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KW > SEC Filings for KW > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for KENNEDY-WILSON HOLDINGS, INC.

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


3-Mar-2014

Annual Report


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 title "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 "Risk Factors" on page 7 and elsewhere in this report.

Unless specifically noted otherwise, as used throughout this Management's Discussion and Analysis section, Kennedy-Wilson Holdings, Inc. is referred to as "Kennedy Wilson" or "KWH" , and Kennedy-Wilson Holdings, Inc. and its subsidiaries are collectively referred to as "The Company," "we," "us" or "our", unless the context requires otherwise.

Overview

Kennedy Wilson is a vertically integrated global real estate investment and services company. For over 35 years, we have owned and operated real estate related investments on behalf of our shareholders and our clients with offices in the United States, United Kingdom, Ireland, Spain and Japan.

Our operations are defined by two core business segments, KW investments and KW services, which work closely together to identify attractive investment markets and opportunities across the world:

KW Investments - we invest in various types of real estate investments through our investments business, either on our own or with strategic partners, where we are typically the general partner, with a promoted interest in the profits of the business beyond our ownership percentage. The main types of real estate we invest in are listed below:

Commercial
We source, acquire, and finance various types of commercial real estate that includes office, industrial, retail, and mixed-use assets.

Multifamily
We focus primarily on apartments in supply-constrained, infill markets. We pursue multifamily acquisition opportunities where we can unlock value through a myriad of strategies, including institutional management, asset rehabilitation, repositioning and creative recapitalization.

Loan Originations / Discounted Loan Purchases We originate and/or acquire loans secured by real estate. Our originations and acquisitions include individual notes on all real estate property types as well as portfolios of loans purchased from financial institutions, corporations and government agencies.

Residential, Hotel, and Other
In certain cases, we may pursue for sale housing acquisition opportunities, including land for entitlements, finished lots, urban infill condominium site and partially finished and finished condominium projects. This group also includes our investment in hotels and our investments in marketable securities. KW Services - our services business offers a comprehensive line of real estate services for the full lifecycle of real estate ownership. Below are the product types we offer through the KW services segment:

Investment Management
We provide acquisition, asset management and disposition services to our equity partners as well as to third parties.

Property Services
This division manages commercial real estate for third-party clients, fund investors, and investments held by the Company.
In addition to earning property management fees, consulting fees, lease commissions, construction management fees, disposition fees, and accounting fees, the Property Services group gives Kennedy Wilson insight into local markets and potential acquisitions.

Research


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Meyers Research LLC ("Meyers"), a Kennedy Wilson company, is a premier consulting practice and the industry's leading provider of data and analytics for the residential real estate development and new home construction industry. Meyers' proprietary iPad application, Zonda, launched in 2013 and provides market insight for the homebuilding industry with real-time data on over 250 metrics impacting the housing market on a national and local level.

Auction and Conventional Sales
The Auction and Conventional Sales group provides innovative marketing and sales strategies for all types of commercial and residential real estate, including single family homes, mixed-use developments, estate homes, multifamily dwellings, new home projects, conversions and scattered properties.

Brokerage
The Brokerage group specializes in innovative marketing programs tailored to client objectives for all types of investment grade and income producing real estate.

Financial Measures and Descriptions
Our key financial measures and indicators are discussed below. Please refer to the critical accounting policies in the Notes to the Consolidated Financial Statements for additional detail regarding the GAAP recognition policies associated with the captions described below. Revenues
Management and leasing fees - management and leasing fees are primarily comprised of base asset management fees and performance based fees generated by our investment management division, property management fees generated by our property services division, leasing fees generated by our brokerage and auction divisions, and consulting fees generated by Meyers.
Commissions - commission revenue consists of acquisition fees generated by our investment management division and sales commissions generated by our brokerage division.
Related Party- related party revenue are management and leasing fees as well as commissions earned from our equity partners and relate to assets in which we have an ownership interest.
Rental and other income - rental and other income is comprised of rental income earned by our consolidated real estate investments.
Sale of real estate - sales of real estate consists of gross sales proceeds received on the sale of consolidated real estate that is not defined as a business by generally accepted accounting principles. This typically includes the sale of condominium units.
Expenses
Commission and marketing expenses - commission and marketing expenses includes fees paid to third party sales and leasing agents as well as business development costs necessary to generate revenues.
Rental operating expenses - rental and operating expenses consists of operating expenses of our consolidated real estate investments, including items such as property taxes, insurance, maintenance and repairs, utilities, supplies, salaries and management fees.
Compensation and related expenses - compensation and related expenses include:
(a) employee compensation, comprising of salary, bonus, employer payroll taxes and benefits paid on behalf of employees and (b) share-based compensation associated with the grants of share-based awards. General and administrative - general and administrative expenses represent administrative costs necessary to run our business and include things such as occupancy and equipment expenses, professional fees, public company costs, travel and related expenses, and communications and information services. Depreciation and amortization - depreciation and amortization is comprised of depreciation expense which is recognized ratably over the useful life of an asset and amortization expense which primarily consist of the amortization of assets allocated to the value of in-place leases upon acquisition of a consolidated real estate asset or the amortization of loan fees.


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Equity in joint venture income - Equity in joint venture income consists of the Company's share of income or loss earned on investments in which the Company can exercise significant influence but does not have control. As of December 31, 2013, approximately 66% of the Company's investment account is invested through joint ventures investments. See the investment in joint venture footnote of the attached notes to the consolidated financial statements for summarized financial data, including balance sheet and income statement information of the underlying joint ventures.
Interest income from loan pool participations and notes receivable - Interest income from loan pool participations is comprised of interest income earned on the Company's loan originations and investments in loans and discounted loan purchases. Additionally, interest income from loan pool participations and note receivable are recognized on a level yield basis, where a level yield model is utilized to determine a yield rate which, based upon projected future cash flows, accretes interest income over the estimated holding period. Acquisition-related gains - Acquisition-related gains consist of gains recognized by the Company upon a GAAP required fair value measurement due to a business combination. These gains are typically recognized when the Company converts a loan into consolidated real estate owned and the fair value of the underlying real estate exceeds the basis in the previously held loan. These gains also arise when there is a change of control of an investment. The gain amount is based upon the fair value of the Company's equity in the investment in excess of the carrying amount of the equity directly preceding the change of control.
Acquisition-related expenses - Acquisition-related expenses consists of the costs incurred to acquire assets, such as stamp duty taxes on foreign transactions, as well as the write off of any costs associated with acquisitions which did not materialize.
Interest expense - corporate debt - Interest expense - corporate debt represents interest costs associated with our senior notes payable, junior subordinated debentures and line of credit facility. This debt is unsecured and we typically use the funds generated from corporate borrowings to fund new investments. Interest expense - mortgage debt - Interest expense - mortgage debt represents interest costs associated with mortgages on our consolidated real estate. These mortgages are typically secured by the underlying real estate collateral. Realized foreign currency exchange income or loss - Realized foreign currency exchange income or loss relates to the settlement of foreign transactions during the year and arise due to changes in currency exchange rates.
Income taxes - The Company's services business operates globally as corporate entities subject to federal, state, and local income taxes and the investment business operates through various partnership structures to participate in multifamily, office and residential property acquisitions as well as originate loans and purchases loan pools. The Company's distributive share of income from its partnership investments will be subject to federal, state, and local taxes at the entity level and the related tax provision attributable to the Company's share of the income tax is reflected in the consolidated financial statements. Noncontrolling Interests - Noncontrolling interests represents income or loss attributable to equity partners for their ownership in investments which the Company controls. Income or loss is attributed to noncontrolling interest partners based on their respective ownership interest in an investment. Non-GAAP Measures
EBITDA and Adjusted EBTIDA
EBITDA(1) - EBITDA represents net income before noncontrolling interest income, 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, loss on early extinguishment of corporate debt 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. 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 spending and acquisitions. Adjusted EBITDA(1) - represents EBITDA, as defined above, adjusted to exclude acquisition and merger related expenses and stock based compensation expense. Our management uses Adjusted EBITDA to analyze our business because it adjusts EBITDA for items we believe do not have an accurate reflection of the nature of our business going forward. Additionally, we believe Adjusted EBITDA is useful to investors to assist them in getting a more accurate picture of our results from operations. Such items may vary for different companies for reasons unrelated to overall operating performance.


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(1) EBITDA, as defined above, 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. Such items may vary for different companies for reasons unrelated to overall operating performance. Adjusted EBITDA represents EBITDA, as defined above, adjusted to exclude corporate merger and acquisition related expenses and share based compensation expense for the Company. Such items may vary for different companies for reasons unrelated to overall operating performance. 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. Results of Operations
The following table sets forth items derived from our consolidated statement of operations for the years ended December 31, 2013, 2012, and 2011:


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                                                              Year Ended December 31
(Dollars in millions)                                    2013         2012          2011
Revenue
Management and leasing fees                           $   18.1     $    15.8     $    12.6
Management and leasing fees - related party               36.0          24.5          14.5
Commissions                                                4.0           5.0           5.8
Commissions - related party                               10.0           8.0          24.2
Rental and other income                                   43.0           8.5           5.1
Sale of real estate                                       10.1           2.3           0.4
Total revenue                                            121.2          64.1          62.6
Operating expenses
Commission and marketing expenses                          3.6           4.6           4.0
Rental operating expense                                  18.9           4.5           3.3
Cost of real estate sold                                   7.9           2.2           0.4
Compensation and related expenses                         76.7          55.8          41.1
General and administrative                                24.6          19.5          14.5
Depreciation and amortization                             17.4           4.9           2.8
Total operating expenses                                 149.1          91.5          66.1
Equity in joint venture income                            29.8          21.5          12.5
Interest income from loan pool participations and
notes receivable                                          13.5           9.2           8.0
Operating income                                          15.4           3.3          17.0
Non-operating income (expense)
Interest income                                            0.3           0.1           0.4
Interest income-related party                              0.3           2.8           2.0
Acquisition-related gains                                 56.6          25.5           6.3
Gain on sale of marketable securities                        -           4.3             -
Acquisition-related expenses                              (1.6 )        (0.7 )           -
Interest expense - corporate debt                        (39.9 )       (26.1 )       (19.0 )
Interest expense - property level debt                   (11.8 )        (2.5 )        (1.6 )
Realized foreign currency exchange loss                   (2.8 )           -             -
Income from continuing operations before benefit
from (provision for) income taxes                         16.5           6.7           5.1
(Provision for) benefit from income taxes                 (2.9 )         0.2           2.0
Income from continuing operations                         13.6           6.9           7.1
Loss from discontinued operations, net of income
taxes                                                     (0.3 )           -             -
Gain (loss) from sale of real estate, net of income
taxes                                                      0.6          (0.2 )         0.4
Net income                                                13.9           6.7           7.5
Net (income) attributable to the noncontrolling
interests                                                (20.3 )        (2.5 )        (1.2 )
Net (loss) income attributable to Kennedy-Wilson
Holdings, Inc.                                            (6.4 )         4.2           6.3
Preferred stock dividends and accretion of issuance
costs                                                     (8.1 )        (8.1 )        (8.7 )
Net loss attributable to Kennedy-Wilson Holdings,
Inc. common shareholders                              $  (14.5 )   $    (3.9 )   $    (2.4 )
EBITDA (1)                                            $  177.6     $    92.1     $    66.2
Adjusted EBITDA (2)                                   $  185.1     $   100.2     $    71.3


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(1) (2) See Non-GAAP Measures section for definition of EBITDA and Adjusted EBITDA The following compares results of operations for the years ended December 31, 2013 and December 31, 2012 and years ended December 31, 2012 and December 31, 2011.
Our Consolidated Financial Results and Comparison of the Years Ended December 31, 2013 and 2012
Our revenues for the years ended December 31, 2013 and 2012 were $121.2 million and $64.1 million. Total operating expenses for the same periods were $149.1 million and $91.5 million, respectively. Net loss attributable to our common shareholders was $14.5 million and $3.9 million in 2013 and 2012, respectively. EBITDA was $177.6 million and $92.1 million in 2013 and 2012, respectively. Adjusted EBITDA was $185.1 million and $100.2 million in 2013 and 2012, respectively. The Company


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achieved a 93% increase in EBITDA and a 85% increase in Adjusted EBITDA for the year ended December 31, 2013 as compared to the same period in 2012. Revenues
Investments Segment Revenues
Rental and other income increased to $43.0 million in 2013 from $8.5 million in 2012. The $34.5 million increase is due to $18.1 million in rental income from new acquisitions and consolidations in 2013 and $16.3 million from properties acquired at the end of 2012.
During the year ended December 31, 2013, we sold 44 condominium units generating $10.1 million of proceeds from the sale of real estate. During the year ended December 31, 2012, we sold five condominium units, generating $2.3 million of proceeds from the sale of real estate.
Services Segment Revenues
Third Party Services - These are management and leasing fees as well as commissions earned from third parties and relate to assets in which we do not have an ownership interest.
Our third party management and leasing services revenues increased to $18.1 million during the year ended December 31, 2013 as compared to approximately $15.8 million for the same period in 2012. The $2.3 million or 15% increase primarily relates to the acquisition in March 2012 of Meyers, a real estate consultancy firm specializing in capital sourcing and real estate research for the single-family homebuilding and multifamily apartment industries. Our third party commission revenues were at $4.0 million in 2013 as compared to approximately $5.0 million in 2012. The decrease is driven by our auction services business which has historically been countercyclical. Improvements in the U.S. real estate markets have caused auction service revenues to decrease. Related Party Services
Our related party management and leasing services generated revenues of $36.0 million in 2013 compared to $24.5 million in 2012. The $11.5 million, or 47%, increase primarily relates to an increase of $6.6 million in additional asset management fees earned on our U.K. Loan Pool due to the expected resolution period being shortened to two years from the initial budget of three years. In addition, we earned $2.7 million in asset management fees relating to a new loan pool in the United Kingdom that was entered into in December 2012. Also during 2013, additional base management fees were earned mainly due to the admission of new investors into one of our funds and as a result of our increased investment activity in the United Kingdom and Ireland.
In 2013, our related party commission revenues were $10.0 million compared to approximately $8.0 million in 2012. The increase in commission revenues are primarily driven by acquisition fees earned on increased investment activity mainly in the United Kingdom and Ireland. Operating Expenses

Investments Segment Operating Expenses

Operating expenses for the year ended December 31, 2013 increased to $84.7 million compared to $41.3 million for the same period in 2012. The increase is attributable to the following:
Compensation and related expenses increased by $9.3 million due to an increase in personnel, particularly due to our growth and expansion in the United Kingdom and Ireland, to source and execute on acquisition opportunities. Additionally, accrued discretionary compensation increased in connection with the increase in Investments EBITDA. General and administrative expenses increased by $2.9 million primarily due to increased travel and rental expense relating to our growing operations in the United Kingdom and Ireland.
Rental operating expenses increased by $14.4 million and depreciation and amortization increased by $11.2 million due to the acquisitions during 2013 and the end of 2012.
During the year ended December 31, 2013 we sold 44 condominium units which resulted in $7.9 million of sale-related costs. During the year ended December 31, 2012, we sold five condominium units which resulted in $2.2 million of sale-related costs.
Services Segment Operating Expenses


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Operating expenses (excluding depreciation and amortization expense) for the year ended December 31, 2013 were approximately $40.7 million as compared to $33.1 million for the same period in 2012. The increase is attributable to the following:

Compensation and related expenses increased by $6.0 million due to an increase in personnel and in accrued discretionary compensation. As a result of the expansion in our Meyers group, we increased our head count in order to service the demand of our customers in the capital sourcing and real estate research for the single-family homebuilding and multifamily apartment industries. Additionally, due to the growth in our Services EBITDA there was an increase in our accrued discretionary compensation.
General and administrative expenses increased by $2.5 million primarily due to the growth of the Company specifically in the United Kingdom, Ireland, and Meyers.
Commissions and marketing expenses decreased by $1.0 million due to the decrease in auction sales previously discussed.
Corporate Operating Expenses
Operating expenses (excluding depreciation and amortization expense) for the year ended December 31, 2013 were approximately $21.9 million as compared to $16.7 million for the same period in 2012. Compensation and related expenses increased by $5.5 million primarily due to the increase in accrued discretionary compensation in connection with the increase in Adjusted EBITDA and the additional resources and costs associated with growing the Company. Investments Segment Equity in Joint Venture Income The following table details summarized financial data for the Company's portion of equity in joint venture income by region for the years ended December 31, 2013 and 2012.

                                                            Years ended December 31,
                                                   2013                                  2012
                                     U.S.    Europe   Japan     Total       U.S.    Europe   Japan    Total
(Dollars in millions)
Rental and other income            $ 98.2   $ 23.8   $ 12.8   $ 134.8     $ 60.6   $  1.9   $ 16.0   $ 78.5
Sale of real estate                  43.7     11.4        -      55.1       61.9        -        -     61.9
Interest income                       3.7      1.5        -       5.2        2.0      2.0        -      4.0
Total revenue                       145.6     36.7     12.8     195.1      124.5      3.9     16.0    144.4
Rental operating expense             47.6      6.2      3.1      56.9       22.7      0.5      4.1     27.3
Cost of real estate sold             33.1      8.6        -      41.7       52.8        -        -     52.8
Compensation and related expense        -        -      0.8       0.8          -        -      0.9      0.9
General and administrative              -      0.8      0.9       1.7          -      0.8        -      0.8
Depreciation and amortization
expense                              31.2     11.3      4.2      46.7       16.5      0.9      5.2     22.6
Total operating expense             111.9     26.9      9.0     147.8       92.0      2.2     10.2    104.4
Acquisition-related gain                -     36.2        -      36.2          -        -        -        -
Fair value gain                       5.1        -        -       5.1        9.5        -        -      9.5
. . .
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