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3. Fair Value Measurements
For a description on how we estimate fair value, see Note 3 to the consolidated financial statements in our 2011 Annual Report on Form 10-K.
Recurring Fair Value Measurements
The table below sets forth our financial assets and liabilities that are accounted for at fair value on a recurring basis as of March 31, 2012 and the hierarchy level of inputs used in measuring their respective fair values under applicable accounting standards (in thousands):
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Quoted Prices in
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Active Markets for
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Significant Other
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Significant
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Identical Assets
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Observable Inputs
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Unobservable Inputs
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Description
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(Level 1)
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(Level 2)
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(Level 3)
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Total
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Assets:
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Marketable securities in deferred compensation plan (1)
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Mutual funds
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$
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6,121
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$
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—
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$
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—
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$
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6,121
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Common stocks
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414
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—
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—
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414
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Other
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238
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—
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—
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238
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Common stock (1)
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454
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—
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—
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454
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Warrants to purchase common shares in KEYW (2)
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—
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133
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—
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133
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Assets
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$
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7,227
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$
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133
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$
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—
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$
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7,360
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Liabilities:
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Deferred compensation plan liability (3)
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$
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6,773
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$
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—
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$
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—
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$
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6,773
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Interest rate derivatives
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—
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2,673
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—
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2,673
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Liabilities
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$
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6,773
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$
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2,673
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$
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—
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$
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9,446
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(1) Included in the line entitled “restricted cash and marketable securities” on our consolidated balance sheet.
(2) Included in the line entitled “prepaid expenses and other assets” on our consolidated balance sheet.
(3) Included in the line entitled “other liabilities” on our consolidated balance sheet.
At December 31, 2011, we owned 1.9 million shares, or approximately 7%, of the common stock of The KEYW Holding Corporation (“KEYW”). During the three months ended March 31, 2012, we completed the sale of all of these shares for $14.0 million. At March 31, 2012 and December 31, 2011, we owned warrants to purchase 50,000 additional shares of KEYW common stock at an exercise price of $9.25 per share.
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 exchangeable senior notes based on quoted market prices 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 of 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.
Nonrecurring Fair Value Measurements
We assess each of our operating properties for impairment quarterly using cash flow projections and estimated fair values that we derive for each of the properties. We update the leasing and other assumptions used in these projections regularly, paying particular attention to properties that have experienced chronic vacancy or face significant market challenges. We review our plans and intentions for our development projects and land parcels quarterly. Each quarter, we also review the reasonableness of changes in our estimated operating property fair values from amounts estimated in the prior quarter. If events or changes in circumstances indicate that the carrying values of certain operating properties, properties in development or land held for future development may be impaired, we perform a recovery analysis for such properties. For long-lived assets to be held and used, we analyze recoverability based on the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the assets over, in most cases, a ten-year holding period. If we believe there is a significant possibility that we might dispose of the assets earlier, we analyze recoverability using a probability weighted analysis of the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the assets over the various possible holding periods. If the recovery analysis indicates that the carrying value of a tested property is not recoverable from estimated future cash flows, it is written down to its estimated fair value and an impairment loss is recognized. If and when our plans change, we revise our recoverability analyses to use the cash flows expected from the operations and eventual disposition of each asset using holding periods that are consistent with our revised plans.
Property fair values are determined based on contract prices, indicative bids, discounted cash flow analyses or yield analyses. The estimated cash flows used are based on our plans for the property and our views of market and economic conditions. The estimates consider items such as current and future rental rates, occupancies for the tested property and comparable properties, estimated operating and capital expenditures and recent sales data for comparable properties; most of these items are influenced by market data obtained from third party sources such as CoStar Group and real estate leasing and brokerage firms and our direct experience with the properties and their markets.
We recognized impairment losses on certain properties and other assets associated with such properties during the three months ended March 31, 2012. Accordingly, certain properties and related assets were adjusted to fair value. The table below sets forth the fair value hierarchy of the valuation techniques used by us in determining such fair values (dollars in thousands):
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Quoted Prices in
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Active Markets for
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Significant Other
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Significant
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Impairment
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Identical Assets
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Observable Inputs
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Unobservable Inputs
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Losses
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Description
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(Level 1)
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(Level 2)
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(Level 3)
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Total
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Recognized
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Assets (1):
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Properties, net
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$
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—
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$
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—
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$
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92,176
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$
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92,176
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$
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5,479
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(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:
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Fair value
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Range
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on measurement
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Valuation
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Unobservable
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(Weighted
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Description
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date
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Technique
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Input
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Average)
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Properties on which impairment losses were recognized
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$
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92,176
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Bid for properties indicative of value
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Indicative bid (1)
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(1)
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Contract of sale
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Contract price (1)
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(1)
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Discounted cash flow
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Discount rate
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11.0% (2)
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Terminal capitalization rate
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9.0% (2)
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Market rent growth rate
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3.0% (2)
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Expense growth rate
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3.0% (2)
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Yield Analysis
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Yield
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12% (2)
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Market rent rate
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8.5 (2)
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Leasing costs
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$20.00 per square foot (2)
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(1) These fair value measurements were developed from third party sources, subject to our corroboration for reasonableness.
(2) Only one level applied to this unobservable input.
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