social distancing guidelines, including, without limitation, adopting hybrid office and remote working schedules and staggering employees' schedules to ensure ample space is available between work spaces and occupied offices. We will continue to monitor and follow local laws and guidance to assess our ability to keep our offices open across the globe. Our IT infrastructure and communications are robust and we are focused on maintaining business continuity, while doing our share to support each community where we do business. The daily operations of our business are not materially directly dependent on a supply chain or production chain that may be disrupted due to the pandemic.
Impact to the Global Economy and Jurisdictions We Invest in
As a result of the unprecedented measures taken across the globe, the disruption and impact of the COVID-19 pandemic to the global economy and financial markets has been significant. We continue to closely monitor changes in applicable laws and COVID-19 guidance provided by local, state and federal regulators, or their equivalents, in the jurisdictions in which we operate. Nearly all the markets in which we operate continue to enforce some form of restriction and/or special procedures on the operations of businesses and international travel due to the COVID-19 pandemic. Although the United States, United Kingdom, Ireland and Spain have eased certain restrictions and have generally started to allow industries to open and operate, there are still measures and restrictions in place that may increase or decrease in response to the impact of the COVID-19 pandemic. Additionally, the continued and long-lasting economic impact of the COVID-19 pandemic may lead to some of our multifamily tenants having difficulty in making rental payments on time.
In addition, substantial inflationary pressures could have a negative impact on certain real estate assets, including, without limitation, development projects that do not have guaranteed, or fixed price contracts and real estate assets with long-term leases that do not provide for short-term rent increases. However, we continue to seek investments in markets where we
see opportunities for stronger relative growth, including multifamily assets with leases that have an initial term of 12 months or less, and continue to work to manage cost overrun risks for our development and redevelopment projects with detailed architectural plans, guaranteed, or fixed price contracts and close supervision by expert Company executives and personnel. Please refer to Development and Redevelopment in the Liquidity and Capital Resources section for a more detailed discussion regarding our development initiatives.
Liquidity
Kennedy Wilson has a strong financial and capital position to help withstand the potential near-term cash flow impact caused by the COVID-19 pandemic. As of December 31, 2021, we had $524.8 million ($327.3 million of which is in foreign currencies of GBP or EUR) of cash on our consolidated balance sheet and have $425.0 million available to draw on our unsecured revolving credit facility.
As of December 31, 2021, we have 6.1 weighted average years to maturity on our debt obligations. We have limited debt maturities over 2022, which total $197.3 million which are secured by non-recourse property-level financings and represent only 2% of our total outstanding debt obligations. During the year ended December 31, 2021, we closed the following bond offerings: (i) $600 million aggregate principal amount of 4.750% senior notes due 2029 (the “2029 Notes”), (ii) $600 million aggregate principal amount of 4.750% senior notes due 2030 (the "2030 Notes") and (iii) $600 million aggregate principal amount of 5.000% senior notes due 2031 (the “2031 Notes,” and together with the 2029 Notes and 2030 Notes, the “Notes”). During the year ended December 31, 2021, we used the proceeds from these offerings, in addition to cash on hand, to fully redeem our existing 5.875% Senior Notes due 2024 (the "2024 Notes"), repay $438.5 million on our revolving line of credit and fully repay the KWE Bonds due 2022 ("KWE Bonds"). As discussed in further detail in "Liquidity and Capital Resources", our need to raise funds from time to time to meet our capital requirements will depend on many factors, including the success and pace of the implementation of our strategy for strategic and accretive growth where appropriate. Additionally, we may opportunistically seek to raise capital (equity or debt) when we believe market conditions are favorable and when consistent with our growth and financing strategies.
Investment portfolio and 2021 Rent Collections
Our investment portfolio is diverse both geographically and by product type. In the United States, our portfolio is focused in the western part of the country. In Europe, our portfolio is primarily located in Dublin, Ireland and the United Kingdom.
As of February 16, 2022, we have collected a total of 97% of our share of rents for the year ended December 31, 2021 from our properties in our global investment portfolio. Such collection rates may not be indicative of collections in any future period. As of December 31, 2021, 87% of our share of the total rents that we collect are generated from our global multifamily and office properties. During the year ended December 31, 2021, we identified $14.3 million of receivables and other lease-related assets that are no longer probable of being collected. Accordingly, the Company will account for these leases on a cash basis and recognize rental income to the extent the Company receives cash from the tenants. Of the $14.3 million identified, $12.9 million related to our Consolidated portfolio and was recorded as a reduction of rental income and $1.4 million related to our share of rental income on our Co-Investments portfolio investments and was recorded as a reduction of income from unconsolidated investments. We have, however, received $11.7 million in cash collections relating to previously uncollectible amounts during the year ended December 31, 2021, which we have recorded to rental income. Cash collections are from asset management teams working to collect outstanding receivables from tenants and the receipt of rental relief amounts from various government programs. We intend to continue to work with our tenants and utilize programs available to us to make further cash collections on previously reserved receivables. In addition to the $11.7 million we have collected above we have submitted $2.3 million of claims to rental relief programs that have not yet been approved and have $0.4 million that have been approved for payment but not yet been received. We will record additional rental income when we receive cash from these claims.