ofc-20210930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended			September 30, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from						to

Commission file number 1-14023

CORPORATE OFFICE PROPERTIES TRUST

(Exact name of registrant as specified in its charter)


Maryland						23-2947217
(State or other jurisdiction of						(IRS Employer
incorporation or organization)						Identification No.)


6711 Columbia Gateway Drive, Suite 300, Columbia, MD			21046
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code: (443) 285-5400

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Shares of beneficial interest, $0.01 par value	OFC	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

As of October 22, 2021, 112,324,851 of Corporate Office Properties Trust’s Common Shares of Beneficial Interest, $0.01 par value, were issued and outstanding.

TABLE OF CONTENTS

FORM 10-Q


		PAGE
PART I: FINANCIAL INFORMATION

Item 1:	Financial Statements
Consolidated Financial Statements
	Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 (unaudited)	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)	5
	Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (unaudited)	8






Notes to Consolidated Financial Statements (unaudited)		10
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4:	Controls and Procedures	45

PART II: OTHER INFORMATION

Item 1:	Legal Proceedings	45
Item 1A:	Risk Factors	46
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3:	Defaults Upon Senior Securities	46
Item 4:	Mine Safety Disclosures	46
Item 5:	Other Information	46
Item 6:	Exhibits	47

SIGNATURES		48

PART I: FINANCIAL INFORMATION

ITEM 1. Financial Statements

Corporate Office Properties Trust and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)

(unaudited)


	September 30, 2021		December 31, 2020
Assets
Properties, net:
Operating properties, net	$	3,227,797	$	3,115,280
Projects in development or held for future development	379,325		447,269
Total properties, net	3,607,122		3,562,549
Property - operating right-of-use assets	38,854		40,570
Property - finance right-of-use assets	40,077		40,425
Assets held for sale, net	2,821		—
Cash and cash equivalents	14,570		18,369
Investment in unconsolidated real estate joint ventures	40,304		29,303
Accounts receivable, net	33,110		41,637
Deferred rent receivable	103,062		92,876
Intangible assets on real estate acquisitions, net	15,788		19,344
Deferred leasing costs (net of accumulated amortization of $31,975 and $30,375, respectively)	62,269		58,613
Investing receivables (net of allowance for credit losses of $1,415 and $2,851, respectively)	75,947		68,754


Prepaid expenses and other assets, net	117,214		104,583
Total assets	$	4,151,138	$	4,077,023
Liabilities and equity
Liabilities:
Debt, net	$	2,159,732	$	2,086,918
Accounts payable and accrued expenses	176,636		142,717
Rents received in advance and security deposits	32,092		33,425
Dividends and distributions payable	31,306		31,231
Deferred revenue associated with operating leases	8,704		10,832
Property - operating lease liabilities	29,630		30,746

Interest rate derivatives	5,562		9,522
Other liabilities	10,691		12,490
Total liabilities	2,454,353		2,357,881
Commitments and contingencies (Note 18)
Redeemable noncontrolling interests	26,006		25,430
Equity:
Corporate Office Properties Trust’s shareholders’ equity:
Common Shares of beneficial interest ($0.01 par value; 150,000,000 shares authorized; shares issued and outstanding of 112,325,411 at September 30, 2021 and 112,181,759 at December 31, 2020)	1,123		1,122
Additional paid-in capital	2,480,412		2,478,906
Cumulative distributions in excess of net income	(839,676)		(809,836)
Accumulated other comprehensive loss	(5,347)		(9,157)
Total Corporate Office Properties Trust’s shareholders’ equity	1,636,512		1,661,035
Noncontrolling interests in subsidiaries:
Common units in Corporate Office Properties, L.P. (“COPLP”)	21,568		20,465

Other consolidated entities	12,699		12,212
Noncontrolling interests in subsidiaries	34,267		32,677
Total equity	1,670,779		1,693,712
Total liabilities, redeemable noncontrolling interests and equity	$	4,151,138	$	4,077,023

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
Revenues
Lease revenue	$	145,749	$	133,875	$	434,031	$	397,034
Other property revenue	841		568		2,146		2,063
Construction contract and other service revenues	28,046		20,323		64,592		46,240
Total revenues	174,636		154,766		500,769		445,337
Operating expenses
Property operating expenses	57,190		51,552		168,780		151,755
Depreciation and amortization associated with real estate operations	36,611		35,332		111,487		101,540
Construction contract and other service expenses	27,089		19,220		61,964		44,052
Impairment losses	—		1,530		—		1,530
General, administrative and leasing expenses	9,342		7,467		26,970		23,111
Business development expenses and land carry costs	1,093		1,094		3,559		3,474
Total operating expenses	131,325		116,195		372,760		325,462
Interest expense	(15,720)		(17,152)		(49,181)		(50,789)
Interest and other income	1,818		1,746		5,911		5,233
Credit loss recoveries	326		1,465		1,040		161
Gain on sales of real estate	(32)		—		39,711		5
Loss on early extinguishment of debt	(1,159)		(3,237)		(59,553)		(3,237)
Loss on interest rate derivatives	—		(53,196)		—		(53,196)
Income (loss) before equity in income of unconsolidated entities and income taxes	28,544		(31,803)		65,937		18,052
Equity in income of unconsolidated entities	297		477		779		1,372
Income tax expense	(47)		(16)		(103)		(95)
Net income (loss)	28,794		(31,342)		66,613		19,329
Net (income) loss attributable to noncontrolling interests:
Common units in COPLP	(357)		386		(831)		(185)
Preferred units in COPLP	—		(77)		—		(231)
Other consolidated entities	(1,336)		(812)		(2,949)		(3,207)



Net income (loss) attributable to COPT common shareholders	$	27,101	$	(31,845)	$	62,833	$	15,706

Earnings per common share: (1)
Net income (loss) attributable to COPT common shareholders - basic	$	0.24	$	(0.29)	$	0.56	$	0.14
Net income (loss) attributable to COPT common shareholders - diluted	$	0.24	$	(0.29)	$	0.56	$	0.14

(1) Basic and diluted earnings per common share are calculated based on amounts attributable to common shareholders of Corporate Office Properties Trust.

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
Net income (loss)	$	28,794	$	(31,342)	$	66,613	$	19,329
Other comprehensive income:
Unrealized (loss) income on interest rate derivatives	(118)		1,428		426		(39,592)
Reclassification adjustments on interest rate derivatives recognized in interest expense	1,226		1,342		3,604		2,408
Reclassification adjustments on interest rate derivatives recognized in loss on interest rate derivatives	—		51,865		—		51,865

Total other comprehensive income	1,108		54,635		4,030		14,681
Comprehensive income	29,902		23,293		70,643		34,010
Comprehensive income attributable to noncontrolling interests	(1,733)		(1,173)		(4,000)		(3,408)
Comprehensive income attributable to COPT	$	28,169	$	22,120	$	66,643	$	30,602

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Equity

(Dollars in thousands)

(unaudited)


	Common Shares		Additional Paid-in Capital		Cumulative Distributions in Excess of Net Income		Accumulated Other Comprehensive Loss		Noncontrolling Interests		Total
For the Three Months Ended September 30, 2020
Balance at June 30, 2020 (112,183,192 common shares outstanding)	$	1,122	$	2,477,977	$	(797,959)	$	(64,513)	$	40,297	$	1,656,924




Share-based compensation (7,504 shares redeemed, net of issuances)	—		1,223		—		—		561		1,784
Redemption of vested equity awards	—		(57)		—		—		—		(57)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		552		—		—		(552)		—
Comprehensive income	—		—		(31,845)		53,965		533		22,653
Dividends	—		—		(30,843)		—		—		(30,843)
Distributions to owners of common and preferred units in COPLP	—		—		—		—		(444)		(444)

Distributions to noncontrolling interests in other consolidated entities	—		—		—		—		(7)		(7)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—		(374)		—		—		—		(374)

Balance at September 30, 2020 (112,175,688 common shares outstanding)	$	1,122	$	2,479,321	$	(860,647)	$	(10,548)	$	40,388	$	1,649,636

For the Three Months Ended September 30, 2021
Balance at June 30, 2021 (112,336,070 common shares outstanding)	$	1,123	$	2,478,416	$	(835,894)	$	(6,415)	$	34,082	$	1,671,312




Redemption of common units	—		—		—		—		(56)		(56)
Share-based compensation (10,659 shares redeemed, net of issuances)	—		1,064		—		—		1,098		2,162
Redemption of vested equity awards	—		(64)		—		—		—		(64)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		1,051		—		—		(1,051)		—
Comprehensive income	—		—		27,101		1,068		600		28,769
Dividends	—		—		(30,883)		—		—		(30,883)
Distributions to owners of common units in COPLP	—		—		—		—		(398)		(398)

Distributions to noncontrolling interests in other consolidated entities	—		—		—		—		(8)		(8)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—		(55)		—		—		—		(55)

Balance at September 30, 2021 (112,325,411 common shares outstanding)	$	1,123	$	2,480,412	$	(839,676)	$	(5,347)	$	34,267	$	1,670,779

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Equity

(Dollars in thousands)

(unaudited)


	Common Shares		Additional Paid-in Capital		Cumulative Distributions in Excess of Net Income		Accumulated Other Comprehensive Loss		Noncontrolling Interests		Total
For the Nine Months Ended September 30, 2020
Balance at December 31, 2019 (112,068,705 common shares outstanding)	$	1,121	$	2,481,558	$	(778,275)	$	(25,444)	$	40,285	$	1,719,245
Cumulative effect of accounting change for adoption of credit loss guidance	—		—		(5,541)		—		—		(5,541)
Balance at December 31, 2019, as adjusted	1,121		2,481,558		(783,816)		(25,444)		40,285		1,713,704

Conversion of common units to common shares (12,009 shares)	—		182		—		—		(182)		—



Share-based compensation (94,974 shares issued, net of redemptions)	1		3,394		—		—		1,335		4,730
Redemption of vested equity awards	—		(1,629)		—		—		—		(1,629)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		527		—		—		(527)		—
Comprehensive income	—		—		15,706		14,896		693		31,295
Dividends	—		—		(92,537)		—		—		(92,537)
Distributions to owners of common and preferred units in COPLP	—		—		—		—		(1,306)		(1,306)
Contributions from noncontrolling interests in other consolidated entities	—		—		—		—		112		112
Distributions to noncontrolling interests in other consolidated entities	—		—		—		—		(22)		(22)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—		(4,711)		—		—		—		(4,711)

Balance at September 30, 2020 (112,175,688 common shares outstanding)	$	1,122	$	2,479,321	$	(860,647)	$	(10,548)	$	40,388	$	1,649,636

For the Nine Months Ended September 30, 2021
Balance at December 31, 2020 (112,181,759 common shares outstanding)	$	1,122	$	2,478,906	$	(809,836)	$	(9,157)	$	32,677	$	1,693,712


Conversion of common units to common shares (8,054 shares)	—		121		—		—		(121)		—
Redemption of common units	—		—		—		—		(297)		(297)


Share-based compensation (135,598 shares issued, net of redemptions)	1		3,239		—		—		3,082		6,322
Redemption of vested equity awards	—		(2,422)		—		—		—		(2,422)
Adjustments to noncontrolling interests resulting from changes in ownership of COPLP	—		1,245		—		—		(1,245)		—
Comprehensive income	—		—		62,833		3,810		1,714		68,357
Dividends	—		—		(92,673)		—		—		(92,673)
Distributions to owners of common units in COPLP	—		—		—		—		(1,196)		(1,196)

Distributions to noncontrolling interests in other consolidated entities	—		—		—		—		(23)		(23)
Adjustment to arrive at fair value of redeemable noncontrolling interests	—		(677)		—		—		—		(677)
Other	—		—		—		—		(324)		(324)

Balance at September 30, 2021 (112,325,411 common shares outstanding)	$	1,123	$	2,480,412	$	(839,676)	$	(5,347)	$	34,267	$	1,670,779

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	For the Nine Months Ended September 30,
	2021		2020
Cash flows from operating activities
Revenues from real estate operations received	$	427,448	$	394,094
Construction contract and other service revenues received	68,780		53,911
Property operating expenses paid	(168,009)		(159,007)
Construction contract and other service expenses paid	(50,275)		(45,686)
General, administrative, leasing, business development and land carry costs paid	(22,367)		(24,408)
Interest expense paid	(46,621)		(49,693)
Lease incentives paid	(8,694)		(12,634)





Other	(359)		2,464
Net cash provided by operating activities	199,903		159,041
Cash flows from investing activities
Development and redevelopment of properties	(176,554)		(284,416)

Tenant improvements on operating properties	(15,149)		(23,377)
Other capital improvements on operating properties	(19,256)		(24,797)


Proceeds from sale of properties	114,050		—
Non-operating distributions from unconsolidated real estate joint venture	872		2,287

Leasing costs paid	(14,929)		(12,455)


Settlement of interest rate derivatives	—		(53,130)
Other	(1,026)		(321)
Net cash used in investing activities	(111,992)		(396,209)
Cash flows from financing activities
Proceeds from debt
Revolving Credit Facility	456,000		409,000
Unsecured senior notes	987,210		395,264
Other debt proceeds	4,630		199,088
Repayments of debt
Revolving Credit Facility	(589,000)		(529,000)
Unsecured senior notes	(600,000)		(122,948)

Scheduled principal amortization	(2,911)		(3,077)
Other debt repayments	(188,960)		—
Deferred financing costs paid	(2,662)		(2,161)



Payments in connection with early extinguishment of debt	(55,720)		(3,037)
Common share dividends paid	(92,632)		(92,512)



Distributions paid to redeemable noncontrolling interests	(1,687)		(13,515)
Redemption of vested equity awards	(2,422)		(1,629)
Other	(3,645)		(1,760)
Net cash (used in) provided by financing activities	(91,799)		233,713
Net decrease in cash and cash equivalents and restricted cash	(3,888)		(3,455)
Cash and cash equivalents and restricted cash
Beginning of period	22,033		18,130
End of period	$	18,145	$	14,675

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(in thousands)

(unaudited)


	For the Nine Months Ended September 30,
	2021		2020
Reconciliation of net income to net cash provided by operating activities:
Net income	$	66,613	$	19,329
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and other amortization	113,676		102,864
Impairment losses	—		1,530


Amortization of deferred financing costs and net debt discounts	3,969		3,104
Increase in deferred rent receivable	(13,515)		(3,560)
Gain on sales of real estate	(39,711)		(5)

Share-based compensation	5,960		4,753
Loss on early extinguishment of debt	59,553		3,237
Loss on interest rate derivatives	—		53,196
Other	(3,708)		(4,184)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable	6,269		(744)
Increase in prepaid expenses and other assets, net	(13,120)		(13,164)
Increase (decrease) in accounts payable, accrued expenses and other liabilities	15,250		(3,971)
Decrease in rents received in advance and security deposits	(1,333)		(3,344)

Net cash provided by operating activities	$	199,903	$	159,041
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents at beginning of period	$	18,369	$	14,733
Restricted cash at beginning of period	3,664		3,397
Cash and cash equivalents and restricted cash at beginning of period	$	22,033	$	18,130

Cash and cash equivalents at end of period	$	14,570	$	11,458
Restricted cash at end of period	3,575		3,217
Cash and cash equivalents and restricted cash at end of period	$	18,145	$	14,675
Supplemental schedule of non-cash investing and financing activities:
Increase (decrease) in accrued capital improvements, leasing and other investing activity costs	$	17,590	$	(195)


Recognition of operating right-of-use assets and related lease liabilities	$	328	$	8,955




Investment in unconsolidated real estate joint venture retained in property disposition	$	11,842	$	—






Increase (decrease) in fair value of derivatives applied to accumulated other comprehensive loss and noncontrolling interests	$	4,030	$	(37,183)

Dividends/distributions payable	$	31,306	$	31,307

Decrease in noncontrolling interests and increase in shareholders’ equity in connection with the conversion of common units into common shares	$	121	$	182
Adjustments to noncontrolling interests resulting from changes in COPLP ownership	$	(1,245)	$	(527)
Increase in redeemable noncontrolling interests and decrease in equity to carry redeemable noncontrolling interests at fair value	$	677	$	4,711

See accompanying notes to consolidated financial statements.

Corporate Office Properties Trust and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

1. Organization

Corporate Office Properties Trust (“COPT”) and subsidiaries (collectively, the “Company”, “we” or “us”) is a fully-integrated and self-managed real estate investment trust (“REIT”). We own, manage, lease, develop and selectively acquire office and data center properties. The majority of our portfolio is in locations that support the United States Government (“USG”) and its contractors, most of whom are engaged in national security, defense and information technology (“IT”) related activities servicing what we believe are growing, durable, priority missions (“Defense/IT Locations”). We also own a portfolio of office properties located in select urban/urban-like submarkets in the Greater Washington, DC/Baltimore region with durable Class-A office fundamentals and characteristics (“Regional Office”). As of September 30, 2021, our properties included the following:

•186 properties totaling 21.7 million square feet comprised of 16.9 million square feet in 160 office properties and 4.7 million square feet in 26 single-tenant data center shell properties (“data center shells”). We owned 19 of these data center shells through unconsolidated real estate joint ventures;

•a wholesale data center with a capacity of 19.25 megawatts;

•13 properties under development (10 office properties and three data center shells), including three partially-operational properties, that we estimate will total approximately 1.8 million square feet upon completion; and

•approximately 720 acres of land controlled for future development that we believe could be developed into approximately 8.9 million square feet and 43 acres of other land.

We conduct almost all of our operations and own almost all of our assets through our operating partnership, Corporate Office Properties, L.P. (“COPLP”) and subsidiaries (collectively, the “Operating Partnership”), of which COPT is the sole general partner. COPLP owns real estate directly and through subsidiary partnerships and limited liability companies (“LLCs”). In addition to owning real estate, COPLP also owns subsidiaries that provide real estate services such as property management, development and construction services primarily for our properties but also for third parties. Some of these services are performed by a taxable REIT subsidiary (“TRS”).

Equity interests in COPLP are in the form of common and preferred units. As of September 30, 2021, COPT owned 98.3% of the outstanding COPLP common units (“common units”) and there were no preferred units outstanding. Common units not owned by COPT carry certain redemption rights. The number of common units owned by COPT is equivalent to the number of outstanding common shares of beneficial interest (“common shares”) of COPT, and the entitlement of common units to quarterly distributions and payments in liquidation is substantially the same as that of COPT common shareholders.

COPT’s common shares are publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “OFC”.

2. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of COPT, the Operating Partnership, their subsidiaries and other entities in which COPT has a majority voting interest and control. We also consolidate certain entities when control of such entities can be achieved through means other than voting rights (“variable interest entities” or “VIEs”) if we are deemed to be the primary beneficiary of such entities. We eliminate all intercompany balances and transactions in consolidation.

We use the equity method of accounting when we own an interest in an entity and can exert significant influence over but cannot control the entity’s operations. We discontinue equity method accounting if our investment in an entity (and net advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further financial support for the entity.

When we own an equity investment in an entity and cannot exert significant influence over its operations, we measure the investment at fair value, with changes recognized through net income. For an investment without a readily determinable fair value, we measure the investment at cost, less any impairments, plus or minus changes resulting from observable price changes for an identical or similar investment of the same issuer.

These interim financial statements should be read together with the consolidated financial statements and notes thereto as

of and for the year ended December 31, 2020 included in the Company’s and Operating Partnership’s 2020 Annual Report on Form 10-K. The unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly state our financial position and results of operations. All adjustments are of a normal recurring nature. The consolidated financial statements have been prepared using the accounting policies described in the Company’s and Operating Partnership’s 2020 Annual Report on Form 10-K as updated for our adoption of recent accounting pronouncements discussed below.

Reclassifications

We reclassified certain amounts from the prior period to conform to the current period presentation of our consolidated financial statements with no effect on previously reported net income or equity.

Recent Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board issued guidance containing practical expedients for reference rate reform related activities pertaining to debt, leases, derivatives and other contracts. The guidance is optional and may be elected over time as reference rate reform activities occur. In 2020, we elected to apply an expedient to treat any changes in loans resulting from reference rate reform as debt modifications (as opposed to extinguishments) and hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of the hedge accounting expedients preserves the presentation of derivatives consistent with past presentation. We will continue to evaluate the impact of this guidance and may apply other elections as applicable as additional changes in the market occur.

3. Fair Value Measurements

Recurring Fair Value Measurements

We have a non-qualified elective deferred compensation plan for Trustees and certain members of our management team that, prior to December 31, 2019, permitted participants to defer up to 100% of their compensation on a pre-tax basis and receive a tax-deferred return on such deferrals. Effective December 31, 2019, no new investments of deferred compensation were eligible for the plan. The assets held in the plan (comprised primarily of mutual funds and equity securities) and the corresponding liability to the participants are measured at fair value on a recurring basis on our consolidated balance sheets using quoted market prices, as are other marketable securities that we hold. The balance of the plan, which was fully funded and totaled $2.6 million as of September 30, 2021, is included in the line entitled “prepaid expenses and other assets, net” on our consolidated balance sheets along with an insignificant amount of other marketable securities. The offsetting liability associated with the plan is adjusted to fair value at the end of each accounting period based on the fair value of the plan assets and reported in “other liabilities” on our consolidated balance sheets. The assets of the plan are classified in Level 1 of the fair value hierarchy, while the offsetting liability is classified in Level 2 of the fair value hierarchy.

The fair values of our interest rate derivatives are determined using widely accepted valuation techniques, including a 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 market data and implied volatilities in such interest rates. While we determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our interest rate derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default. However, as of September 30, 2021, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivatives and determined that these adjustments are not significant. As a result, we determined that our interest rate derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets (excluding investing receivables) and accounts payable and accrued expenses are reasonable estimates of their fair values because of the short maturities of these instruments. The fair values of our investing receivables, as disclosed in Note 7, were based on the discounted estimated future cash flows of the loans (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans with similar maturities and credit quality, and the estimated cash payments include scheduled principal and interest payments. For our disclosure of debt fair values in Note 9, we estimated the fair value of our unsecured senior notes based on quoted market rates for publicly-traded debt (categorized within Level 2 of the fair value hierarchy) and estimated the fair value of our other debt based on the discounted estimated future cash payments to be made on such debt (categorized within Level 3 of the fair value hierarchy); the discount rates used approximate current market rates for loans, or groups of loans, with similar maturities and credit quality, and the estimated future payments include scheduled

principal and interest payments. Fair value estimates are made as of a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment.

For additional fair value information, refer to Note 7 for investing receivables, Note 9 for debt and Note 10 for interest rate derivatives.

The table below sets forth our financial assets and liabilities accounted for at fair value on a recurring basis as of September 30, 2021 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):

Description

Quoted Prices in
Active Markets for
Identical Assets (Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)