Kennedy Wilson(KW) - 2023 Q4 - Annual Report

Part I Business Kennedy Wilson is a global real estate investment company managing $24.5 billion in AUM, focused on high-quality real estate in the Western U.S., U.K., and Ireland Company Overview As of December 31, 2023, Kennedy Wilson managed $24.5 billion in AUM, primarily in multifamily and commercial properties, reporting a net loss of $341.8 million for FY2023 - Kennedy Wilson's AUM grew to $24.5 billion in 2023, with a portfolio primarily comprising multifamily (57% of NOI) and commercial (35% of NOI) properties geographically focused in the Western U.S., U.K., and Ireland[15][16] Key Financial Metrics (2019-2023) | Metric | 2023 | 2022 | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue ($M) | $562.6 | $540.0 | $453.6 | $454.0 | $569.7 | | Net (Loss) Income to KW Shareholders ($M) | $(341.8) | $64.8 | $313.2 | $92.9 | $224.1 | | Basic (Loss) Income per Share | $(2.46) | $0.47 | $2.26 | $0.66 | $1.60 | | Adjusted EBITDA ($M) | $189.8 | $591.5 | $927.9 | $608.0 | $728.1 | | AUM ($B) | $24.5 | $23.0 | $21.6 | $17.6 | $18.1 | - For the 2023 fiscal year, 100% of the common stock dividend was classified as a non-taxable return of capital, compared to 62.19% in 2022[23] Business Segments The company operates through two main segments: the Consolidated Portfolio, focused on wholly-owned assets, and the Co-Investment Portfolio, involving joint ventures and funds with partners - The company's two primary business segments are the Consolidated Portfolio (typically wholly-owned assets) and the Co-Investment Portfolio (5% to 50% ownership interest alongside partners)[30] Consolidated Portfolio Summarized Balance Sheet ($ in millions) | | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $5,167.6 | $5,639.9 | | Total Liabilities | $3,518.0 | $3,681.0 | | Equity | $1,649.6 | $1,958.9 | Co-Investment Portfolio Summarized Balance Sheet ($ in millions) | | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $5,201.1 | $4,862.7 | | Total Liabilities | $2,884.8 | $2,475.2 | | Equity | $2,316.3 | $2,387.5 | Investment Types Kennedy Wilson invests across multifamily, commercial, and real estate debt, with active development projects and a focus on affordable housing - The company's Vintage Housing Holdings (VHH) platform focuses on affordable housing, managing 11,971 units; in 2023, KW received $59.1 million in proceeds and recorded a $51.5 million fair value gain on its investment[40][42][44] - The global debt platform has a total capacity of $10.8 billion, with $6.7 billion invested or committed, holding 101 loans with an unpaid principal balance of $4.9 billion (KW's share: $263.0 million) at an average interest rate of 9.4% as of December 31, 2023[51][53] - The company is actively developing 1,462 multifamily units and 415,000 commercial square feet, with an estimated total capitalization share of approximately $613.0 million for these projects[50] - In February 2024, the company entered an agreement to sell The Shelbourne Hotel in Dublin, Ireland, with the sale expected to close in Q1 2024[57] Fair Value Investments As of December 31, 2023, 93% of unconsolidated investments were held at fair value, resulting in significant net fair value losses for FY2023 - $1.9 billion, or 93% of unconsolidated investments (25% of total assets), were held at estimated fair value as of December 31, 2023[62] Fair Value Changes (FY2023 vs FY2022) | Metric ($ in millions) | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Net Fair Value (Losses) Gains | $(229.3) | $114.6 | | Performance Allocations Write-downs | $(64.3) | $(21.1) | - The company uses discounted cash flow and direct capitalization approaches to value its real estate assets, with capitalization rates ranging from 4.10% to 9.30% and discount rates from 6.30% to 11.00%[63][65][68] Industry Overview The report details market conditions in the Western U.S., Ireland, and the U.K., highlighting impacts of interest rates and housing supply - Western U.S.: Commercial real estate transactions dropped by an estimated 59% in 2023 due to elevated interest rates, but the multifamily sector experienced strong rental growth[76][77] - Ireland: The economy is projected to have progressively higher GDP growth, reaching 5.4% by year-end 2025, with a strong rental market due to significant housing undersupply[82][84] - United Kingdom: Real GDP fell by 0.3% in Q4 2023, and full-year office leasing was down 16% compared to the previous year[86][87] Risk Factors This section details numerous risks that could adversely affect the company's business and financial condition, including economic, operational, and stock ownership factors Risks Related to Our Business The company's business is vulnerable to economic downturns, adverse credit markets, inflation, fair value volatility, and foreign operation risks - The business is highly sensitive to economic slowdowns, which can lead to decreased demand, lower rents, declining property values, and reduced access to capital[112][113] - Elevated interest rates and credit market volatility increase borrowing costs and may negatively impact the ability to secure future financing or refinance existing debt on favorable terms[118] - Approximately 41% of revenues are sourced from foreign operations, primarily the U.K. and Ireland, exposing the company to risks from currency fluctuations, political instability, and differing legal and tax systems[125] - As of December 31, 2023, 25% of total assets were recorded at estimated fair value, which involves subjective judgments and can result in significant non-cash volatility in financial results[131][137] Risks Related to Our Company The company faces risks from significant debt, restrictive covenants, reliance on key personnel, and volatility in quarterly financial results - The company has significant debt and may incur more, which increases debt service costs and the risk of default; debt agreements contain restrictive covenants that limit operational and financial flexibility[176][178][180] - The company's success is highly dependent on its senior executives, particularly the CEO, and the loss of their services could significantly diminish relationships with lenders, partners, and clients[184] - The company's ability to use its net operating loss carryforwards ($47.5 million federal, $100.8 million California) and foreign tax credits ($100.5 million) may be limited by ownership changes under Section 382 of the tax code[193] Risks Related to Ownership of Our Common Stock Stockholders face risks from significant influence by directors, potential dilution, stock price volatility, and anti-takeover provisions - As of December 31, 2023, directors and executive officers owned approximately 13% of the outstanding common stock, giving them significant influence over stockholder votes[198] - Stockholders face potential dilution from outstanding warrants convertible into approximately 25 million shares and Series A Preferred Stock convertible into approximately 12 million shares[199] - The company has a staggered board and other anti-takeover provisions that may entrench management and deter takeover attempts, potentially limiting stockholders' ability to receive a premium for their shares[202][204] Unresolved Staff Comments The company reports that it has no unresolved staff comments - None[209] Cybersecurity The company has a NIST CSF-based cybersecurity program overseen by the Board, with no material incidents reported - The company's cybersecurity risk management program is designed and assessed based on the National Institute of Standards and Technology Cybersecurity Framework (NIST CSF)[211] - Oversight is provided by the Board of Directors and its Audit Committee, with management responsible for implementation, assisted by a third-party IT and cybersecurity firm[213][216][217] - The company is not aware of any cybersecurity risks or incidents that have materially affected or are reasonably likely to materially affect its business, operations, or financial condition[212] Properties This section details the company's consolidated properties, including commercial and multifamily portfolios with high occupancy rates Consolidated Properties by Type (as of Dec 31, 2023) | Property Type | Size | Occupancy/Leased % | | :--- | :--- | :--- | | Commercial | 5.0 million sq. ft. | 93% | | Multifamily | 9,230 units | 94% | - The commercial lease expiration schedule indicates that 42% of the annualized base rent is scheduled to expire between 2024 and 2026[221] Legal Proceedings The company states it is not currently involved in any legal proceedings material to its business - The company is not currently involved in any legal proceedings that it believes would be material to its business[224] Mine Safety Disclosures This item is not applicable to the company - Not Applicable[226] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE, paid quarterly dividends, repurchased shares, and saw AUM increase by 7% in 2023 - The company paid quarterly dividends of $0.24 per share in 2023[230] AUM Reconciliation for FY 2023 ($ in millions) | | Dec 31, 2022 | Increases | Decreases | Dec 31, 2023 | | :--- | :--- | :--- | :--- | :--- | | AUM | $23,028.4 | $4,412.1 | $2,897.6 | $24,542.9 | - During FY2023, the company repurchased 0.7 million shares of its common stock at a weighted average price of $11.17 per share[234] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, Kennedy Wilson reported a net loss of $341.8 million and a significant drop in Adjusted EBITDA, primarily due to non-cash fair value losses and cap rate expansion 2023 Highlights The company reported a net loss of $341.8 million in 2023, driven by non-cash fair value losses, and acquired a $4.1 billion construction loan portfolio - Net loss to common shareholders was $341.8 million in 2023, a significant downturn from a net income of $64.8 million in 2022[245] - The company recorded $293.6 million of non-cash fair value losses and accrued performance allocation decreases, primarily due to estimated cap rate expansion on office and multifamily properties[245] - Acquired a $4.1 billion construction loan portfolio from Pacific Western Bank with partner Fairfax, with Kennedy Wilson taking a 5% investment interest[245] Results of Operations Total revenue increased slightly in FY2023, but significant fair value losses from unconsolidated investments led to a total net loss Results of Operations by Segment (Year Ended Dec 31, 2023, $ in millions) | Segment | Total Revenue | Net Income (Loss) | Net (Loss) Attributable to KW Shareholders | | :--- | :--- | :--- | :--- | | Consolidated | $472.4 | $22.6 | $0.2 | | Co-Investments | $88.0 | $(208.4) | $(208.4) | | Corporate | $2.2 | $(95.6) | $(133.6) | | Total | $562.6 | $(281.4) | $(341.8) | - Consolidated Portfolio rental income decreased by $19.6 million to $415.3 million due to non-core asset sales, while hotel income increased by $10.2 million to $57.1 million due to improved post-pandemic travel[259][260] - Co-Investment Portfolio investment management fees increased to $61.9 million from $44.8 million, and loan income grew to $26.1 million from $11.7 million, driven by the expanding debt platform and higher interest rates[272][273] Liquidity and Capital Resources The company maintains liquidity through cash and credit lines, but faced a credit rating downgrade, impacting future debt market access - As of December 31, 2023, the company had $313.7 million of consolidated cash and $349.6 million of availability under its lines of credit[295] - In December 2023, S&P downgraded the company's credit rating to 'BB-' and maintained a negative CreditWatch, which could impact future ability to access debt markets[299] - The company has an estimated $95.0 million in remaining costs to complete its share of active market-rate development projects[300] Consolidated Contractual Cash Obligations ($ in millions) | Period | Amount | | :--- | :--- | | Less than 1 year | $151.2 | | 1 - 3 years | $1,906.8 | | 4 - 5 years | $1,151.5 | | After 5 years | $2,152.4 | | Total | $5,361.9 | Critical Accounting Policies The company's critical accounting policies involve significant judgment in fair value investments, performance allocations, and real estate acquisitions - Fair Value Investments: The company uses fair value accounting for its commingled funds and has elected the fair value option for 72 other unconsolidated investments, requiring subjective estimates for valuation[402][404] - Performance Allocations: These are calculated each period based on the cumulative performance of funds as if the underlying investments were realized at fair value, making them subject to significant volatility and potential reversals[407] - Real Estate Acquisitions: The allocation of purchase price to land, buildings, and intangible lease values is based on management estimates of relative fair value, which can affect future depreciation and amortization expenses[409][410] Quantitative and Qualitative Disclosures About Market Risk This section incorporates market risk disclosures from Item 7, covering interest rate and foreign currency risks - The information for this item is incorporated by reference from Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations[412] Financial Statements and Supplementary Data This section presents the company's audited financial statements and the auditor's unqualified opinion, noting a critical audit matter on fair value investments - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of the company's internal control over financial reporting[417][418] - A critical audit matter was identified related to the evaluation of the fair value of certain unconsolidated investments and commingled funds, citing the high degree of subjectivity and sensitivity of the discounted cash flow models used[422][423] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[701] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[703] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023[705] Other Information The company reports no director or officer adopted or terminated a Rule 10b5-1 trading arrangement during Q4 2023 - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the three months ended December 31, 2023[708] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections The company reports no applicable information for this item - None[709] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's 2024 annual meeting proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2024 annual meeting[711] Executive Compensation Information for this item is incorporated by reference from the company's 2024 annual meeting proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2024 annual meeting[712] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's 2024 annual meeting proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2024 annual meeting[713] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's 2024 annual meeting proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2024 annual meeting[714] Principal Accounting Fees and Services Information for this item is incorporated by reference from the company's 2024 annual meeting proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2024 annual meeting[715] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and various exhibits filed as part of the annual report - This item lists all financial statements, schedules, and exhibits filed with the Form 10-K[718]