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Fair Value Measurements

12 Months Ended

Dec. 31, 2022

18. Fair Value Measurements

Fair Value Measurements on a Recurring Basis

To manage or hedge our exposure to interest rate risk, we follow established risk management policies and procedures, including the use of a variety of derivative financial instruments. We do not enter into derivative financial instruments for speculative purposes.

As of December 31, 2022 and 2021, we had various derivative financial instruments consisting of interest rate swap and cap agreements that are measured at fair value on a recurring basis. The net unrealized gain (loss) on our derivative financial instruments designated as effective hedges was $55.0 million and ($17.2) million as of December 31, 2022 and 2021 and was recorded in "Accumulated other comprehensive income (loss)" in our consolidated balance sheets, of which a portion was reclassified to "Redeemable noncontrolling interests." Within the next 12 months, we expect to reclassify $29.2 million of the net unrealized gain as a decrease to interest expense.

The fair values of the derivative financial instruments are based on the estimated amounts we would receive or pay to terminate the contracts at the reporting date and are determined using interest rate pricing models and observable inputs. The derivative financial instruments are classified within Level 2 of the valuation hierarchy.

The following is a summary of assets and liabilities measured at fair value on a recurring basis:


	Fair Value Measurements
	Total		Level 1		Level 2		Level 3

	(In thousands)
December 31, 2022
Derivative financial instruments designated as effective hedges:
Classified as assets in "Other assets, net"	$	53,515		—	$	53,515		—
Derivative financial instruments designated as ineffective hedges:
Classified as assets in "Other assets, net"		8,107		—		8,107		—

December 31, 2021
Derivative financial instruments designated as effective hedges:
Classified as assets in "Other assets, net"	$	393		—	$	393		—
Classified as liabilities in "Other liabilities, net"		18,361		—		18,361		—
Derivative financial instruments designated as ineffective hedges:
Classified as assets in "Other assets, net"		558		—		558		—

The fair values of our derivative financial instruments were determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of the derivative financial instrument. This analysis reflected the contractual terms of the derivative, including the period to maturity, and used observable market-based inputs, including interest rate market data and implied volatilities in such interest rates. While it was determined that the majority of the inputs used to value the derivatives fall within Level 2 of the fair value hierarchy under authoritative accounting guidance, the credit valuation adjustments associated with the derivatives also utilized Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default. However, as of December 31, 2022 and 2021, the significance of the impact of the credit valuation adjustments on the overall valuation of the derivative financial instruments was assessed, and it was determined that these adjustments were not significant to the overall valuation of the derivative financial instruments. As a result, it was determined that the derivative financial instruments in their entirety should be classified in Level 2 of the fair value hierarchy. The net unrealized gains and losses included in "Other comprehensive income (loss)" in our consolidated statements of comprehensive income (loss) for each of the three years in the period ended December 31, 2022 were attributable to the net change in unrealized gains or losses related to the interest rate swaps and caps that were outstanding during those periods, none of which were reported in our consolidated statements of operations as the interest rate swaps and caps were documented and qualified as hedging instruments.

Fair Value Measurements on a Nonrecurring Basis

We evaluate the carrying amount of our assets for impairment. An impairment exists when the carrying amount of an asset exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.

In connection with the preparation and review of our 2021 annual consolidated financial statements, we assessed the recoverability of the carrying amount of our real estate and related intangible assets. This assessment resulted in the remeasurement of 7200 Wisconsin Avenue, RTC-West and a development parcel, which were written down to their estimated aggregate fair value of $309.0 million and were classified as Level 2 in the fair value hierarchy. Our estimates of the fair values were based on expected sales prices as determined by contracts that were under negotiation as of December 31, 2021, after adjusting for estimated selling costs. The assets were sold to an unconsolidated real estate venture in April 2022. The remeasurement results in impairment losses totaling $25.1 million, which are included in "Impairment loss" in our consolidated statement of operations for the year ended December 31, 2021.

There were no other assets measured at fair value on a nonrecurring basis as of December 31, 2022 and 2021.

Financial Assets and Liabilities Not Measured at Fair Value

As of December 31, 2022 and 2021, all financial instruments and liabilities were reflected in our consolidated balance sheets at amounts which, in our estimation, reasonably approximated their fair values, except for the following:


	December 31, 2022				December 31, 2021
	Carrying				Carrying
	Amount ⁽¹⁾		Fair Value		Amount ⁽¹⁾		Fair Value

	(In thousands)
Financial liabilities:
Mortgage loans	$	1,901,875	$	1,830,651	$	1,788,259	$	1,814,780
Revolving credit facility		—		—		300,000		300,363
Unsecured term loans		550,000		551,369		400,000		400,519

(1)	The carrying amount consists of principal only.

The fair values of the mortgage loans, revolving credit facility and unsecured term loans were determined using Level 2 inputs of the fair value hierarchy. The fair value of our mortgage loans is estimated by discounting the future contractual cash flows of these instruments using current risk-adjusted rates available to borrowers with similar credit profiles based on market sources. The fair value of our revolving credit facility and unsecured term loans is calculated based on the net present value of payments over the term of the facilities using estimated market rates for similar notes and remaining terms.

- 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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