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Fair Value Measurements

6 Months Ended

Jun. 30, 2021

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) real estate fund investments, (ii) the assets in our deferred compensation plan (for which there is a corresponding liability on our consolidated balance sheets), (iii) loans receivable (for which we have elected the fair value option under ASC Subtopic 825-10, Financial Instruments ("ASC 825-10")), (iv) interest rate swaps and (v) 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, 2021
	Total		Level 1		Level 2		Level 3
Real estate fund investments	$	3,739	$	—	$	—	$	3,739
Deferred compensation plan assets ($4,968 included in restricted cash and $102,270 in other assets)	107,238		62,383		—		44,855
Loans receivable ($44,716 included in investments in partially owned entities and $4,060 in other assets)	48,776		—		—		48,776
Interest rate swaps and caps (included in other assets)	4,994		—		4,994		—
Total assets	$	164,747	$	62,383	$	4,994	$	97,370

Mandatorily redeemable instruments (included in other liabilities)	$	50,267	$	50,267	$	—	$	—
Interest rate swaps (included in other liabilities)	50,818		—		50,818		—
Total liabilities	$	101,085	$	50,267	$	50,818	$	—

(Amounts in thousands)	As of December 31, 2020
	Total		Level 1		Level 2		Level 3
Real estate fund investments	$	3,739	$	—	$	—	$	3,739
Deferred compensation plan assets ($10,813 included in restricted cash and $94,751 in other assets)	105,564		65,636		—		39,928
Loans receivable ($43,008 included in investments in partially owned entities and $4,735 in other assets)	47,743		—		—		47,743
Interest rate swaps and caps (included in other assets)	17		—		17		—
Total assets	$	157,063	$	65,636	$	17	$	91,410

Mandatorily redeemable instruments (included in other liabilities)	$	50,002	$	50,002	$	—	$	—
Interest rate swaps (included in other liabilities)	66,033		—		66,033		—
Total liabilities	$	116,035	$	50,002	$	66,033	$	—

Real Estate Fund Investments

As of June 30, 2021, we had four real estate fund investments with an aggregate fair value of $3,739,000, $339,812,000 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, 2021

December 31, 2020

June 30, 2021

December 31, 2020

Discount rates

7.2% to 15.0%

7.6% to 15.0%

11.8%

12.7%

Terminal capitalization rates

5.3% to 10.6%

5.5% to 10.3%

7.8%

7.9%

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,
	2021		2020		2021		2020
Beginning balance	$	3,739	$	45,129	$	3,739	$	222,649
Purchases/additional fundings	295		—		789		6,000
Net unrealized loss on held investments	(295)		(27,676)		(789)		(211,196)
Ending balance	$	3,739	$	17,453	$	3,739	$	17,453

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,				For the Six Months Ended June 30,
	2021		2020		2021		2020
Beginning balance	$	41,639	$	30,568	$	39,928	$	32,435
Purchases	2,564		5,656		3,013		6,949
Sales	(544)		(357)		(689)		(2,832)
Realized and unrealized gains (losses)	969		38		2,262		(1,191)
Other, net	227		267		341		811
Ending balance	$	44,855	$	36,172	$	44,855	$	36,172

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, 2021	December 31, 2020	June 30, 2021	December 31, 2020
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,
	2021		2020		2021		2020
Beginning balance	$	48,209	$	51,990	$	47,743	$	59,251
Credit losses	—		(6,108)		—		(13,369)
Interest accrual	867		793		1,708		793
Paydowns	(300)		—		(675)		—
Ending balance	$	48,776	$	46,675	$	48,776	$	46,675

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 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, 2021 and December 31, 2020.


(Amounts in thousands)	As of June 30, 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(1)	$	3,041	$	840,000	(2)	L+193	2.01%	2.26%	5/24
PENN 11 mortgage loan interest rate swap(3)	1,858		500,000			L+275	2.83%	3.03%	3/24
Various interest rate caps	95		175,000
	$	4,994	$	1,515,000

Included in other liabilities:
Unsecured term loan interest rate swap	$	44,732	$	750,000	(4)	L+100	1.10%	3.87%	10/23
33-00 Northern Boulevard mortgage loan interest rate swap	6,086		100,000			L+180	1.89%	4.14%	1/25
	$	50,818	$	850,000

____________________

(1)Entered into on May 15, 2021.

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

(3)Entered into on March 7, 2021.

(4)Remaining $50,000 balance of our unsecured term loan bears interest at a floating rate of LIBOR plus 1.00%.


(Amounts in thousands)	As of December 31, 2020
						Variable Rate
Hedged Item	Fair Value		Notional Amount			Spread over LIBOR	Interest Rate	Swapped Rate	Expiration Date
Included in other assets:
Various interest rate caps	$	17	$	175,000

Included in other liabilities:
Unsecured term loan interest rate swap	$	57,723	$	750,000	(1)	L+100	1.15%	3.87%	10/23
33-00 Northern Boulevard mortgage loan interest rate swap	8,310		100,000			L+180	1.95%	4.14%	1/25
	$	66,033	$	850,000

____________________

(1)Remaining $50,000 balance of our unsecured term loan bears interest at a floating rate of LIBOR plus 1.00%.

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 sheet as of June 30, 2021. As of December 31, 2020, assets measured at fair value on a nonrecurring basis on our consolidated balance sheet consisted of real estate assets that have been written down to estimated fair value for impairment purposes. The impairment losses primarily relate to wholly owned street retail assets.

Our estimate of the fair value of these assets was measured using widely accepted valuation techniques including (i) discounted cash flow analyses based upon market conditions and expectations of growth and utilized unobservable quantitative inputs, including a capitalization rate of 5.0% and discount rate of 7.0%, and (ii) comparable sales activity.


(Amounts in thousands)	As of December 31, 2020
	Total		Level 1		Level 2		Level 3
Real estate assets	$	191,116	$	—	$	—	$	191,116

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, 2021					As of December 31, 2020
		Carrying Amount			Fair Value		Carrying Amount			Fair Value
Cash equivalents		$	1,770,459		$	1,770,000	$	1,476,427		$	1,476,000
Debt:
	Mortgages payable	$	5,585,015		$	5,586,000	$	5,608,458		$	5,612,000
	Senior unsecured notes	1,200,000			1,247,000		450,000			476,000
	Unsecured term loan	800,000			800,000		800,000			800,000
	Unsecured revolving credit facilities	575,000			575,000		575,000			575,000
	Total	$	8,160,015	(1)	$	8,208,000	$	7,433,458	(1)	$	7,463,000

____________________

(1)Excludes $50,262 and $34,462 of deferred financing costs, net and other as of June 30, 2021 and December 31, 2020, 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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