FAIR VALUE MEASUREMENTS AND THE FAIR VALUE OPTION

The following table presents fair value measurements (including items that are required to be measured at fair value and items for which the fair value option has been elected) as of June 30, 2017:



(Dollars in millions)	Level 1		Level 2			Level 3		Total
Unconsolidated investments	$	—	$	—		$	330.8	$	330.8
Marketable securities	7.9		—			—		7.9
Currency derivative contracts	—		(85.5		)	—		(85.5		)
Total	$	7.9	$	(85.5	)	$	330.8	$	253.2

The following table presents fair value measurements (including items that are required to be measured at fair value and items for which the fair value option has been elected) as of December 31, 2016:



(Dollars in millions)	Level 1		Level 2			Level 3		Total
Unconsolidated investments	$	—	$	—		$	329.4	$	329.4
Marketable securities	7.5		—			—		7.5
Currency derivative contracts	—		(47.2		)	—		(47.2		)
Total	$	7.5	$	(47.2	)	$	329.4	$	289.7

Unconsolidated Investments

Kennedy Wilson elected to use the fair value option ("FV Option") for seventeen unconsolidated investments to more accurately reflect the timing of the value created in the underlying investments and report those results in current operations. Kennedy Wilson's investment balance in the FV Option investments was $282.6 million and $282.4 million at June 30, 2017 and December 31, 2016, respectively, which is included in unconsolidated investments in the accompanying balance sheets.

Additionally, Kennedy Wilson records its investments in KW Property Fund III, L.P., Kennedy Wilson Real Estate Fund IV, and Kennedy Wilson Real Estate Fund V, LP (the "Funds") based upon the net assets that would be allocated to its interests in the Funds assuming the Funds were to liquidate their investments at fair value as of the reporting date. Kennedy Wilson’s investment balance in the Funds was $48.2 million and $47.0 million at June 30, 2017 and December 31, 2016, respectively, which is included in unconsolidated investments in the accompanying consolidated balance sheets. As of June 30, 2017, Kennedy Wilson had unfunded capital commitments to the Funds in the amount of $16.2 million.

In estimating fair value of real estate held by the Funds and the seventeen FV Option investments, the Company considers significant unobservable inputs such as capitalization and discount rates.

The following table summarizes the Company's investments in unconsolidated investments held at fair value by type:



(Dollars in millions)	June 30, 2017		December 31, 2016
FV Option	$	282.6	$	282.4
Funds	48.2		47.0
Total	$	330.8	$	329.4

The following table presents changes in Level 3 investments, investments in investment companies and investments in joint ventures that elected the fair value option for the three and six months ended June 30, 2017 and 2016:



	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in millions)	2017			2016			2017			2016
Beginning balance	$	375.8		$	234.8		$	329.4		$	223.8
Unrealized and realized gains	5.7			9.0			27.8			26.6
Unrealized and realized losses	(0.1		)	—			(1.0		)	—
Contributions	5.0			4.3			25.2			20.1
Distributions	(55.2		)	(12.0		)	(74.5		)	(34.9		)
Other	(0.4		)	0.5			23.9			1.0
Ending balance	$	330.8		$	236.6		$	330.8		$	236.6

Unobservable inputs for real estate

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



	Estimated Rates Used for
	Capitalization Rates	Discount Rates
Office	4.75% - 8.60%	7.25% - 9.75%
Retail	5.50% - 9.00%	7.25% - 11.00%
Multifamily	4.75% - 7.75%	8.00% - 9.75%
Land and condominium units	N/A	8.00% - 15.00%

In valuing indebtedness the Company considers significant inputs such as the term of the debt, value of collateral, market loan-to-value ratios, market interest rates and spreads, and credit quality of investment entities. The credit spreads used for these types of investments range from 1.53% to 3.46%.

The accuracy of estimating fair value for investments utilizing unobservable inputs cannot be determined with precision and cannot be substantiated by comparison to quoted prices in active markets. As such, estimated fair value may not be realized in a current sale or immediate settlement of the asset or liability. Additionally, there are inherent uncertainties in any fair value measurement technique, and changes in the underlying assumptions used, including capitalization rates, discount rates, liquidity risks, and estimates of future cash flows, could significantly affect the fair value measurement amounts.

Marketable Securities

Marketable securities include Kennedy Wilson's investment in publicly traded equity securities and fixed income investments. The fixed income portfolio consists mainly of U.S. government and investment grade corporate bonds. The carrying value of marketable securities is a level 1 valuation as the fair value is based off of unadjusted quoted market prices in active markets for identical securities.

The amount above excludes Kennedy Wilson's 30.0 million shares in KWE as the investment is eliminated due to the consolidation of KWE's results in KW Group's consolidated financial statements. Kennedy Wilson's investment in KWE had a market value of approximately $434.0 million (cost basis of $454.9 million, net of realized and unrealized hedging activity) based on a per share price of $14.46 at June 30, 2017. As of June 30, 2017, the Company had fully hedged the foreign currency rate risk of its net investment in KWE through using currency forward contracts and options, with a notional amount of £356.0 million.

Currency derivative contracts

KW Group uses foreign currency derivative contracts such as forward contracts and options to manage its foreign currency risk exposure against the effects of a portion of its certain non-U.S. dollar denominated currency net investments. Foreign currency options are valued using a variant of the Black-Scholes model tailored for currency derivatives and the foreign currency forward contracts are valued based on the difference between the contract rate and the forward rate at maturity of the underlying currency applied to the notional value in the underlying currency discounted at a market rate for similar risks. Although the Company has determined that the majority of the inputs used to value its currency derivative contracts fall within Level 2 of the fair value hierarchy, the counterparty risk adjustments associated with the currency derivative contracts utilize Level 3 inputs. However, as of June 30, 2017, KW Group assessed the significance of the impact of the counterparty valuation adjustments on the overall valuation of its derivative positions and determined that the counterparty valuation adjustments are not significant to the overall valuation of its derivative. As a result, the Company has determined that its derivative valuation in its entirety be classified in Level 2 of the fair value hierarchy.

If the derivative applies for hedge accounting, changes in fair value are recorded in other comprehensive income in the accompanying consolidated statements of comprehensive income (loss) as the portion of the currency derivative contracts used to hedge foreign currency exposure of its certain net investments in foreign operations qualifies as a net investment hedge under FASB ASC Topic 815. Ineffective portions of currency derivative contracts and contracts that do not quality for net investment hedges are recognized in the statement of operations within other income.

The fair value of the currency derivative contracts held as of June 30, 2017 and December 31, 2016 are reported in other assets for hedge assets and included in accrued expenses and other liabilities for hedge liabilities on the balance sheet. See note 11 for a complete discussion on other comprehensive income including currency derivative contracts and foreign currency translations.

The table below details the currency derivative contracts KW Group held as of June 30, 2017 and the activity during the six months ended June 30, 2017:



(Dollars in millions)				June 30, 2017					Six Months Ended June 30, 2017
Currency Hedged	Underlying Currency	Notional		Hedge Asset		Hedge Liability			Change in Unrealized Gains (Losses)			Realized Gains (Losses)			Cash Received (Paid)
Outstanding
EUR	USD	€	130.0	$	0.3	$	(2.8	)	$	(6.2	)	$	—		$	—
EUR⁽¹⁾	GBP	€	360.0	—		(79.8		)	(11.0		)	—			—
EUR⁽¹⁾⁽²⁾	GBP			—		—			(14.5		)	—			—
GBP	USD	£	356.0	6.7		(3.0		)	(10.2		)	—			(0.5		)
GBP⁽³⁾	USD	£	259.7	—		(6.8		)	—			(6.8		)	—
Yen	USD	¥	757.0	0.2		(0.3		)	(0.1		)	—			—
Total Outstanding				7.2		(92.7		)	(42.0		)	(6.8		)	(0.5		)
Settled
GBP	USD			—		—			0.2			0.2			3.0
Total Settled				—		—			0.2			0.2			3.0
Total				7.2		(92.7		)	(41.8		)	(6.6		)	2.5
Noncontrolling interests				—		60.8			19.4			—			—
Total - Kennedy Wilson share				$	7.2	$	(31.9	)	$	(22.4	)	$	(6.6	)	$	2.5

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

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

⁽³⁾ Relates to hedges on GBP escrow cash that is held by Kennedy Wilson relating to the proposed acquisition of KWE. Derivative losses are offset by realized foreign currency exchange gains on translation of cash.

The gains recognized through other comprehensive income will remain in accumulated other comprehensive income until the underlying investments they were hedging are substantially liquidated by KW Group.

Fair value of financial instruments

The carrying amounts of cash and cash equivalents, accounts receivable including related party receivables, accounts payable, accrued expenses and other liabilities, accrued salaries and benefits, and deferred and accrued income taxes approximate fair value due to their short-term maturities. The carrying value of loans (excluding related party loans as they are presumed not to be an arm’s length transaction) approximates fair value as the terms are similar to loans with similar characteristics available in the market.

Debt liabilities are accounted for at face value plus net unamortized debt premiums and any fair value adjustments as part of business combinations. The fair value as of June 30, 2017 and December 31, 2016 for the senior notes payable and investment debt were estimated to be approximately $5.5 billion and $5.0 billion, respectively, based on a comparison of the yield that would be required in a current transaction, taking into consideration the risk of the underlying collateral and the Company's credit risk to the current yield of a similar security, compared to their carrying value of $5.5 billion and $4.9 billion at June 30, 2017 and December 31, 2016, respectively. The inputs used to value the Company's senior notes payable and mortgage loans payable are based on observable inputs for similar assets and quoted prices in markets that are not active and are therefore determined to be level 2 inputs.