INVESTMENTS IN JOINT VENTURES

Kennedy Wilson has a number of joint venture interests, generally ranging from 5% to approximately 50%, that were formed to acquire, manage, develop, and/or sell real estate and invest in loan pools and discounted loan portfolios. Kennedy Wilson has significant influence over these entities, but not control, and accordingly, these investments are accounted for under the equity method.

Joint Venture Holdings

As of September 30, 2013 and December 31, 2012, the Company's equity investment in joint ventures totaled $742.2 million and $543.2 million, respectively.

The following table details our investments in joint ventures by investment type and geographic location as of September 30, 2013:



	Multifamily		Commercial		Loan		Residential		Other		Total
Western U.S.	$	133,425,000	$	155,906,000	$	48,640,000	$	59,566,000	$	460,000	$	397,997,000
Japan	72,187,000		—		—		—		—		72,187,000
United Kingdom	—		99,888,000		13,216,000		—		—		113,104,000
Ireland	48,522,000		98,563,000		—		—		—		147,085,000
Other U.S.	134,000		3,795,000		7,000		342,000		7,570,000		11,848,000
Total	$	254,268,000	$	358,152,000	$	61,863,000	$	59,908,000	$	8,030,000	$	742,221,000

The following table details our investments in joint ventures by investment type and geographic location as of December 31, 2012:



	Multifamily		Commercial		Loan		Residential		Other		Total
Western U.S.	$	126,860,000	$	141,572,000	$	41,855,000	$	51,784,000	$	460,000	$	362,531,000
Japan	102,658,000		—		—		—		—		102,658,000
Ireland	22,359,000		9,530,000		36,729,000		—		—		68,618,000
Other U.S.	356,000		3,518,000		20,000		222,000		5,270,000		9,386,000
Total	$	252,233,000	$	154,620,000	$	78,604,000	$	52,006,000	$	5,730,000	$	543,193,000

KW Residential LLC

The Company's largest joint venture investment, KW Residential, LLC ("KWR"), had a balance of $72.2 million and $102.7 million as of September 30, 2013 and December 31, 2012, respectively. KWR is a joint venture investment in a portfolio of 50 apartment buildings comprised of approximately 2,400 units, located primarily in Tokyo and surrounding areas. Kennedy Wilson owns approximately 41% of KWR.

During the three and nine months ended September 30, 2013, Kennedy Wilson recognized $0.3 million and $6.6 million, respectively, in losses from foreign currency translation adjustments, net of hedges from its investment in KWR. For the three and nine months ended September 30, 2012, Kennedy Wilson recognized $0.6 million and $2.5 million, respectively, in gains from foreign currency translation adjustments, net of hedges from its investment in KWR.

During the three and nine months ended September 30, 2013 and 2012, the Company received the following cash distributions from its investment in KWR for the settlement of hedges, refinancing of property level debt, and operating distributions:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Settlement of hedges	$	—	$	—	$	10,838,000	$	—
Refinancing of property level debt	—		—		5,273,000		1,766,000
Operating distributions	4,125,000		—		6,590,000		7,257,000
Total	$	4,125,000	$	—	$	22,701,000	$	9,023,000

The cash received as a result of unwinding KWR's hedges will not be realized in our statement of operations until the underlying investment is substantially liquidated.

As of September 30, 2013, the Company did not have any other joint venture investments which individually exceeded 10% of the investments in the joint venture balance.

Note Conversion into Real Estate

During the second quarter of 2013, the Company and one of its equity partners foreclosed on a class A office building and an adjacent 3.5 acre site in Dublin, Ireland. As a result of the foreclosure, the joint venture was required to consolidate the assets and liabilities at fair value under ASC 805 - Business Combinations. As the fair value of the assets was in excess of the basis in the previously held mortgage notes, the joint venture recognized a $30.1 million acquisition related gain. The Company's portion of the gain was $15.0 million and was recognized in equity in joint venture income.

During the third quarter of 2013, the Company and one of its equity partners converted a mortgage note purchased in the fourth quarter 2012 by the Company and its equity partners into a 100% equity interest on "The Rock", a retail, residential and entertainment center in Manchester, United Kingdom. As a result of the conversion, the joint venture was required to consolidate the assets and liabilities at fair value. As the fair value of the assets were in excess of the basis in the previously held mortgage note, the joint venture recognized 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.

Retail Centers Consolidation

On September 30, 2013, the Company and one of its equity partners amended existing operating agreements governing investments in three retail centers in the Western U.S. in which the Company has on average an approximate 90% ownership interest and which were accounted for on the equity method. As a result of obtaining control, the joint venture investments are now consolidated as of September 30, 2013 and not treated as investments in joint ventures. The investments are presented as an equity method investment for prior periods. See note 4.

Contributions to Joint Ventures

During the nine months ended September 30, 2013, Kennedy Wilson made $279.4 million in contributions to new and existing joint venture investments.

See the table below for a breakdown of contributions to new joint venture investments for the nine months ended September 30, 2013:



	Multifamily			Commercial			Residential
	Amount		No. of Properties	Amount		No. of Properties	Amount		No. of Properties	Total
Western U.S.	$	9,085,000	2	$	30,320,000	4	$	4,350,000	2	$	43,755,000
United Kingdom	—		—	92,169,000		3	—		—	92,169,000
Ireland	57,951,000		1	38,734,000		1	—		—	96,685,000
Total contributions - new joint venture investments	$	67,036,000	3	$	161,223,000	8	$	4,350,000	2	$	232,609,000

In addition to the capital contributions above to new joint venture investments, during the same period, Kennedy Wilson contributed $46.8 million to existing joint ventures to pay off external debt, fund our share of a development project and for working capital needs.

Equity in joint venture income is reduced by acquisition costs of $12.0 million during the nine months ended September 30, 2013. These costs are the result of investing more than $130 million into new commercial project joint ventures, principally in the United Kingdom and Ireland which resulted in significant stamp duty taxes.

Distributions from Joint Ventures

The following table details cash distributions by investment type and geographic location for the nine months ended September 30, 2013:



	Multifamily				Commercial				Loan				Residential				Total
	Operating		Investing		Operating		Investing		Operating		Investing		Operating		Investing		Operating		Investing
Western U.S.	$	7,367,000	$	7,121,000	$	12,638,000	$	15,805,000	$	—	$	—	$	3,290,000	$	444,000	$	23,295,000	$	23,370,000
Japan	6,121,000		16,580,000		—		—		—		—		—		—		6,121,000		16,580,000
United Kingdom	—		—		745,000		4,379,000		226,000		304,000		—		—		971,000		4,683,000
Ireland	1,707,000		28,946,000		1,953,000		—		—		—		—		—		3,660,000		28,946,000
Other	371,000		121,000		—		—		—		—		—		53,000		371,000		174,000
Total	$	15,566,000	$	52,768,000	$	15,336,000	$	20,184,000	$	226,000	$	304,000	$	3,290,000	$	497,000	$	34,418,000	$	73,753,000

During the nine months ended September 30, 2013, Kennedy Wilson received $108.2 million in operating and investing distributions from its joint ventures. Investing distributions resulted from KWR's favorable settlement of Japanese yen-related hedges and refinancing a portion of its multifamily portfolio, the refinancing of property level debt, asset sales, and loan resolutions. Operating distributions resulted from operating cash flow generated by the joint venture investments.

Variable Interest Entities

Kennedy Wilson has determined that it has investments in five variable interest entities ("VIEs") as of September 30, 2013 and has concluded that Kennedy Wilson is not the primary beneficiary of any of the investments. As of September 30, 2013, the five VIEs had assets totaling $211.2 million with Kennedy Wilson’s exposure to loss as a result of its interests in these VIEs totaling $84.9 million related to its equity contributions.

The Company determines the appropriate accounting method with respect to all investments that are not VIEs based on the control-based framework (controlled entities are consolidated) provided by the consolidations guidance in ASC Topic 810. The Company's determination considers specific factors cited under ASC 810-20 "Control of Partnerships and Similar Entities" which presumes that control is held by the general partner (and managing member equivalents in limited liability companies). Limited partners' substantive participation rights may overcome this presumption of control. The Company accounts for joint ventures it is deemed not to control using the equity method of accounting while controlled entities are consolidated.

Capital Commitments

As of September 30, 2013, Kennedy Wilson has unfulfilled capital commitments totaling $9.0 million to four of its joint ventures. We may be called upon to contribute additional capital to joint ventures in satisfaction of Kennedy Wilson capital commitment obligations.

Guarantees

Kennedy Wilson has certain guarantees associated with loans secured by consolidated assets or assets held directly or in various joint ventures. As of September 30, 2013 the maximum potential amount of future payments (undiscounted) Kennedy Wilson could be required to make under the guarantees was approximately $53.3 million which is approximately 1.7% of the property level debt of the Company. The guarantees expire through 2017, and Kennedy Wilson’s 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 sale proceeds from the property. Based upon Kennedy Wilson’s evaluation of guarantees under ASC Subtopic 460-10 "Estimated Fair Value of Guarantees," the estimated fair value of guarantees made as of September 30, 2013 and December 31, 2012 is immaterial.