Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measures

v3.24.3
Fair Value Measures
 9 Months Ended
Sep. 30, 2024
Fair Value Disclosures [Abstract]  
Fair Value Measures
Note 5 – Fair Value Measures
Items Measured at Fair Value on a Recurring Basis
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis as of the periods indicated below, aggregated by the level in the fair value hierarchy within which those instruments fall (in thousands):
Level 1 Level 2 Level 3
Balance as of September 30, 2024
Derivative liabilities $ —  $ 102  $ —  $ 102 
Level 1 Level 2 Level 3
Balance as of December 31, 2023
Derivative liabilities $ —  $ 264  $ —  $ 264 
Derivative Liabilities – The Company’s derivative financial instruments comprise interest rate collar agreements entered into in order to hedge interest rate volatility with respect to the Company’s borrowings with an aggregate notional amount of $60.0 million as of September 30, 2024 and December 31, 2023 (as described in Note 6 – Debt, Net). The valuation of derivative instruments is determined using 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, as well as observable market-based inputs, including interest rate curves and implied volatilities. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company’s potential nonperformance risk and the performance risk of the counterparties.
Although the Company determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of September 30, 2024 and December 31, 2023, the Company assessed the significance of the impact of the credit valuation
adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of the Company’s derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Items Measured at Fair Value on a Non-Recurring Basis
Certain financial and nonfinancial assets and liabilities are measured at fair value on a non-recurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.
Real Estate and Other Investments – The Company performs quarterly impairment review procedures for real estate investments, right of use assets and its investment in the Arch Street Joint Venture, primarily through continuous monitoring of events and changes in circumstances that could indicate the carrying value of such assets may not be recoverable.
The following table summarizes the Company’s provisions for impairment during the periods indicated below (dollars in thousands). The impairment charges reflect changes in the Company’s future cash flow assumptions for agreed-upon or estimated sales proceeds with respect to real estate assets that were expected to be sold as well as changes to assumptions with regard to management’s intent to sell or lease the real estate assets.
Nine Months Ended September 30,
2024 2023
Number of properties 8  6 
Carrying value of impaired properties $ 62,710  $ 54,803 
Provisions for impairment (25,365) (26,976)
Estimated fair value $ 37,345  $ 27,827 
The Company estimates fair values using Level 2 and Level 3 inputs and uses a combined income and market approach, specifically using discounted cash flow analysis and/or recent comparable sales transactions. The evaluation of real estate assets for potential impairment requires the Company’s management to exercise significant judgment and make certain key assumptions, including the following: (1) capitalization rates; (2) discount rates; (3) number of years the property will be held; (4) property operating expenses; and (5) re-leasing assumptions including number of months to re-lease, market rental revenue and required tenant improvements. There are inherent uncertainties in making these estimates such as market conditions and performance and sustainability of the Company’s tenants.
For the Company’s impairment tests for the real estate assets during the nine months ended September 30, 2024, the fair value measurement for seven properties were determined based on the sales price under a definitive agreement and one property was determined by a discount rate of 9.0% and capitalization rate of 8.5%. During the nine months ended September 30, 2024, impairment charges of $22.1 million were recorded for held and used properties and impairment charges of $3.3 million were recorded for one disposed property. No impairment charges were recorded for held for sale properties during the nine months ended September 30, 2024.
For the Company’s impairment tests for the real estate assets during the nine months ended September 30, 2023, the fair value measurement for five properties was determined based on sales prices under definitive agreements and one property was determined by applying an estimated sales price based on market data. During the nine months ended September 30, 2023, impairment charges of $14.0 million were recorded for held and used properties, impairment charges of $8.4 million were recorded for held for sale properties and impairment charges of $4.6 million were recorded for disposed properties.
The following tables present certain of the Company’s assets measured at fair value on a non-recurring basis as of the period indicated below, aggregated by the level in the fair value hierarchy within which those assets fall (in thousands):
Level 1
Level 2 (1)
Level 3 (1)
Balance as of December 31, 2023
Assets of properties held and used $ —  $ —  $ 5,402  $ 5,402 
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(1)The fair value of the level 2 category is derived using negotiated sales prices with third parties and the fair value of the level 3 category is derived using discounted cash flow analysis and management estimates of selling prices.
There were no assets measured at fair value on a non-recurring basis as of September 30, 2024.
Fair Value of Financial Instruments
The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, accounts receivable, notes receivable and accounts payable approximate their carrying value in the accompanying consolidated balance sheets due to their short-term nature. The fair values of the Company’s long-term financial instruments are reported below (in thousands):
Level
Carrying Value at September 30, 2024
Fair Value at September 30, 2024
Carrying Value at December 31, 2023
Fair Value at December 31, 2023
Assets:
Notes receivable 3 $ 2,500  $ 2,500  $ 2,500  $ 2,500 
Liabilities (1):
Mortgages payable 2 $ 355,000  $ 341,241  $ 355,000  $ 334,897 
Credit facility revolver 2 130,000  130,000  116,000  116,000 
Derivative liabilities 2 102  102  264  264 
Total $ 485,102  $ 471,343  $ 471,264  $ 451,161 
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(1)Current and prior period liabilities’ carrying and fair values exclude net deferred financing costs.
Notes Receivable – The carrying value of the Company’s long-term promissory note receivable was determined to be at fair value based on management’s estimates of credit spreads and observable market interest rates, representing level 3 on the fair value hierarchy.
Debt – The fair value is estimated by an independent third party using a discounted cash flow analysis, based on management’s estimates of credit spreads and observable market interest rates, representing level 2 on the fair value hierarchy.