Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.8
Fair Value Measurements
 6 Months Ended
Jun. 30, 2013
Fair Value Disclosures [Abstract]  
Fair value measurements
Fair Value Measurements

For a description on how we estimate fair value, see Note 3 to the consolidated financial statements in COPT’s 2012 Annual Report on Form 10-K and Note 3 to the COPLP consolidated financial statements in our Current Report on Form 8-K dated July 25, 2013.
 
Recurring Fair Value Measurements
 
Our partner in a real estate joint venture has the right to require us to acquire its interest at fair value beginning in March 2020; accordingly, we classify the fair value of our partner’s interest as a redeemable noncontrolling interest in the mezzanine section of our consolidated balance sheet. In determining the fair value of our partner’s interest as of June 30, 2013, we used discount rates ranging from 10.0% to 20.0% (15.7% weighted average), which factored in risk appropriate to the level of future property development expected to be undertaken by the joint venture; a significant increase (decrease) in the discount rate used in determining the fair value would result in a significantly (lower) higher fair value. Given our reliance on the unobservable inputs, the valuations are classified in Level 3 of the fair value hierarchy.

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, other assets (excluding mortgage loans receivable) and accounts payable and accrued expenses are reasonable estimates of their fair values because of the short maturities of these instruments.  We estimated the fair values of our mortgage loans receivable as discussed in Note 6 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 7 to the consolidated financial statements, we estimated the fair value of our unsecured senior notes and exchangeable 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 at 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 mortgage loans receivable, Note 7 for debt and Note 8 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 June 30, 2013 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
 
$
6,649

 
$
—

 
$
—

 
$
6,649

Common stocks
 
216

 
—

 
—

 
216

Other
 
211

 
—

 
—

 
211

Common stock (1)
 
1,825

 
—

 
—

 
1,825

Interest rate derivatives (2)
 
—

 
6,963

 
—

 
6,963

Warrants to purchase common stock (2)
 
—

 
299

 
—

 
299

Assets
 
$
8,901

 
$
7,262

 
$
—

 
$
16,163

Liabilities:
 
 

 
 

 
 

 
 

Deferred compensation plan liability (3)
 
$
7,076

 
$
—

 
$
—

 
$
7,076

Interest rate derivatives
 
—

 
3,556

 
—

 
3,556

Liabilities
 
$
7,076

 
$
3,556

 
$
—

 
$
10,632

Redeemable noncontrolling interest
 
$
—

 
$
—

 
$
15,571

 
$
15,571


(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 COPT’s 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 June 30, 2013 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:
 
 

 
 

 
 

 
 

Common stock (1)
 
$
1,825

 
$
—

 
$
—

 
$
1,825

Interest rate derivatives (2)
 
—

 
6,963

 
—

 
6,963

Warrants to purchase common stock (2)
 
—

 
299

 
—

 
299

Assets
 
$
1,825

 
$
7,262

 
$
—

 
$
9,087

Liabilities:
 
 

 
 

 
 

 
 

Interest rate derivatives
 
$
—

 
$
3,556

 
$
—

 
$
3,556

Redeemable noncontrolling interest
 
$
—

 
$
—

 
$
15,571

 
$
15,571


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

Nonrecurring Fair Value Measurements
 
Six Months Ended June 30, 2013

During the six months ended June 30, 2013, we recognized impairment losses on operating properties in the current and prior period primarily in connection with dispositions completed or expected to occur in connection with the Strategic Reallocation Plan to dispose of properties and land that are no longer aligned with our strategy. The table below sets forth the fair value hierarchy of the valuation technique used by us in determining the fair value of the properties (dollars in thousands):
 
 
Quoted Prices in
 
 
 
Significant
 
 
 
Impairment Losses Recognized
 
 
Active Markets for
 
Significant Other
 
Unobservable
 
 
 
Three Months
 
Six Months
 
 
Identical Assets
 
Observable Inputs
 
Inputs
 
 
 
Ended
 
Ended
Description
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
June 30, 2013
 
June 30, 2013
Assets (1):
 
 

 
 

 
 

 
 

 
 
 
 
Properties, net
 
$
—

 
$
—

 
$
113,144

 
$
113,144

 
$
7,195

 
$
9,052


(1) Reflects balance sheet classifications of assets at time of fair value measurement, excluding the effect of held for sale classifications.

The table below sets forth quantitative information about significant unobservable inputs used for the Level 3 fair value measurements reported above (dollars in thousands):
Description
 
Fair Value on 
Measurement Date
 
Valuation Technique
 
 Unobservable Input
 
Range (Weighted Average)
Property on which impairment loss was recognized
 
$
113,144

 
Bids for property indicative of value
 
Indicative bids (1)
 
(1)

(1) This fair value measurement was developed by a third party source, subject to our corroboration for reasonableness.

Six Months Ended June 30, 2012

During the six months ended June 30, 2012, we recognized non-cash impairment losses of $7.7 million for the amount by which the carrying values of certain properties exceeded their estimated fair values. The table below sets forth the fair value hierarchy of the valuation techniques used by us in determining such fair values (dollars in thousands):
 
 
Quoted Prices in
 
 
 
Significant
 
 
 
Impairment Losses Recognized (1)
 
 
Active Markets for
 
Significant Other
 
Unobservable
 
 
 
Three Months
 
Six Months
 
 
Identical Assets
 
Observable Inputs
 
Inputs
 
 
 
Ended
 
Ended
Description
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
June 30, 2012
 
June 30, 2012
Assets (2):
 
 

 
 

 
 

 
 

 
 

 
 
Properties, net
 
$
—

 
$
—

 
$
202,250

 
$
202,250

 
$
2,214

 
7,693


(1) Represents impairment losses, excluding exit costs incurred of $105,000 for the three months ended June 30, 2012 and $1.2 million for the six months ended June 30, 2012.
(2) Reflects balance sheet classifications of assets at time of fair value measurement, excluding the effect of held for sale classifications.

The table below sets forth quantitative information about significant unobservable inputs used for the Level 3 fair value measurements reported above (dollars in thousands):
Description
 
Fair Value on 
Measurement Date
 
Valuation Technique
 
 Unobservable Input
 
Range (Weighted Average)
Properties on which impairment losses were recognized
 
$
202,250

 
Bid for properties indicative of value
 
Indicative bid (1)
 
(1)
 
 
 
 
Contract of sale
 
Contract price (1)
 
(1)
 
 
 
 
Discounted cash flow
 
Discount rate
 
11.0% (2)
 
 
 
 
 
 
Terminal capitalization rate
 
9.0% (2)
 
 
 
 
 
 
Market rent growth rate
 
3.0% (2)
 
 
 
 
 
 
Expense growth rate
 
3.0% (2)
 
 
 
 
Yield Analysis
 
Yield
 
12% (2)
 
 
 
 
 
 
Market rent rate
 
$8.50 (2)
 
 
 
 
 
 
Leasing costs
 
$20.00 per square foot (2)
(1) These fair value measurements were developed by third party sources, subject to our corroboration for reasonableness.
(2) Only one value applied for this unobservable input.