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Fair Value Measurements

6 Months Ended

Jun. 30, 2022

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 as well as certain U.S. Treasury securities that are highly liquid and are actively traded in secondary markets; 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) investments in U.S. Treasury bills (classified as available-for-sale), (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 Subtopic 825-10, Financial Instruments ("ASC 825-10")), (v) interest rate swaps and caps and (vi) mandatorily redeemable instruments (Series G-1 through G-4 convertible preferred units and Series D-13 cumulative redeemable preferred units). The tables on the following page, aggregate the fair values of these financial assets and liabilities by their levels in the fair value hierarchy.

14. Fair Value Measurements - continued

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis - continued


(Amounts in thousands)	As of June 30, 2022
	Total		Level 1		Level 2		Level 3
Investments in U.S. Treasury bills (1)	$	494,045	$	494,045	$	—	$	—
Real estate fund investments	930		—		—		930
Deferred compensation plan assets ($5,040 included in restricted cash and $91,162 in other assets)	96,202		52,047		—		44,155
Loans receivable ($48,299 included in investments in partially owned entities and $3,747 in other assets)	52,046		—		—		52,046
Interest rate swaps and caps (included in other assets)	74,039		—		74,039		—
Total assets	$	717,262	$	546,092	$	74,039	$	97,131

Mandatorily redeemable instruments (included in other liabilities)	$	49,383	$	49,383	$	—	$	—
Interest rate swaps (included in other liabilities)	1,756		—		1,756		—
Total liabilities	$	51,139	$	49,383	$	1,756	$	—

(Amounts in thousands)	As of December 31, 2021
	Total		Level 1		Level 2		Level 3
Real estate fund investments	$	7,730	$	—	$	—	$	7,730
Deferred compensation plan assets ($9,104 included in restricted cash and $101,070 in other assets)	110,174		65,158		—		45,016
Loans receivable ($46,444 included in investments in partially owned entities and $3,738 in other assets)	50,182		—		—		50,182
Interest rate swaps and caps (included in other assets)	18,929		—		18,929		—
Total assets	$	187,015	$	65,158	$	18,929	$	102,928

Mandatorily redeemable instruments (included in other liabilities)	$	49,659	$	49,659	$	—	$	—
Interest rate swaps (included in other liabilities)	32,837		—		32,837		—
Total liabilities	$	82,496	$	49,659	$	32,837	$	—

____________________

(1) During the six months ended June 30, 2022, we purchased $794,793 in U.S. Treasury bills with an aggregate par value of $800,000 and realized proceeds of $300,000 from maturing U.S. Treasury bills. As of June 30, 2022, our investments in U.S. Treasury bills have an aggregate amortized cost of $496,650 and have remaining maturities of less than one year.

Real Estate Fund Investments

As of June 30, 2022, we had two real estate fund investments with an aggregate fair value of $930,000, $275,459,000 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 assets)

Unobservable Quantitative Input

June 30, 2022

December 31, 2021

June 30, 2022

December 31, 2021

Discount rates

12.0% to 13.0%

12.0% to 15.0%

12.6%

13.2%

Terminal capitalization rates

5.5% to 9.4%

5.5% to 8.8%

7.6%

7.4%

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.

14. Fair Value Measurements - continued

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis - continued

Real Estate Fund Investments - continued

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,				For the Six Months Ended June 30,
	2022		2021		2022		2021
Beginning balance	$	13,402	$	3,739	$	7,730	$	3,739
Previously recorded unrealized loss on exited investments	53,724		—		59,396		—
Realized loss on exited investments	(53,724)		—		(53,724)		—
Net unrealized loss on held investments	(6,800)		(295)		(6,800)		(789)
Dispositions	(5,672)		—		(5,672)		—
Purchases/additional fundings	—		295		—		789
Ending balance	$	930	$	3,739	$	930	$	3,739

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 that provide net asset values on a fair value basis from a third-party administrator, which are compiled from the quarterly reports provided to them from each limited partnership and investment fund. 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,				For the Six Months Ended June 30,
	2022		2021		2022		2021
Beginning balance	$	44,526	$	41,639	$	45,016	$	39,928
Purchases	2,104		2,564		2,947		3,013
Sales	(1,880)		(544)		(2,787)		(689)
Realized and unrealized (losses) gains	(858)		969		(2,098)		2,262
Other, net	263		227		1,077		341
Ending balance	$	44,155	$	44,855	$	44,155	$	44,855

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. These investments are classified as Level 3.


	Range		Weighted Average (based on fair value of investments)
Unobservable Quantitative Input	June 30, 2022	December 31, 2021	June 30, 2022	December 31, 2021
Discount rates	6.5%	6.5%	6.5%	6.5%
Terminal capitalization rates	5.0%	5.0%	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)	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2022		2021		2022		2021
Beginning balance	$	50,848	$	48,209	$	50,182	$	47,743

Interest accrual	1,198		867		2,397		1,708
Paydowns	—		(300)		(533)		(675)
Ending balance	$	52,046	$	48,776	$	52,046	$	48,776

14. Fair Value Measurements - continued

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis - continued

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 hedged 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, 2022 and December 31, 2021.


(Amounts in thousands)	As of June 30, 2022
						Variable Rate
Hedged Item	Fair Value		Notional Amount			Spread over LIBOR/SOFR	Interest Rate	Swapped Rate	Expiration Date
Included in other assets:
Interest rate swaps:
555 California Street mortgage loan	$	42,763	$	840,000	(1)	L+193	3.26%	2.26%	5/24
PENN 11 mortgage loan	23,609		500,000			L+195	3.07%	2.23%	3/24
Unsecured term loan	2,497		750,000		(2)	S+130	2.83%	4.05%	10/23
4 Union Square South mortgage loan	1,613		100,000		(3)	L+140	2.46%	3.74%	1/25
Various interest rate caps	3,557		1,650,000
	$	74,039	$	3,840,000

Included in other liabilities:
770 Broadway mortgage loan interest rate swap	$	1,756	$	350,000	(4)	S+225	3.75%	5.11%	7/27

____________________

See notes below.


(Amounts in thousands)	As of December 31, 2021
						Variable Rate
Hedged Item	Fair Value		Notional Amount			Spread over LIBOR	Interest Rate	Swapped Rate	Expiration Date
Included in other assets:
555 California Street mortgage loan interest rate swap	$	11,814	$	840,000	(1)	L+193	2.04%	2.26%	5/24
PENN 11 mortgage loan interest rate swap	6,565		500,000			L+195	2.05%	2.23%	3/24
Various interest rate caps	550		1,650,000
	$	18,929	$	2,990,000
Included in other liabilities:
Unsecured term loan interest rate swap	$	28,976	$	750,000	(2)	L+100	1.10%	3.87%	10/23
33-00 Northern Boulevard mortgage loan interest rate swap	3,861		100,000		(3)	L+180	1.91%	4.14%	1/25
	$	32,837	$	850,000

____________________

(1)Represents our 70.0% share of the $1.2 billion mortgage loan.

(2)Remaining $50,000 balance of our unsecured term loan bears interest at a floating rate of SOFR plus 1.30%.

(3)Upon the sale of 33-00 Northern Boulevard in June 2022, the $100,000 corporate-level interest rate swap was reallocated and now hedges the interest rate on $100,000 of the 4 Union Square South mortgage loan through January 2025. The remaining $20,000 mortgage loan balance bears interest at a floating rate of LIBOR plus 1.40%.

(4)Upon the June 28, 2022 refinancing of the mortgage loan, the interest rate on $350,000 of the loan was swapped to a fixed rate of 5.11% and on July 22, 2022, the interest rate on the remaining $350,000 was swapped to a fixed rate of 4.85%. The swaps result in a blended fixed interest rate of 4.98% through July 2027.

14. Fair Value Measurements - continued

Fair Value Measurements on a Nonrecurring Basis

There were no assets measured at fair value on a nonrecurring basis on our consolidated balance sheets as of June 30, 2022 and December 31, 2021.

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)		As of June 30, 2022					As of December 31, 2021
		Carrying Amount			Fair Value		Carrying Amount			Fair Value
Cash equivalents		$	504,097		$	504,000	$	1,346,684		$	1,347,000
Debt:
	Mortgages payable	$	5,888,415		$	5,779,000	$	6,099,215		$	6,052,000
	Senior unsecured notes	1,200,000			1,087,000		1,200,000			1,230,000
	Unsecured term loan	800,000			800,000		800,000			800,000
	Unsecured revolving credit facilities	575,000			575,000		575,000			575,000
	Total	$	8,463,415	(1)	$	8,241,000	$	8,674,215	(1)	$	8,657,000

____________________

(1)Excludes $70,684 and $58,268 of deferred financing costs, net and other as of June 30, 2022 and December 31, 2021, respectively.

- 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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