Fair Value Measurements

9 Months Ended

Sep. 30, 2020

FAIR VALUE MEASUREMENTS

Fair Value of Financial Instruments

The following table presents the carrying value and estimated fair value of the Company’s financial instruments:


	September 30, 2020				December 31, 2019
	Carrying Value		Fair Value		Carrying Value		Fair Value


Financial liabilities:
Mortgages payable, net	$	92,075	$	94,078	$	94,155	$	98,082
Unsecured notes payable, net	$	1,185,479	$	1,205,002	$	796,247	$	822,883
Unsecured term loans, net	$	467,391	$	458,788	$	716,523	$	720,000
Unsecured revolving line of credit	$	—	$	—	$	18,000	$	18,000
Derivative liability	$	34,804	$	34,804	$	12,288	$	12,288

The carrying value of the derivative liability is included within “Other liabilities” in the accompanying condensed consolidated balance sheets.

Recurring Fair Value Measurements

The following table presents the Company’s financial instruments, which are measured at fair value on a recurring basis, by the level in the fair value hierarchy within which those measurements fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.


	Fair Value
	Level 1		Level 2		Level 3		Total
September 30, 2020

Derivative liability	$	—	$	34,804	$	—	$	34,804

December 31, 2019

Derivative liability	$	—	$	12,288	$	—	$	12,288

Derivatives: The fair value of the derivative liability is determined using a discounted cash flow analysis on the expected future cash flows of each derivative. This analysis uses observable market data including forward yield curves and implied volatilities to determine the market’s expectation of the future cash flows of the variable component. The fixed and variable components of the derivative are then discounted using calculated discount factors developed based on the LIBOR swap rate and are aggregated to arrive at a single valuation for the period. The Company also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives use Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2020 and December 31, 2019, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation. As a result, the Company has determined that its derivative valuations in their entirety are classified within Level 2 of the fair value hierarchy. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered any applicable credit enhancements. The Company’s derivative instruments are further described in Note 8 to the condensed consolidated financial statements.

Nonrecurring Fair Value Measurements

The following table presents the Company’s assets measured at fair value on a nonrecurring basis as of September 30, 2020 and December 31, 2019, aggregated by the level within the fair value hierarchy in which those measurements fall. The table includes information related to properties remeasured to fair value as a result of impairment charges recorded during the nine months ended September 30, 2020 and the year ended December 31, 2019, except for those properties sold prior to September 30, 2020 and December 31, 2019, respectively. Methods and assumptions used to estimate the fair value of these assets are described after the table.


	Fair Value
	Level 1		Level 2			Level 3			Total		Provision for Impairment
September 30, 2020
Investment property	$	—	$	—		$	2,500	(a)	$	2,500	$	2,279

December 31, 2019
Investment properties	$	—	$	11,644	(b)	$	5,300	(c)	$	16,944	$	12,298

(a)Represents the fair value of the Company’s Streets of Yorktown investment property as of September 30, 2020, the date the asset was measured at fair value. The estimated fair value of Streets of Yorktown was based upon third-party comparable sales prices, derived from property-specific information, market transactions and other industry data and are considered significant unobservable inputs.

(b)Represents the fair value of the Company’s King Philip’s Crossing investment property as of December 31, 2019, the date the asset was measured at fair value. The estimated fair value of King Philip’s Crossing was based upon the expected sales price from an executed sales contract and determined to be a Level 2 input.

(c)Represents the fair value of the Company’s Streets of Yorktown investment property as of September 30, 2019, the date the asset was measured at fair value. The estimated fair value of Streets of Yorktown was determined using the income approach. The income approach involves discounting the estimated income stream and reversion (presumed sale) value of a property over an estimated holding period to a present value at a risk-adjusted rate. The discount rates and third-party comparable sales prices used in this approach are derived from property-specific information, market transactions and other industry data and are considered significant inputs to this valuation. The reversion value of the property was based upon third-party comparable sales prices, which contain unobservable inputs used by these third parties. A weighted average discount rate of 6.89% was used to (i) present value the estimated income stream over the estimated holding period and (ii) present value the reversion value.

Fair Value Disclosures

The following table presents the Company’s financial liabilities, which are measured at fair value for disclosure purposes, by the level in the fair value hierarchy within which those measurements fall.


	Fair Value
	Level 1		Level 2		Level 3		Total
September 30, 2020
Mortgages payable, net	$	—	$	—	$	94,078	$	94,078
Unsecured notes payable, net	$	750,908	$	—	$	454,094	$	1,205,002
Unsecured term loans, net	$	—	$	—	$	458,788	$	458,788
Unsecured revolving line of credit	$	—	$	—	$	—	$	—

December 31, 2019
Mortgages payable, net	$	—	$	—	$	98,082	$	98,082
Unsecured notes payable, net	$	255,965	$	—	$	566,918	$	822,883
Unsecured term loans, net	$	—	$	—	$	720,000	$	720,000
Unsecured revolving line of credit	$	—	$	—	$	18,000	$	18,000

The Company estimates the fair value of its Level 3 financial liabilities using a discounted cash flow model that incorporates future contractual principal and interest payments. The Company estimates the fair value of its mortgages payable, net and Level 3 unsecured notes payable, net by discounting the anticipated future cash flows of each instrument at rates currently offered to the Company by its lenders for similar debt instruments of comparable maturities. The Company estimates the fair value of its unsecured term loans, net and unsecured revolving line of credit by discounting the anticipated future cash flows at a reference rate, currently one-month LIBOR, plus an applicable credit spread currently offered to the Company by its lenders for similar instruments of comparable maturities. The following rates were used in the discounted cash flow model to calculate the fair value of the Company’s Level 3 financial liabilities:


	September 30, 2020	December 31, 2019
Mortgages payable, net – range of discount rates used	3.7% to 4.2%	3.2% to 3.6%
Unsecured notes payable, net – weighted average discount rate used	4.40%	3.79%
Unsecured term loans, net – weighted average credit spread portion of discount rate used	1.93%	1.26%
Unsecured revolving line of credit – credit spread portion of discount rate used	1.65%	1.05%

There were no transfers between the levels of the fair value hierarchy during the nine months ended September 30, 2020 and the year ended December 31, 2019.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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