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FAIR VALUE OF FINANCIAL INSTRUMENTS
12 Months Ended
Dec. 31, 2012
FAIR VALUE OF FINANCIAL INSTRUMENTS  
FAIR VALUE OF FINANCIAL INSTRUMENTS

 

NOTE 7    FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents, for each of the fair value hierarchy levels required under ASC 820, "Fair Value Measurement," our assets and liabilities that are measured at fair value on a recurring basis.

 
  December 31, 2012   December 31, 2011  
 
   
  Fair Value Measurements Using    
  Fair Value Measurements Using  
 
  Total   Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
  Total   Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 
 
   
  (In thousands)
   
  (In thousands)
 

Liabilities

                                                 

Warrants

  $ 123,573     —       —     $ 123,573   $ 127,764     —       —     $ 127,764  

Interest rate swaps

  $ 7,183     —     $ 7,183     —     $ 4,367     —     $ 4,367     —    

The valuation of warrants is based on an option pricing valuation model. The inputs to the model include the fair value of the stock related to the warrants, exercise price of the warrants, term, expected volatility, risk-free interest rate and dividend yield.

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates derived from observable market interest rate curves.

The following table presents a reconciliation of the beginning and ending balances of the fair value measurements using significant unobservable inputs (Level 3) which are our Sponsors and Management Warrants:

 
  December 31,  
 
  2012   2011   2010  
 
  (In thousands)
 

Beginning of year

  $ 127,764   $ 227,348   $ —    

Warrant liability loss (gain) (a)

    185,017     (101,584 )   140,900  

Settlements (b)

    (189,208 )   —       —    

Purchases

    —       2,000     86,448  
               

End of year

  $ 123,573   $ 127,764   $ 227,348  
               

(a)
The unrealized loss during 2012 related to the Sponsors and Management Warrants held as of December 31, 2012 was $73.8 million. The losses and gains for 2011 and 2010, respectively, were all unrealized.

(b)
Settlements were for $80.5 million in cash and 1,525,272 shares of our common stock. Please refer to Note 3 – Sponsors and Management Warrants.

The fair values were estimated using an option pricing model and Level 3 inputs due to the unavailability of comparable market data. Changes in the fair value of the Sponsors Warrants and the Management Warrants are recognized in earnings as a warrant liability gain or loss.

The significant unobservable input used in the fair value measurement of our warrants designated as Level 3 as of December 31, 2012 is as follows:

 
  Fair Value   Valuation
Technique
  Unobservable
Input
  Volatility  
 
  (In thousands)
   
   
   
 

Warrants

  $ 123,573   Option Pricing Valuation Model   Expected Volatility (a)     29 %

(a)
Based on the asset volatility of comparable companies.

The expected volatility in the table above is a significant unobservable input used to estimate the fair value of our warrant liabilities. An increase in expected volatility would increase the fair value of the liability, while a decrease in expected volatility would decrease the fair value of the liability.

The following tables summarize our assets and liabilities that were measured at fair value on a non-recurring basis and include (1) Investment in Real Estate Affiliates related to the fair value based on purchases of our previously held equity investments; (2) impairment charges recorded in 2010 related to the fair value of owned properties and the fair value of debt related to properties that emerged from bankruptcy.

Investment in Real Estate Affiliates
  Total Fair
Value
Measurement
as of
December 31,
  Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  Significant Other
Observable Inputs
(Level 2)
  Significant
Unobservable Inputs
(Level 3)
  Total Loss
Year Ended
December 31,
 
 
  (In thousands)
 

2012

  $ 22,405 (a) $ 22,405   $ —     $ —     $ —    

2011

  $ 128,764 (b) $ —     $ —     $ 128,764 (b) $ 6,053 (c)

(a)
We measured our equity interest in Millennium Waterway Apartments based on our purchase of our partner's 23.5% economic interest in Millennium Waterway Apartments. We used Level 1 inputs for the cash payment.
(b)
Represents the fair value of our previously held equity investment in The Woodlands as of the acquisition date. The fair value was derived from the fair value of the assets and liabilities acquired in The Woodlands acquisition, which is further discussed in Note 4 – Acquisitions and Dispositions. As of the acquisition date, The Woodlands financial condition and results of operations were consolidated.
(c)
Represents the loss on remeasurement of our previously held equity investment in The Woodlands.

 
  Total Fair
Value
Measurement
as of
December 31,
2010
  Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  Significant Other
Observable
Inputs
(Level 2)
  Significant
Unobservable Inputs
(Level 3)
  Total (Loss) Gain –
Year Ended
December 31, 2010
 
 
  (In thousands)
 

Impairment Charges

                               

Master Planned Communities:

                               

Maryland – Columbia (a)

  $ 34,823   $ —     $ —     $ 34,823   $ (56,798 )

Maryland – Gateway (a)

    1,649     —       —       1,649     (2,613 )

Summerlin South (a)

    203,325     —       —       203,325     (345,920 )

Operating Assets:

                               

Landmark Mall (b)

    23,750     —       —       23,750     (24,434 )

Riverwalk Marketplace (c)

    10,179     —       —       10,179     (55,975 )

Strategic Developments:

                               

Century Plaza Mall (b)

    4,500     —       —       4,500     (12,899 )

Nouvelle at Natick (a)

    13,413     —       —       13,413     (4,135 )
                       

Total investments in real estate

  $ 291,639   $ —     $ —     $ 291,639   $ (502,774 )
                       

Debt

                               

Fair value of emerged entity mortgage debt (d)

  $ 65,753   $ —     $ —     $ 65,753   $ 2,749  
                       

Total liabilities

  $ 65,753   $ —     $ —     $ 65,753   $ 2,749  
                       

(a)
The fair value was calculated based on a discounted cash flow analysis using a discount rate of 20.0%.
(b)
The fair value is based on estimated sales value.
(c)
The fair value was calculated based on a discounted cash flow analysis using a discount rate and a residual capitalization rate of 8.5% for both computations.
(d)
The fair value of debt relates to properties that emerged from bankruptcy in 2010.

The estimated fair values of our financial instruments that are not measured at fair value on a recurring basis are as follows:

 
  December 31, 2012   December 31, 2011  
 
  Carrying
Amount
  Estimated
Fair Value
  Carrying
Amount
  Estimated
Fair Value
 
 
  (In thousands)
 

Assets:

                         

Notes receivable, net

  $ 27,953   $ 27,953   $ 35,354   $ 35,354  

Tax indemnity receivable, including interest

    319,622     (a )   331,771     (a )

Liabilities:

                         

Fixed-rate debt

  $ 158,636   $ 158,879   $ 83,164   $ 85,047  

Variable-rate debt (b)

    479,964     479,964     468,100     468,100  

SID bonds

    49,712     56,475     55,213     53,908  
                   

Total mortgages, notes and loans payable

  $ 688,312   $ 695,318   $ 606,477   $ 607,055  
                   

(a)
It is not practicable to estimate the fair value of the tax indemnity receivable, including interest, as the timing and ultimate amount received under contract is highly dependent on numerous future events that cannot be reliably predicted.
(b)
As more fully described below, $172.0 million of variable-rate debt has been swapped to a fixed rate for the term of the related debt.

Notes receivable are carried at net realizable value which approximates fair value. The estimated fair values of these notes receivable are categorized as Level 3 due to certain factors, such as current interest rates, terms of the note and credit worthiness of the borrower.

The fair value of debt in the table above was estimated based on a discounted future cash payment model using Level 2 inputs, which includes risk premiums for loans of comparable quality and a risk free rate derived from the current London Interbank Offered Rate ("LIBOR") or U.S. Treasury obligation interest rates. The discount rates reflect our judgment as to what the approximate current lending rates for loans or groups of loans with similar maturities and credit quality would be if credit markets were operating efficiently and assuming that the debt is outstanding through maturity.

The carrying amounts of cash and cash equivalents and accounts receivable approximate fair value because of the short-term maturity of these instruments.