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Fair Value Measurements
3 Months Ended
Mar. 31, 2022
Fair Value Disclosures [Abstract]  
Fair Value Measurements

Note 7 — Fair Value Measurements

Recurring Fair Value Measurements

In 2020, we paid an upfront premium of $12.1 million for the option to enter into a $1.5 billion notional amount interest rate swap at a future date. This interest rate option, or swaption, provides partial protection against exposure to rising interest rates between now and October 2024. We receive a cash settlement in the future if the prevailing interest rate is higher than the 1.68% five-year swap strike price. The amount of future cash settlement is capped if the prevailing interest rate exceeds 2.78%. Alternatively, if interest rates were to decrease below the specified strike price, we would not receive a cash settlement, nor would we have any requirement to make a payment.

 

During the year ended December 31, 2021, we paid upfront a premium of $5.6 million (including transaction costs) for the option to enter into a $500.0 million notional amount interest rate swap at a future date. This interest rate option, or swaption, provides partial protection against our refinancing interest rate risk relative to our Notes Payable to AIR and is intended to mitigate interest rate increases between now and January 2024. We receive a cash settlement in the future if the prevailing interest rate is higher than the 3% strike price on the five-year swap rate. Alternatively, if interest rates were to decrease below the specified strike price, we would not receive a cash settlement, nor would we have any requirement to make a payment.

 

From time to time we purchase interest rate swaps, caps, and other instruments to provide protection against increases in interest rates on our floating rate debt. The fair value of these instruments are included in the fair value table below.

We measure at fair value on a recurring basis our interest rate options, which are presented in other assets in our condensed consolidated balance sheets. Our interest rate options are classified within Level 2 of the GAAP fair value hierarchy, and we estimate their fair value using pricing models that rely on observable market information, including contractual terms, market prices, and interest rate yield curves. The fair value adjustment is included in earnings in Unrealized gains on interest rate options in our condensed consolidated statements of operations. Changes in fair value are reflected as a non-cash transaction in adjustments to arrive at cash flows from operations, and the upfront premium is reflected in purchase of interest rate option in our condensed consolidated statements of cash flows.

We have investments of $5.1 million in property technology funds consisting of privately held entities that develop technology related to the real estate industry. These investments are measured at net asset value (“NAV”) as a practical expedient. Refer to Note 4 for further details of unfunded commitments.

The following table summarizes fair value for our interest rate options and our investments in real estate technology funds as of March 31, 2022, and December 31, 2021, (in thousands):

 

 

As of March 31, 2022

 

 

As of December 31, 2021

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Interest rate options

 

$

44,227

 

 

$

 

 

$

44,227

 

 

$

 

 

$

25,449

 

 

$

 

 

$

25,449

 

 

$

 

Investment in real estate technology funds (1)

 

$

5,104

 

 

$

 

 

$

 

 

$

 

 

$

9,613

 

 

 

 

 

 

 

 

 

 

(1)
Investments measured at fair value using NAV as a practical expedient are not classified in the fair value hierarchy. 

Fair Value Disclosures

We believe that the carrying value of the consolidated amounts of cash and cash equivalents, restricted cash, accounts receivable and payables approximated their fair value as of March 31, 2022, and December 31, 2021, due to their relatively short-term nature and high probability of realization. We estimate the fair value of our non-recourse property debt, construction loans, and Notes Payable to AIR using an income and market approach, including comparison of the contractual terms to observable and unobservable inputs such as market interest rate risk spreads, contractual interest rates, remaining periods to maturity, debt service coverage ratios, and loan to value ratios. We classify the fair value of our non-recourse property debt and construction loans debt within Level 2 of the GAAP fair value hierarchy based on the significance of certain of the unobservable inputs used to estimate its fair value.

The carrying amount of the Notes Payable to AIR approximated their fair value at both March 31, 2022 and December 31, 2021.

The following table summarizes the carrying value and fair value of our non-recourse property debt and construction loans (in thousands):

 

 

As of March 31, 2022

 

 

December 31, 2021

 

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

Non-recourse property debt

 

$

516,142

 

 

$

507,416

 

 

$

484,883

 

 

$

498,960

 

Construction loans

 

$

184,788

 

 

$

184,788

 

 

$

168,376

 

 

$

168,376