XML 43 R21.htm IDEA: XBRL DOCUMENT v3.22.0.1
Financial Instruments and Fair Value Measurements
 12 Months Ended
Dec. 31, 2021
Fair Value Disclosures [Abstract]  
Financial Instruments and Fair Value Measurements Financial Instruments and Fair Value Measurements
Fair value is defined as the price that would be received from 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, Fair Value Measurements and Disclosures, sets forth a fair value hierarchy that categorizes inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and lowest priority to unobservable inputs. Categorization within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
•Level 1 – Unadjusted quoted prices in active markets
Financial instruments are classified as Level 1 if their value is observable in an active market. Such instruments are valued by reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted price is readily available, and the price represents actual and regularly occurring market transactions. An active market is one in which transactions occur with sufficient volume and frequency to provide pricing information on an ongoing basis.

•Level 2 – Valuation Technique Using Observable Inputs
Financial instruments classified as Level 2 are valued using quoted prices for identical instruments in markets that are not considered to be active, or quoted prices for similar assets or liabilities in active markets, or valuation techniques in which all significant inputs are observable, or can be corroborated by observable market data for substantially the entire contractual term of the financial asset or liability.

•Level 3 – Valuation Technique Using Significant Unobservable Inputs
Financial instruments are classified as Level 3 if their valuation incorporates significant inputs that are not based on observable market data (unobservable inputs). Such inputs are generally determined based on observable inputs of a similar nature, historical observations on the level of the inputs, or other analytical techniques.
We evaluate our hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from period to period. Changes in the type of inputs may result in a reclassification for certain assets. We have not historically had changes in classifications and do not expect that changes in classifications between levels will be frequent.
Financial Instruments Not Measured at Fair Value on the Consolidated Balance Sheets
The fair value of short-term financial instruments such as cash and cash equivalents, accounts receivable, escrow deposits, loans receivable, accounts payable, distributions payable, line of credit payable and commercial paper borrowings, and other liabilities approximate their carrying value in the accompanying consolidated balance sheets, due to their short-term nature. The fair value of our financial instruments not carried at fair value are disclosed as follows (in millions):
At December 31, 2021
Carrying valueEstimated fair value
Mortgages payable assumed in connection with acquisitions (1)
$1,114.1 $1,154.7 
Notes and bonds payable (2)
$12,257.3 $13,114.5 
At December 31, 2020
Carrying valueEstimated fair value
Mortgages payable assumed in connection with acquisitions (1)
$299.6 $309.4 
Notes and bonds payable (2)
$8,302.4 $9,324.0 
(1) Excludes non-cash net premiums recorded on the mortgages payable. The unamortized balance of these net premiums is $28.7 million at December 31, 2021, and $1.7 million at December 31, 2020. Also excludes deferred financing costs of $790,000 at December 31, 2021, and $973,000 at December 31, 2020.
(2) Excludes non-cash premiums and discounts recorded on notes payable. The unamortized balance of the net premiums was $295.5 million at December 31, 2021, and $14.6 million at December 31, 2020. Also excludes deferred financing costs of $53.1 million at December 31, 2021 and $49.2 million at December 31, 2020.
The estimated fair values of our mortgages payable assumed in connection with acquisitions and private senior notes payable have been calculated by discounting the future cash flows using an interest rate based upon the relevant forward interest rate curve, plus an applicable credit-adjusted spread. Because this methodology includes unobservable inputs that reflect our own internal assumptions and calculations, the measurement of estimated fair values related to our mortgages payable is categorized as level three on the three-level valuation hierarchy.
The estimated fair values of our publicly-traded senior notes and bonds payable are based upon indicative market prices and recent trading activity of our senior notes and bonds payable, including the senior notes and bonds payable assumed in the debt exchange offer on November 9, 2021 in connection with our merger with VEREIT. Because this methodology includes inputs that are less observable by the public and are not necessarily reflected in active markets, the measurement of the estimated fair values related to our notes and bonds payable is categorized as level two on the three-level valuation hierarchy.
Financial Instruments Measured at Fair Value on a Recurring Basis
For derivative assets and liabilities, we utilize interest rate swaps and forward-starting swaps to manage interest rate risk, and cross-currency swaps, currency exchange swaps, foreign currency forwards and foreign currency collars to manage foreign currency risk. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, spot and forward rates, as well as option volatility.
Derivative fair values also include credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although we have determined that the majority of the inputs used to value our derivatives fall within level two on the three-level valuation hierarchy, the credit valuation adjustments associated with our derivatives utilize level three inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by ourselves and our counterparties. However, at December 31, 2021 and 2020, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we determined that our derivative valuations in their entirety are classified as level two.
Items Measured at Fair Value on a Non-Recurring Basis
Certain financial and nonfinancial assets and liabilities are measured at fair value on a non-recurring basis and are subject to fair value adjustments only under certain circumstances, such as when an impairment write-down occurs.
During 2020, we identified the impact of the COVID-19 pandemic as an impairment triggering event for properties occupied by certain clients experiencing difficulties meeting their lease obligations to us. After considering the impacts of the COVID-19 pandemic on the key assumptions noted above, we determined that the carrying values of 38 properties classified as held for investment for the year ended December 31, 2020 were not recoverable. As a result, we recorded provisions for impairment of $105.0 million for the year ended December 31, 2020 on the applicable properties impacted by the COVID-19 pandemic. Of the provisions for impairment recorded during 2020
for properties impacted by the COVID-19 pandemic, a total of 13 assets occupied by certain of our clients in the theater industry were impaired for $83.8 million, which reduced the carrying value of the properties from $123.4 million to their estimated fair value of $39.6 million. Impairments recorded on other properties during the year ended December 31, 2020 totaled $42.2 million.
The following table summarizes our provisions for impairment during the periods indicated below (dollars in millions):
Year Ended December 31,
202120202019
Total provisions for impairment$39.0 $147.2 $40.2 
Number of properties:
Classified as held for sale16 1 — 
Classified as held for investment11 34 3 
Sold76 64 48 
Derivative Designated as Hedging Instruments
In order to hedge the foreign currency risk associated with interest payments on intercompany loans denominated in British Pound Sterling, or GBP, during the second quarter of 2021, we initiated a hedging strategy to enter into foreign currency forward contracts to sell GBP and buy U.S. Dollars, or USD. These foreign currency forwards are designated as cash flow hedges. Forward points on the forward contracts are included in the assessment of hedge effectiveness. Amounts reported in other comprehensive income (loss) related to foreign currency derivative contracts will be reclassified to other gains and (losses) in the same period during which the hedged forecasted transactions affect earnings.
As of December 31, 2021, we had one interest rate swap in place on our $250.0 million unsecured term loan. Our objective in using derivatives is to add stability to interest expense and to manage our exposure to interest rate movements. We designated this interest rate swap as a cash flow hedge in accordance with Topic 815, Derivatives and Hedging. This interest rate swap is recorded on the consolidated balances sheets at fair value. Changes to fair value are recorded to accumulated other comprehensive income, or AOCI, and are amortized through interest expense over the term of the associated debt.
In February 2020, we entered into five forward starting treasury rate locks with notional amounts totaling $500.0 million. The treasury rate locks were entered into to hedge our exposure to the changes in the 10-year US treasury rates in anticipation of potential future debt offerings during the first half of 2020. The treasury rate locks were designated as cash flow hedges, with any changes in fair value recorded in AOCI. Upon the initial issuance of the 2031 Notes in May 2020, we amortized the AOCI balance over the term of the 2031 Notes. In June 2020, all five treasury rate locks were terminated and we entered into six forward starting interest rate swaps with notional amounts totaling $500.0 million in a cashless settlement of the terminated treasury rate locks. The forward starting swaps were entered into to hedge our exposure to the changes in the 3-month USD-LIBOR swap rate in anticipation of potential future debt offerings through a current estimated range ending in 2023. The forward starting swaps are designated as cash flow hedges, with any changes in fair value recorded in AOCI. Upon issuance of the 2031 Notes during July 2020, the AOCI balance associated with four of the forward starting swaps with a notional amount of $350.0 million we amortized over the term of the notes. However, we elected not to terminate the four forward starting interest rate swaps, and redesignated the swaps in a new hedging relationship for a future debt issuance to hedge our exposure to the changes in the 10-year US treasury rates in anticipation of potential future debt offerings between May 2020 and December 2023. Upon the December 2020 issuance of $325.0 million of 0.750% notes due March 2026 and $400.0 million of 1.800% notes due March 2033, the AOCI balance associated with six of the forward starting swaps with a notional amount of $500.0 million began amortizing over the term. The AOCI balance being amortized represents the change in fair value on four swaps with a notional amount of $350.0 million from the July issuance of the 2031 notes through the December note issuances and the change in fair value from the two remaining forward starting swaps with a notional amount of $150.0 million from their June 2020 inception through the December note issuances. The notional amounts of the six swaps were first applied to the $400.0 million of 1.800% notes due March 2033, with the remaining $100.0 million of notional applied to the $325.0 million of 0.750% notes due March 2026. However, we elected not to terminate any of the six forward starting interest rate swaps, and redesignated the swaps in a new hedging relationship to hedge our exposure to the changes in the 10-year US treasury rates in anticipation of potential future debt offerings between December 2020 and December 2023.
Due to the size of the initial net investment resulting from the termination value of the treasury rate locks being rolled into them, two of the six forward starting swaps were determined to be hybrid debt instruments containing embedded at-market swap derivative instruments. As a result, we have bifurcated the derivative instrument and the debt instrument for those two forward starting interest rate swaps for accounting purposes. The remaining four forward starting interest rates swaps are accounted for as derivative instruments.
The following table summarizes the amount of unrealized gain (loss) on derivatives in other comprehensive income (loss) during the periods indicated below (in thousands):
Years Ended December 31,
Derivatives in Cash Flow Hedging Relationships202120202019
Currency swaps$8,232 $(2,169)$(971)
Interest rate swaps34,659 (32,757)(8,219)
Foreign currency forwards 7,557 — — 
Total unrealized gain (loss) on derivatives$50,448 $(34,926)$(9,190)
The following table summarizes the amount of gain (loss) on derivatives reclassified from accumulated other comprehensive income (loss) during the periods indicated below (in thousands):
Years Ended December 31,
Derivatives in Cash Flow Hedging RelationshipsLocation of Gain (Loss) Recognized in Income202120202019
Currency swapsForeign currency and derivative gain (loss), net$3,541 $(3,617)$(5,472)
Interest rate swapsInterest expense (10,343)(11,434)(3,436)
Net decrease to net income $(6,802)$(15,051)$(8,908)
We expect to reclassify $9.4 million from AOCI as an increase to interest expense relating to interest rate swaps and $3.3 million from AOCI to foreign currency gain relating to cross-currency swaps within the next twelve months.
Derivatives Not Designated as Hedging Instruments
Based on our potential exposure to changes in foreign currency exchange rate, primarily in British Pound Sterling and, to a lesser extent, the Euro, we initiated a program in the third quarter of 2021 to enter into foreign currency collars. A foreign currency collar consists of a written call option and a purchased put option to sell the foreign currency at a range of predetermined exchange rates. A foreign currency collar guarantees that the exchange rate of the currency will not fluctuate beyond the range of the options’ strike prices. Our foreign currency collars generally have maturities of five months or less and are not designated as hedge instruments for accounting purposes. The gains or loss on these derivative contracts are recognized in other income, net based on the changes in fair value. As of December 31, 2021, we had no outstanding foreign currency collars.
In addition, from time to time we enter into currency exchange swap agreements to reduce the effects of currency exchange rate fluctuations between the British Pound Sterling and Euro. These derivative contracts generally mature within two months and are not designated as hedge instruments for accounting purposes. As the currency exchange swap is not accounted for as a hedging instrument, the change in fair value is recorded in earnings through the caption entitled 'Foreign currency and derivative gains, net' in the consolidated statements of income and comprehensive income.
The net gain from derivatives not designated in hedging relationships for 2021 totaled $9.7 million and resulted from short term currency exchange swaps and foreign currency collars. The net loss from derivatives not designated in hedging relationships for 2020 totaled $14.5 million and resulted from short term currency exchange swaps.
The following table summarizes the terms and fair values of our derivative financial instruments at December 31, 2021 and December 31, 2020 (dollars in millions):
Derivative Type
Number of Instruments (1)
Accounting Classification
Notional Amount as of December 31,
Weighted Average Strike Rate (2)
Maturity Date (3)
Fair Value - asset (liability) as of December 31,
Derivatives Designated as Hedging Instruments2021202020212020
Interest rate swap
1Derivative$250.0 $250.03.04%03/2024$(11.9)$(22.6)
Cross-currency swaps (4)
4Derivative166.3 166.4(5)05/2034(13.8)(21.4)
Foreign currency forwards32Derivative176.1 0.0(6)01/2022 - 08/20247.6 — 
Forward-starting swaps (7)
4Derivative300.0 300.01.86%11/2032 - 06/2033(3.2)(16.5)
Forward-starting swaps (7)
2Hybrid debt200.0 200.01.93%11/2032 - 06/2033(5.1)(12.8)
$1,092.4 $916.4 $(26.4)$(73.3)
Derivatives not Designated as Hedging Instruments
Currency exchange swaps (8)
4Derivative1,639.5 625.0(9)01/2022 - 02/2022(14.7)(8.2)
Total of all Derivatives$2,731.9 $1,541.4 $(41.1)$(81.5)
(1)This column represents the number of instruments outstanding as of December 31, 2021.
(2)Weighted average strike rate is calculated using the current notional value as of December 31, 2021.
(3)This column represents maturity dates for instruments outstanding as of December 31, 2021.
(4)Represents four British Pound Sterling, or GBP cross-currency swaps with notional amount of $166.3 million.
(5)GBP fixed rates initially at 4.82% and escalating to 10.96%, and USD weighted average fixed rate at 9.78%.
(6)Weighted average forward GBP-USD exchange rate of 1.41.
(7)There were five treasury rate locks entered into during February 2020 that were terminated in June 2020 and converted into six forward starting interest rate swaps through a cashless settlement. For full discussion of the hedging arrangements for these six forward starting swaps, please refer to Derivative Designated as Hedging Instruments above.
(8)Represents two British Pound Sterling, or GBP currency exchange swaps with notional amount of $1.36 billion and two Euro, or EUR currency exchange swaps with notional amount of $275.9 million.
(9)Weighted average Forward GBP-USD exchange rate of 1.34 and Weighted Average Forward EUR-USD exchange rate of 1.16.
We have agreements with each of our derivative counterparties containing provisions under which we could be declared in default on our derivative obligations if repayment of our indebtedness is accelerated by the lender due to our default.
Certain of our derivative transactions include credit support annex collateral agreements with derivative counterparties requiring collateral posting based on changes in value of the derivative. As of December 31, 2021 and December 31, 2020, no collateral has been posted related to such arrangements