Fair Value Measurements |
Fair Value Measurements ASC 820 defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels: Level 1 – quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities; Level 2 – observable prices that are based on inputs not quoted in active markets, but corroborated by market data; and Level 3 – unobservable inputs that are used when little or no market data is available. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as consider counterparty credit risk in our assessment of fair value. Considerable judgment is necessary to interpret Level 2 and 3 inputs in determining the fair value of our financial and non-financial assets and liabilities. Accordingly, our fair value estimates, which are made at the end of each reporting period, may be different than the amounts that may ultimately be realized upon sale or disposition of these assets. Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis Financial assets and liabilities that are measured at fair value on our consolidated balance sheets consist of (i) marketable securities, (ii) real estate fund investments, (iii) the assets in our deferred compensation plan (for which there is a corresponding liability on our consolidated balance sheets), (iv) loans receivable (for which we have elected the fair value option under ASC 825-10), (v) interest rate swaps and (vi) mandatorily redeemable instruments (Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units). The tables below aggregate the fair values of these financial assets and liabilities by their levels in the fair value hierarchy. | | | | | | | | | | | | | | | | | (Amounts in thousands) | | | Total | | Level 1 | | Level 2 | | Level 3 | Real estate fund investments | $ | 17,453 |
| | $ | — |
| | $ | — |
| | $ | 17,453 |
| Deferred compensation plan assets ($12,444 included in restricted cash and $81,637 in other assets) | 94,081 |
| | 57,909 |
| | — |
| | 36,172 |
| Loans receivable ($41,340 included in investments in partially owned entities and $5,335 in other assets) | 46,675 |
| | — |
| | — |
| | 46,675 |
| Interest rate swaps (included in other assets) | 67 |
| | — |
| | 67 |
| | — |
| Total assets | $ | 158,276 |
| | $ | 57,909 |
| | $ | 67 |
| | $ | 100,300 |
| | | | | | | | | Mandatorily redeemable instruments (included in other liabilities) | $ | 50,058 |
| | $ | 50,058 |
| | $ | — |
| | $ | — |
| Interest rate swaps (included in other liabilities) | 81,502 |
| | — |
| | 81,502 |
| | — |
| Total liabilities | $ | 131,560 |
| | $ | 50,058 |
| | $ | 81,502 |
| | $ | — |
| | | | | | | | | (Amounts in thousands) | | | Total | | Level 1 | | Level 2 | | Level 3 | Marketable securities | $ | 33,313 |
| | $ | 33,313 |
| | $ | — |
| | $ | — |
| Real estate fund investments | 222,649 |
| | — |
| | — |
| | 222,649 |
| Deferred compensation plan assets ($11,819 included in restricted cash and $91,954 in other assets) | 103,773 |
| | 71,338 |
| | — |
| | 32,435 |
| Interest rate swaps (included in other assets) | 4,327 |
| | — |
| | 4,327 |
| | — |
| Total assets | $ | 364,062 |
| | $ | 104,651 |
| | $ | 4,327 |
| | $ | 255,084 |
| | | | | | | | | Mandatorily redeemable instruments (included in other liabilities) | $ | 50,561 |
| | $ | 50,561 |
| | $ | — |
| | $ | — |
| Interest rate swaps (included in other liabilities) | 40,354 |
| | — |
| | 40,354 |
| | — |
| Total liabilities | $ | 90,915 |
| | $ | 50,561 |
| | $ | 40,354 |
| | $ | — |
|
| | 15. | Fair Value Measurements - continued |
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis - continued Real Estate Fund Investments As of June 30, 2020, we had four real estate fund investments with an aggregate fair value of $17,453,000, or $324,111,000 below cost. These investments are classified as Level 3. Significant unobservable quantitative inputs used in determining the fair value of each investment include capitalization rates and discount rates. These rates are based on the location, type and nature of each property, current and anticipated market conditions, industry publications and from the experience of our Acquisitions and Capital Markets departments. Significant unobservable quantitative inputs in the table below were utilized in determining the fair value of these real estate fund investments. | | | | | | | | | | Range | | Weighted Average (based on fair value of investments) | Unobservable Quantitative Input | | | | | | | | Discount rates | 6.8% to 15.0% | | 8.2% to 12.0% | | 13.4% | | 9.3% | Terminal capitalization rates | 5.5% to 9.3% | | 4.6% to 8.2% | | 7.3% | | 5.3% |
The inputs above are subject to change based on changes in economic and market conditions and/or changes in use or timing of exit. Changes in discount rates and terminal capitalization rates result in increases or decreases in the fair values of these investments. The discount rates encompass, among other things, uncertainties in the valuation models with respect to terminal capitalization rates and the amount and timing of cash flows. Therefore, a change in the fair value of these investments resulting from a change in the terminal capitalization rate may be partially offset by a change in the discount rate. It is not possible for us to predict the effect of future economic or market conditions on our estimated fair values. The table below summarizes the changes in the fair value of real estate fund investments that are classified as Level 3. | | | | | | | | | | | | | | | | | (Amounts in thousands) | For the Three Months Ended June 30, | | | | 2020 | | 2019 | | 2020 | | 2019 | Beginning balance | $ | 45,129 |
| | $ | 322,858 |
| | $ | 222,649 |
| | $ | 318,758 |
| Purchases/additional fundings | — |
| | — |
| | 6,000 |
| | 4,000 |
| Net unrealized loss on held investments | (27,676 | ) | | (16,262 | ) | | (211,196 | ) | | (16,162 | ) | Ending balance | $ | 17,453 |
| | $ | 306,596 |
| | $ | 17,453 |
| | $ | 306,596 |
|
Deferred Compensation Plan Assets Deferred compensation plan assets that are classified as Level 3 consist of investments in limited partnerships and investment funds, which are managed by third parties. We receive quarterly financial reports from a third-party administrator, which are compiled from the quarterly reports provided to them from each limited partnership and investment fund. The quarterly reports provide net asset values on a fair value basis which are audited by independent public accounting firms on an annual basis. The period of time over which these underlying assets are expected to be liquidated is unknown. The third party administrator does not adjust these values in determining our share of the net assets and we do not adjust these values when reported in our consolidated financial statements. The table below summarizes the changes in the fair value of deferred compensation plan assets that are classified as Level 3. | | | | | | | | | | | | | | | | | (Amounts in thousands) | For the Three Months Ended June 30, | | | | 2020 | | 2019 | | 2020 | | 2019 | Beginning balance | $ | 30,568 |
| | $ | 37,562 |
| | $ | 32,435 |
| | $ | 37,808 |
| Purchases | 5,656 |
| | 1,969 |
| | 6,949 |
| | 2,877 |
| Sales | (357 | ) | | (18,041 | ) | | (2,832 | ) | | (20,155 | ) | Realized and unrealized gains (losses) | 38 |
| | 215 |
| | (1,191 | ) | | 738 |
| Other, net | 267 |
| | 286 |
| | 811 |
| | 723 |
| Ending balance | $ | 36,172 |
| | $ | 21,991 |
| | $ | 36,172 |
| | $ | 21,991 |
|
| | 15. | Fair Value Measurements - continued |
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis - continued Loans Receivable Loans receivable consist of loan investments in real estate related assets for which we have elected the fair value option under ASC 825-10 as of January 1, 2020. These investments are classified as Level 3. Significant unobservable quantitative inputs used in determining the fair value of each investment include capitalization rates and discount rates. These rates are based on the location, type and nature of each property, current and anticipated market conditions, industry publications and from the experience of our Acquisitions and Capital Markets departments. Significant unobservable quantitative inputs in the table below were utilized in determining the fair value of these loans receivable. | | | | | | | | Range | | Weighted Average (based on fair value of investments) | Unobservable Quantitative Input | | | | Discount rates | 6.0% to 6.5% | | 6.1% | Terminal capitalization rates | 5.0% | | 5.0% |
The table below summarizes the changes in fair value of loans receivable that are classified as Level 3. | | | | | | | | | (Amounts in thousands) | | | | Beginning balance | $ | 51,990 |
| | $ | 59,251 |
| Credit losses | (6,108 | ) | | (13,369 | ) | Interest accrual | 793 |
| | 793 |
| Ending balance | $ | 46,675 |
| | $ | 46,675 |
|
Derivatives and Hedging We utilize various financial instruments to mitigate the impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies, depending on our analysis of the interest rate environment and the costs and risks of such strategies. We recognize the fair values of all derivatives in "other assets" or "other liabilities" on our consolidated balance sheets. Derivatives that are not hedges are adjusted to fair value through earnings. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedge asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. Reported net income and equity may increase or decrease prospectively, depending on future levels of interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows. The following tables summarize our consolidated derivative instruments, all of which hedge variable rate debt, as of June 30, 2020 and December 31, 2019. | | | | | | | | | | | | | | | | | | (Amounts in thousands) | | | | | | | | | Variable Rate | | | | | Hedged Item (Interest rate swaps) | | Fair Value | | Notional Amount | | Spread over LIBOR | | Interest Rate | | Swapped Rate | | Expiration Date | Included in other assets: | | | | | | | | | | | | | Other | | $ | 67 |
| | $ | 175,000 |
| | | | | | | | | | | | | | | | | | | | | | Included in other liabilities: | | | | | | | | | | | | | Unsecured term loan | | $ | 68,709 |
| | $ | 750,000 |
| (1) | L+100 | | 1.18% | | 3.87% | | 10/23 | 33-00 Northern Boulevard mortgage loan | | 9,592 |
| | 100,000 |
| | L+180 | | 1.99% | | 4.14% | | 1/25 | 888 Seventh Avenue mortgage loan | | 2,355 |
| | 375,000 |
| | L+170 | | 1.88% | | 3.25% | | 12/20 | 770 Broadway mortgage loan | | 846 |
| | 700,000 |
| | L+175 | | 1.93% | | 2.56% | | 9/20 | | | $ | 81,502 |
| | $ | 1,925,000 |
| | | | | | | | |
____________________ | | (1) | Remaining $50,000 balance of our unsecured term loan bears interest at a floating rate of LIBOR plus 1.00%. |
15. Fair Value Measurements - continued Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis - continued Derivatives and Hedging - continued | | | | | | | | | | | | | | | | | | (Amounts in thousands) | | | | | | | | | Variable Rate | | | | | Hedged Item (Interest rate swaps) | | Fair Value | | Notional Amount | | Spread over LIBOR | | Interest Rate | | Swapped Rate | | Expiration Date | Included in other assets: | | | | | | | | | | | | | 770 Broadway mortgage loan | | $ | 4,045 |
| | $ | 700,000 |
| | L+175 | | 3.46% | | 2.56% | | 9/20 | 888 Seventh Avenue mortgage loan | | 218 |
| | 375,000 |
| | L+170 | | 3.44% | | 3.25% | | 12/20 | Other | | 64 |
| | 175,000 |
| | | | | | | | | | | $ | 4,327 |
| | $ | 1,250,000 |
| | | | | | | | | | | | | | | | | | | | | | Included in other liabilities: | | | | | | | | | | | | | Unsecured term loan | | $ | 36,809 |
| | $ | 750,000 |
| | L+100 | | 2.80% | | 3.87% | | 10/23 | 33-00 Northern Boulevard mortgage loan | | 3,545 |
| | 100,000 |
| | L+180 | | 3.52% | | 4.14% | | 1/25 | | | $ | 40,354 |
| | $ | 850,000 |
| | | | | | | | |
Fair Value Measurements on a Nonrecurring Basis As of June 30, 2020, assets measured at fair value on a nonrecurring basis (for impairment purposes) on our consolidated balance sheet consist of our investment in Fifth Avenue and Times Square JV. There were no assets measured at fair value on a nonrecurring basis on our consolidated balance sheet as of December 31, 2019. Our estimate of the fair value of our investment in Fifth Avenue and Times Square JV was measured using a discounted cash flow analysis based upon market conditions and expectations of growth and utilized unobservable quantitative inputs including a capitalization rate of 4.5% and discount rate of 6.0%, resulting in a write-down during the three months ended June 30, 2020 of $306,326,000 before noncontrolling interests of $467,000 (see Note 8 - Investments in Partially Owned Entities). | | | | | | | | | | | | | | | | | (Amounts in thousands) | | | Total | | Level 1 | | Level 2 | | Level 3 | Investment in Fifth Avenue and Times Square JV | $ | 2,955,957 |
| | $ | — |
| | $ | — |
| | $ | 2,955,957 |
|
Financial Assets and Liabilities not Measured at Fair Value Financial assets and liabilities that are not measured at fair value on our consolidated balance sheets include cash equivalents (primarily money market funds, which invest in obligations of the United States government), and our secured and unsecured debt. Estimates of the fair value of these instruments are determined by the standard practice of modeling the contractual cash flows required under the instrument and discounting them back to their present value at the appropriate current risk adjusted interest rate, which is provided by a third-party specialist. For floating rate debt, we use forward rates derived from observable market yield curves to project the expected cash flows we would be required to make under the instrument. The fair value of cash equivalents and borrowings under our unsecured revolving credit facilities and unsecured term loan are classified as Level 1. The fair value of our secured debt and unsecured debt are classified as Level 2. The table below summarizes the carrying amounts and fair value of these financial instruments. | | | | | | | | | | | | | | | | | | (Amounts in thousands) | | | | | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | Cash equivalents | $ | 1,494,756 |
| | $ | 1,495,000 |
| | $ | 1,276,815 |
| | $ | 1,277,000 |
| Debt: | | | | | | | | | Mortgages payable | $ | 5,662,657 |
| | $ | 5,656,000 |
| | $ | 5,670,016 |
| | $ | 5,714,000 |
| | Senior unsecured notes | 450,000 |
| | 450,000 |
| | 450,000 |
| | 468,000 |
| | Unsecured term loan | 800,000 |
| | 800,000 |
| | 750,000 |
| | 750,000 |
| | Unsecured revolving credit facilities | 1,075,000 |
| | 1,075,000 |
| | 575,000 |
| | 575,000 |
| | Total | $ | 7,987,657 |
| (1) | $ | 7,981,000 |
| | $ | 7,445,016 |
| (1) | $ | 7,507,000 |
|
____________________ (1)
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