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KW > SEC Filings for KW > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for KENNEDY-WILSON HOLDINGS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for KENNEDY-WILSON HOLDINGS, INC.


7-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

The following discussion and analysis of our financial condition and results of operations contains forward-looking statements within the meaning of the federal securities laws. See the discussion under the heading "Forward-looking Statements" 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 subsidiaries.

Overview
Founded in 1977, we are an international real estate investment and services firm. We are a vertically-integrated real estate operating company with approximately 390 professionals in 24 offices throughout the United States, United Kingdom, Ireland, Spain and Japan. Based on management's estimate of fair value as of September 30, 2013, we have approximately $13.7 billion of real estate and real estate-related assets under our management ("AUM"), totaling approximately 68.8 million square feet of properties throughout the United States, Europe and Japan. This includes ownership in 16,511 multifamily apartment units and 9.6 million square feet of commercial properties, of which 2,030 units and 1.2 million square feet are owned by our consolidated subsidiaries and 14,481 units and 8.4 million square feet are held in joint ventures.
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 and is not the basis for determining our management fees. Our assets under management consist 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. Our operations are defined by two core business units: KW Investments and KW Services.
KW Investments invests our capital and our partners' capital in real-estate related assets including multifamily, commercial, and residential properties as well as loans secured by real estate. Occasionally we will engage in development. We are diligent in our operations of these investments and typically look to maximize cash flow on our income-producing properties, value on our non-income-producing properties, and resolutions on our loans secured by real estate. We will utilize leverage on our investments where we feel appropriate. We are mindful of the amount of leverage we elect to use, our exposure to variable interest rates, and the timing of maturities. KW Services provides a full array of real estate-related services for the full life cycle of real estate ownership and investment to clients that include financial institutions, developers, builders and government agencies. Kennedy Wilson provides auction and conventional sales, property management, investment management, asset management, leasing, construction management, acquisitions, dispositions, research and trust services.


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The following table describes our investment account (Kennedy Wilson's equity in real estate and loans secured by real estate), which includes the following financial statement captions and is derived from our consolidated balance sheets, as of September 30, 2013 and December 31, 2012 (dollars in millions):

                                                September 30, 2013       December 31, 2012
Investment in joint ventures                   $            742.2      $             543.2
Real estate, net of depreciation                            518.0                    289.4
Mortgage debt                                              (340.4 )                 (236.5 )
Notes receivable                                             28.2                    136.6
Acquired in-place lease value, net of
amortization(1)                                               8.6                      9.3
Loan pool participations                                     58.8                     95.6
Total net investment account                              1,015.4                    837.6
Add back:
Accumulated depreciation and amortization                    24.0                     12.0
Kennedy Wilson's share of accumulated
depreciation and amortization included in
investment in joint ventures                                 90.6                     59.3
Total gross investment account                 $          1,130.0      $             908.9

(1) Included in other assets. The following table breaks down our net investment account information derived from our consolidated balance sheet, by investment type and geographic location as of September 30, 2013:

                                                            Dollars in Millions
                                             Loans Secured
                                                   by                          Residential, Hotel,
                             Multifamily      Real Estate       Commercial        and Other (1)         Total
Western U.S.               $       214.5     $       84.8     $      199.5     $           112.5     $    611.3
Other U.S.                           0.1                -              4.3                   7.9           12.3
Japan                               72.2                -              6.9                     -           79.1
United Kingdom                         -             57.7             99.9                     -          157.6
Ireland                             48.5              8.0             98.6                     -          155.1
Total                      $       335.3     $      150.5     $      409.2     $           120.4     $  1,015.4


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(1) Includes for-sale residential properties, condominiums and residential land. The following table breaks down our investment account information derived from our consolidated balance sheet, by investment type and geographic location as of December 31, 2012:
                                                           Dollars in Millions
                                            Loans Secured
                                                  by                          Residential, Hotel,
                            Multifamily      Real Estate       Commercial        and Other (1)         Total
Western U.S.              $       171.7     $       69.0     $      167.9     $           106.9     $    515.5
Other U.S.                          0.4                -              3.3                  10.5           14.2
Japan                             102.7                -              8.6                     -          111.3
United Kingdom                        -            120.4                -                     -          120.4
Ireland                            22.4             44.3              9.5                     -           76.2
Total                     $       297.2     $      233.7     $      189.3     $           117.4     $    837.6


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(1) Includes for-sale residential properties, condominiums and residential land.


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Kennedy Wilson's Recent Highlights
We reported third quarter 2013 Adjusted EBITDA of $42.3 million, a 142% increase from $17.5 million for the same period in 2012. For the nine months ended September 30, 2013, Adjusted EBITDA was $111.3 million, a 101% increase from $55.5 million for the same period in 2012.

Investments business
Investment account
As of September 30, 2013, our gross investment account was $1.1 billion, compared to $908.9 million as of December 31, 2012. The net investment account was $1.0 billion as of September 30, 2013 compared to $837.6 million at December 31, 2012, after accumulated depreciation and amortization of $114.6 million and $71.3 million, respectively. The change in the net investment account was comprised of $387.1 million of cash contributed to and income earned on investments offset by $209.3 million of cash distributed from investments. During the nine months ended September 30, 2013, the Company and its equity partners received approximately $940 million in distributions from their investments.

As of September 30, 2013, the Company and its equity partners owned 22.9 million rentable square feet of real estate, including investments in 16,511 apartment units and 79 commercial properties. Additionally, as of September 30, 2013, the Company and its equity partners owned in excess of $1.6 billion in unpaid principal balance of loans secured by real estate.

Operating metrics
During the nine months ended September 30, 2013, our investments business achieved an EBITDA of $99.5 million, a 111% increase from $47.2 million for the same period in 2012.

During the nine months ended September 30, 2013, based on our investments in 11,755 same property multifamily units, rental revenues increased 5%, net operating income increased 7% and occupancy increased 1% at the property level from the same period in 2012. In addition, based on our investments in 2.8 million square feet of same property commercial real estate, rental revenues increased 15%, net operating income increased 18% and occupancy increased 4% at the property level from the same period in 2012.

Acquisition/disposition program
From January 1, 2010 through September 30, 2013, the Company and its equity partners acquired approximately $10.6 billion of real estate related investments (including unpaid principal balance of loan purchases). During the nine months ended September 30, 2013, the Company and its equity partners acquired $2.6 billion of real estate related investments, in which the Company invested $368.5 million of equity. Our investments were directed 71% to the United Kingdom and Ireland and 29% to the Western U.S.

During the fourth quarter of 2012, the Company and one of its equity partners acquired the mortgage on The Rock, a premier retail, residential and entertainment center in Manchester, United Kingdom. During the third quarter, the Company and its equity partner converted their mortgage note to a 100% equity ownership in the property resulting in a $28.8 million acquisition related gain. The Company's portion of the gain was $14.4 million and was recognized in equity in joint venture income.

During the nine months ended September 30, 2013, the Company and its equity partners sold a total of $177.4 million of real estate, which resulted in a gain of $41.3 million, of which our share was $13.2 million ($29.9 million of our equity invested) including nine commercial buildings, two multifamily properties and 52 condos.

Property level debt financing
As of September 30, 2013, the Company and its equity partners had approximately $3.2 billion of property level debt with a weighted average interest rate of 5.1% and a weighted average maturity of 6.1 years.

As of September 30, 2013 the Company and its equity partners property level debt was 54% at fixed interest rates, 31% floating with interest rate caps and 15% at floating interest rates.

Key investment updates
UK Loan Pool
Our book equity in this investment is $11.4 million; we own 12.5% before carried interest.

In December 2011, the Company and its equity partners acquired a loan pool secured by real estate located in the United Kingdom with an unpaid principal balance of $2.1 billion. As of September 30, 2013, the unpaid principal balance was $189.1 million due to loan resolutions of approximately $1.9 billion, representing approximately 91% of the pool. During the nine months ended September 30, 2013, the Company received $53.4 million in distributions related to resolutions.


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Japan multifamily
Our book equity in this investment is $72.2 million; we own 40.9% before carried interest.

We maintained 96% occupancy in 50 apartment buildings as of September 30, 2013 with a total of 2,410 units.

Since Fairfax Financial became our partner in the Japanese multifamily portfolio in September 2010, we have distributed a total of $104.4 million, of which our share was $49.1 million.

Services business
Management and leasing fees and commissions increased by 52% to $54.0 million for the nine months ended September 30, 2013, from $35.5 million for the same period in 2012.

During the nine months ended September 30, 2013, our services business achieved an EBITDA of $22.6 million, a 102% increase from $11.2 million for the same period in 2012.

Corporate financing
In September 2013, the Company issued and sold 6.9 million shares of common stock primarily to institutional investors, resulting in gross proceeds of $127.7 million. A portion of the proceeds were used to pay off the outstanding balance on our line of credit.

In September 2013, the Company increased the availability on its line of credit to $140.0 million from $100.0 million and extended the line's maturity to October 1, 2016.

Subsequent events
In October 2013, Meyers Research, a wholly owned subsidiary, launched Zonda, a mobile application designed to provide market insight for the homebuilding industry by combining interactive tools and real-time data on approximately 300 metrics impacting housing.

Results of Operations
The following table sets forth items derived from our consolidated statement of
operations for the three and nine month periods ended September 30, 2013 and
2012:

                                       40
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                                                                                            Nine Months Ended
                                              Three Months Ended September 30,                September 30,
                                                  2013                 2012              2013              2012
Revenue
Management and leasing fees                $      4,462,000       $   4,015,000     $  13,925,000     $  11,272,000
Management and leasing fees - related
party                                            10,649,000           6,320,000        27,962,000        18,036,000
Commissions                                         836,000           1,477,000         2,296,000         3,513,000
Commissions - related party                       5,025,000             668,000         9,865,000         2,652,000
Sale of real estate                               1,546,000           1,275,000        10,060,000         1,275,000
Rental and other income                          10,690,000           1,485,000        27,452,000         4,432,000
Total revenue                                    33,208,000          15,240,000        91,560,000        41,180,000
Operating expenses
Commission and marketing expenses                 1,011,000           1,371,000         2,845,000         3,676,000
Compensation and related expenses                20,956,000          11,364,000        52,840,000        30,658,000
Cost of real estate sold                            883,000           1,275,000         7,885,000         1,275,000
General and administrative                        5,760,000           5,014,000        17,574,000        13,571,000
Depreciation and amortization                     4,531,000             989,000        12,003,000         2,903,000
Rental operating expenses                         4,167,000             847,000        11,852,000         2,638,000
Total operating expenses                         37,308,000          20,860,000       104,999,000        54,721,000
Equity in joint venture income                    9,379,000           1,848,000        20,955,000        12,472,000
Interest income from loan pool
participations and notes receivable               3,983,000           3,712,000        10,209,000         7,126,000
Operating income (expense)                        9,262,000             (60,000 )      17,725,000         6,057,000
Non-operating income (expense)
Interest income                                     205,000             179,000           444,000         2,503,000
Acquisition-related gain                          1,668,000                   -        11,127,000                 -
Acquisition-related expenses                              -                   -          (510,000 )               -
Gain on sale of marketable securities                     -                   -                 -         2,931,000
Interest expense                                (13,141,000 )        (6,755,000 )     (37,104,000 )     (19,979,000 )
Other                                                     -              (6,000 )               -           (80,000 )
Loss from continuing operations before
(provision for)
benefit from income taxes                        (2,006,000 )        (6,642,000 )      (8,318,000 )      (8,568,000 )
(Provision for) benefit from income
taxes                                              (726,000 )         2,500,000         1,446,000         5,121,000
Loss from continuing operations                  (2,732,000 )        (4,142,000 )      (6,872,000 )      (3,447,000 )
Discontinued Operations
(Loss) income from discontinued
operations, net of income taxes                    (291,000 )                 -          (294,000 )           2,000
Gain (loss) from sale of real estate,
net of income taxes                                 338,000                   -           555,000          (212,000 )
Net loss                                         (2,685,000 )        (4,142,000 )      (6,611,000 )      (3,657,000 )
Net loss (income) attributable to the
noncontrolling interests                            652,000             (64,000 )       2,550,000        (2,990,000 )
Net loss attributable to Kennedy-Wilson
Holdings, Inc.                                   (2,033,000 )        (4,206,000 )      (4,061,000 )      (6,647,000 )
Preferred dividends and accretion of
preferred stock issuance costs                   (2,036,000 )        (2,036,000 )      (6,108,000 )      (6,108,000 )
Net loss attributable to Kennedy-Wilson
Holdings, Inc. common
   shareholders                            $     (4,069,000 )     $  (6,242,000 )   $ (10,169,000 )   $ (12,755,000 )
EBITDA (1)                                 $     40,272,000       $  14,551,000     $ 105,803,000     $  50,453,000
Adjusted EBITDA (2)                        $     42,307,000       $  17,473,000     $ 111,269,000     $  55,453,000


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(1) EBITDA represents net income before interest expense, our share of interest expense included in income from investments in joint ventures and loan pool participations, depreciation and amortization, our share of depreciation and amortization included in income from investments in joint ventures, and income taxes. We do not adjust EBITDA for gains or losses on the extinguishment of mortgage debt, as we are in the business of purchasing discounted notes secured by real estate and, in connection with these note purchases, we may resolve these loans through discounted payoffs with the borrowers. EBITDA is not a recognized term under GAAP and does not purport to be an alternative to net earnings as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, EBITDA is not intended to be a measure of free cash flow available for management's discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Our presentation of EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. EBITDA is not calculated under GAAP and should not be considered in isolation or as a substitute for net income, cash flows or other financial data prepared in accordance with GAAP or as a measure of our overall profitability or liquidity. Our management believes EBITDA is useful in evaluating our operating performance compared to that of other companies in our industry because the calculation of EBITDA generally eliminates the effects of financing and income taxes and the accounting effects of capital


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spending and acquisitions. Such items may vary for different companies for reasons unrelated to overall operating performance. Additionally, we believe EBITDA is useful to investors to assist them in getting a more accurate picture of our results from operations.
(2) Adjusted EBITDA represents EBITDA, as defined above, adjusted to exclude stock-based compensation expense. Our management uses Adjusted EBITDA to analyze our business because it adjusts EBITDA for items we believe will not be relevant or comparable to the nature of our business going forward. Such items may vary for different companies for reasons unrelated to overall operating performance. Additionally, we believe Adjusted EBITDA is useful to investors to assist them in getting a more meaningful picture of our results from operations. However, EBITDA and Adjusted EBITDA are not recognized measurements under GAAP, and when analyzing our operating performance, readers should use EBITDA and Adjusted EBITDA in addition to, and not as an alternative for, net income as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, EBITDA and Adjusted EBITDA are not intended to be a measure of free cash flow for our management's discretionary use, as it does not consider certain cash requirements such as tax and debt service payments. The amounts shown for EBITDA and Adjusted EBITDA also differ from the amounts calculated under similarly titled definitions in our debt instruments, which are further adjusted to reflect certain other cash and non-cash charges and are used to determine compliance with financial covenants and our ability to engage in certain activities, such as incurring additional debt and making certain restricted payments. We use certain non-GAAP measures to analyze our business including EBITDA(1) and Adjusted EBITDA,(2) which are calculated as follows:

                                           Three Months Ended September 30,         Nine Months Ended September 30,
                                               2013                 2012                 2013                2012
Net loss                                $     (2,685,000 )     $  (4,142,000 )   $      (6,611,000 )    $ (3,657,000 )
Non-GAAP adjustments:
Add back:
Interest expense                              13,141,000           6,755,000            37,104,000        19,979,000
Kennedy Wilson's share of interest
expense included in
   investment in joint ventures and
loan pool participation                       12,688,000           8,364,000            33,405,000        23,364,000
Depreciation and amortization                  4,531,000             989,000            12,003,000         2,903,000
Kennedy Wilson's share of
depreciation and amortization
   included in investment in joint
ventures                                      11,871,000           5,085,000            31,348,000        12,985,000
Benefit from (provision for) income
taxes                                            726,000          (2,500,000 )          (1,446,000 )      (5,121,000 )
EBITDA (1)                                    40,272,000          14,551,000           105,803,000        50,453,000
Stock-based compensation                       2,035,000           2,922,000             5,466,000         5,000,000
Adjusted EBITDA (2)                     $     42,307,000       $  17,473,000     $     111,269,000      $ 55,453,000


-----


(1) (2) See definitions in previous discussion. The following tables summarize revenue, operating expenses, non-operating expenses, operating income (loss) and net income (loss) and calculates EBITDA(1) and Adjusted EBITDA(2) by our investments and services operating segments and corporate for the three and nine months ended September 30, 2013 and 2012:


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                                           Three Months Ended September 30,         Nine Months Ended September 30,
                                               2013                 2012                2013                 2012
Investments
Rental income and sale of real estate   $     12,236,000       $   2,760,000     $     37,512,000       $  5,707,000
Operating expenses                           (17,891,000 )       (10,184,000 )        (56,085,000 )      (22,008,000 )
Equity in joint venture income                 9,379,000           1,848,000           20,955,000         12,472,000
Interest income from loan pool
participations and notes receivable            3,983,000           3,712,000           10,209,000          7,126,000
Operating income (loss)                        7,707,000          (1,864,000 )         12,591,000          3,297,000

Interest income-related party                    136,000             139,000              208,000          2,408,000
Acquisition-related gains                      1,668,000                   -           11,127,000                  -
Acquisition-related expenses                           -                   -             (510,000 )                -
Gain on sale of marketable securities                  -                   -                    -          2,931,000
Interest expense                              (2,876,000 )          (160,000 )         (7,435,000 )         (477,000 )
Other                                                  -              (6,000 )                  -            (80,000 )
Income from continuing operations              6,635,000          (1,891,000 )         15,981,000          8,079,000
Discontinued operations
(Loss) income from discontinued
operations, net of income taxes                 (291,000 )                 -             (294,000 )            2,000
Gain (loss) from sale of real estate,
net of income taxes                              338,000                   -              555,000           (212,000 )
Income (loss) before (provision for)
benefit from taxes                             6,682,000          (1,891,000 )         16,242,000          7,869,000
Non-GAAP adjustments:
Add back:
Interest expense                               2,876,000             160,000            7,435,000            477,000
Kennedy Wilson's share of interest
expense included in
   investment in joint ventures and
loan pool participation                       12,688,000           8,364,000           33,405,000         23,364,000
Depreciation and amortization                  4,153,000             856,000           11,084,000          2,538,000
Kennedy Wilson's share of
depreciation and amortization
   included in investment in joint
ventures                                      11,871,000           5,085,000           31,348,000         12,985,000
EBITDA and Adjusted EBITDA (1) (2)      $     38,270,000       $  12,574,000     $     99,514,000       $ 47,233,000



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