Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.7.0.1
Fair Value Measurements
3 Months Ended
Mar. 31, 2017
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements

Recurring Fair Value Measurements

COPT has a non-qualified elective deferred compensation plan for Trustees and certain members of our management team that permits participants to defer up to 100% of their compensation on a pre-tax basis and receive a tax-deferred return on such deferrals. 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 COPT’s consolidated balance sheet using quoted market prices, as are other marketable securities that we hold. The balance of the plan, which was fully funded, totaled $4.2 million as of March 31, 2017, and is included in the accompanying COPT consolidated balance sheets in the line entitled restricted cash and 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 COPT’s consolidated balance sheets. The assets of the plan and other marketable securities that we hold are classified in Level 1 of the fair value hierarchy. The liability associated with the plan 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 March 31, 2017, 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.  As discussed in Note 6, we estimated the fair values of our investing receivables 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 8, 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.  Settlement at such fair value amounts may not be possible and may not be a prudent management decision.
 
For additional fair value information, please refer to Note 6 for investing receivables, Note 8 for debt and Note 9 for interest rate derivatives. 

COPT and Subsidiaries

The table below sets forth financial assets and liabilities of COPT and its subsidiaries that are accounted for at fair value on a recurring basis as of March 31, 2017 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)
 
Total
Assets:
 
 

 
 

 
 

 
 

Marketable securities in deferred compensation plan (1)
 
 

 
 

 
 

 
 

Mutual funds
 
$
4,075

 
$

 
$

 
$
4,075

Other
 
76

 

 

 
76

Interest rate derivatives (2)
 

 
1,183

 

 
1,183

Total assets
 
$
4,151

 
$
1,183

 
$

 
$
5,334

Liabilities:
 
 

 
 

 
 

 
 

Deferred compensation plan liability (3)
 
$

 
$
4,151

 
$

 
$
4,151

Interest rate derivatives (3)
 

 
735

 

 
735

Total liabilities
 
$

 
$
4,886

 
$

 
$
4,886


(1) Included in the line entitled “restricted cash and marketable securities” on COPT’s consolidated balance sheet.
(2) Included in the line entitled “prepaid expenses and other assets” on COPTs consolidated balance sheet.
(3) Included in the line entitled “other liabilities” on COPT’s consolidated balance sheet.

COPLP and Subsidiaries

The table below sets forth financial assets and liabilities of COPLP and its subsidiaries that are accounted for at fair value on a recurring basis as of March 31, 2017 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)
 
Total
Assets:
 
 

 
 

 
 

 
 

Interest rate derivatives (1)
 
$

 
$
1,183

 
$

 
$
1,183

Liabilities:
 
 

 
 

 
 

 
 

Interest rate derivatives (2)
 
$

 
$
735

 
$

 
$
735


(1) Included in the line entitled “prepaid expenses and other assets” on COPLPs consolidated balance sheet.
(2) Included in the line entitled “other liabilities” on COPLPs consolidated balance sheet.

Nonrecurring Fair Value Measurements

As part of our closing process for the first quarter of 2017, we conducted our quarterly review of our portfolio for indicators of impairment and found there to be no impairment losses for the quarter.

Changes in the expected future cash flows due to changes in our plans for specific properties (especially our expected holding period) could result in the recognition of impairment losses. In addition, because properties held for sale are carried at the lower of carrying value or estimated fair values less costs to sell, declines in their estimated fair values due to market conditions and other factors could result in the recognition of impairment losses.

The table below sets forth the fair value hierarchy of the valuation technique we used to determine nonrecurring fair value measurements of properties held for sale as of March 31, 2017 (dollars in thousands):
 
 
Fair Values as of March 31, 2017
 
 
 
Quoted Prices in
 
 
 
Significant
 
 
 
 
 
Active Markets for
 
Significant Other
 
Unobservable
 
 
 
 
 
Identical Assets
 
Observable Inputs
 
Inputs
 
 
 
Description
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
Assets:
 
 

 
 

 
 

 
 

 
Assets held for sale, net
 
$

 
$

 
$
40,086

 
$
40,086

 


The table below sets forth quantitative information about significant unobservable inputs used for the Level 3 fair value measurements reported above as of March 31, 2017 (dollars in thousands):
Valuation Technique
 
Fair Values on 
Measurement Date
 
 Unobservable Input
 
Range (Weighted Average)
Discounted cash flow
 
$
37,604

 
Discount rate
 
9.3% - 11.3% (10.1%)
 
 
 
 
Terminal capitalization rate
 
8.3% - 11.4% (8.6%)
Yield analyses
 
$
2,482

 
Investor yield requirement
 
9.0% (1)

(1) Only one fair value applied for this unobservable input.