| Fair Value | Fair Value Recurring Fair Values The table below presents a summary of financial assets and financial liabilities carried at fair value on a recurring basis, including financial instruments for which the fair value option was elected, but excluding financial assets under the NAV practical expedient, categorized into the three tier fair value hierarchy that is prioritized based upon the level of transparency in inputs used in the valuation techniques, as follows: Level 1 —Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 —Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in non-active markets, or valuation techniques utilizing inputs that are derived principally from or corroborated by observable data directly or indirectly for substantially the full term of the financial instrument. Level 3 —At least one assumption or input is unobservable and it is significant to the fair value measurement, requiring significant management judgment or estimate. Fair Value Measurement Hierarchy (In thousands) Level 1 Level 2 Level 3 Total September 30, 2021 Assets Marketable equity securities $ 180,112 $ — $ — $ 180,112 AFS debt securities held for disposition — — 37,108 37,108 Other assets—derivative assets — 1,179 — 1,179 Fair Value Option: Loans held for investment — — 112,252 112,252 Loans held for disposition — — 387,664 387,664 Equity method investments held for disposition — — 115,753 115,753 December 31, 2020 Assets Marketable equity securities $ 218,485 $ — $ — $ 218,485 AFS debt securities held for disposition — — 28,576 28,576 Other assets—derivative assets — 99 — 99 Fair Value Option: Loans held for investment — — 36,797 36,797 Loans held for disposition — — 1,258,539 1,258,539 Equity method investments — — 28,540 28,540 Equity method investments held for disposition — — 153,259 153,259 Liabilities Other liabilities — derivative liabilities — 103,772 — 103,772 Other liabilities—settlement liability — — 24,285 24,285 Marketable Equity Securities Marketable equity securities consist of publicly traded equity securities held largely by private open-end funds sponsored and consolidated by the Company, and prior to January 2021, equity investment in a third party mutual fund. The equity securities of the consolidated funds comprise listed stocks primarily in the U.S. and to a lesser extent, in Europe, and predominantly in the digital real estate and telecommunication sectors. These marketable equity securities are valued based upon listed prices in active markets and classified as Level 1 of the fair value hierarchy. Debt Securities The Company's investment in debt securities is composed of available-for-sale ("AFS") N-Star CDO bonds, which are subordinate bonds retained by NRF Holdco from its sponsored collateralized debt obligations ("CDOs"), and CDO bonds originally issued by NRF Holdco that it subsequently repurchased at a discount. These CDOs are collateralized primarily by commercial real estate debt and securities. The following tables summarize the balance of the N-Star CDO bonds. Amortized Cost without Allowance for Credit Loss Allowance for Credit Loss Gross Cumulative Unrealized (in thousands) Gains Losses Fair Value September 30, 2021 $ 55,618 $ (24,882) $ 6,372 $ — $ 37,108 December 31, 2020 46,561 (24,688) 6,703 — 28,576 The N-Star CDO bonds are included in the pending sale of NRF Holdco. There were no sales of N-Star CDO bonds during the nine months ended September 30, 2021 and year ended December 31, 2020. These CDOs have long-dated stated maturities through 2037 and 2041, however, the Company expects the N-Star CDO bonds to have remaining future cash flows up to 2.3 years from September 30, 2021. Fair value of N-Star CDO bonds, classified as Level 3, are determined using an internal price interpolated based upon third party prices of the senior N-Star CDO bonds of the respective CDOs, and applying the Company's knowledge of the underlying collateral and recent trades, if any within the securitizations. Impairment of AFS Debt Securities AFS debt securities are considered to be impaired if their fair value is less than their amortized cost basis. If the Company intends to sell or is more likely than not required to sell the debt security before recovery of its amortized cost, the entire impairment amount is recognized in earnings within other gain (loss) as a write-off of the amortized cost basis of the debt security. If the Company does not intend to sell or is not more likely than not required to sell the debt security before recovery of its amortized cost, the credit component of the loss is recognized in earnings within other gain (loss) as an allowance for credit loss, which may be subject to reversal for subsequent recoveries in fair value. The non-credit loss component is recognized in other comprehensive income or loss ("OCI"). The allowance is charged off against the amortized cost basis of the security if in a subsequent period, the Company intends to or is more likely than not required to sell the security, or if the Company deems the security to be uncollectible. Changes in allowance for credit losses for AFS debt securities are presented below: Nine Months Ended September 30, (In thousands) 2021 2020 Allowance for credit losses Beginning balance $ 24,688 $ — Provision for credit losses 194 23,973 Ending balance $ 24,882 $ 23,973 Credit losses were determined based upon an analysis of the present value of contractual cash flows expected to be collected from the underlying collateral as compared to the amortized cost basis of the security. At September 30, 2021 and December 31, 2020, there were no AFS debt securities in unrealized loss position without allowance for credit loss. Derivatives The Company's derivative instruments generally consist of: (i) foreign currency put options, forward contracts and costless collars to hedge the foreign currency exposure of certain investments in foreign subsidiaries or equity method joint ventures (in EUR and in GBP), with notional amounts and termination dates based upon the anticipated return of capital from these investments; and (ii) interest rate caps to limit the exposure to changes in interest rates on various floating rate debt obligations (indexed primarily to LIBOR and to a lesser extent, EURIBOR and GBP LIBOR). These derivative contracts may be designated as qualifying hedge accounting relationships, specifically as net investment hedges and cash flow hedges, respectively. At September 30, 2021 and December 31, 2020, notional amounts aggregated to the equivalent of $184.9 million and $350.5 million, respectively, for foreign exchange contracts, and the equivalent of $2.8 billion and $4.6 billion, respectively, for interest rate contracts, all of which were composed predominantly of non-designated economic hedges. The derivative instruments are subject to master netting arrangements with counterparties that allow the Company to offset the settlement of derivative assets and liabilities in the same currency by instrument type or, in the event of default by the counterparty, to offset all derivative assets and liabilities with the same counterparty. Notwithstanding the conditions for right of offset may have been met, the Company presents derivative assets and liabilities with the same counterparty on a gross basis on the consolidated balance sheets. Realized and unrealized gains and losses on derivative instruments are recorded in other gain (loss) on the consolidated statement of operations, other than interest expense, as follows: Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2021 2020 2021 2020 Foreign currency contracts: Realized gain transferred from AOCI to earnings $ — $ 414 $ 1,520 $ 414 Unrealized gain transferred from AOCI to earnings (1) — — — 1,485 Unrealized gain (loss) in earnings on non-designated contracts 1,457 (840) 1,129 (1,616) Interest rate contracts: Interest expense on designated contracts (2) — 6 (20) 12 Unrealized loss in earnings on non-designated contracts (13) (197) (248) (123) Realized loss transferred from AOCI to earnings — — (1,328) — __________ (1) The portion of derivative notional that is in excess of the beginning balance of the foreign denominated net investment is dedesignated upon a reassessment of the effectiveness of net investment hedges at period end. (2) Represents amortization of the cost of designated interest rate caps to interest expense based upon expected hedged interest payments on variable rate debt. Prior to January 2021, the Company had entered into a series of forward contracts on its shares in a third party real estate mutual fund in an aggregate notional amount of $119 million and a series of swap contracts with the same counterparty to pay the return of the Dow Jones U.S. Select REIT Total Return Index. The forward and swap contracts were settled upon expiration in January 2021 through delivery of all of the Company's shares in the mutual fund, realizing an immaterial net loss upon settlement. The forwards and swaps were not designated accounting hedges. At December 31, 2020, the forwards and swaps were in a liability position of $102.7 million and $0.1 million, respectively. During the three and nine months ended September 30, 2020, the forwards and swaps had realized and unrealized fair value losses totaling $0.2 million and gains totaling $27.0 million, respectively, which were partially offset by an increase in NAV of $2.3 million and a decrease in NAV of $20.0 million, respectively, in the Company's investment in the mutual fund, both of which were recorded in other income on the consolidated statement of operations. The Company's foreign currency and interest rate contracts are generally traded over-the-counter, and are valued using a third-party service provider. Quotations on over-the-counter derivatives are not adjusted and are generally valued using observable inputs such as contractual cash flows, yield curve, foreign currency rates and credit spreads, and are classified as Level 2 of the fair value hierarchy. Although credit valuation adjustments, such as the risk of default, rely on Level 3 inputs, these inputs are not significant to the overall valuation of the derivatives. As a result, derivative valuations in their entirety are classified as Level 2 of the fair value hierarchy. Settlement Liability In March 2020, the Company entered into a cooperation agreement with Blackwells Capital LLC ("Blackwells"), a stockholder of the Company. Pursuant to the cooperation agreement, Blackwells agreed to a standstill in its proxy contest with the Company, and to abide by certain voting commitments, including a standstill with respect to the Company until the expiration of the agreement in March 2030 and voting in favor of the Board of Directors' recommendations until the third anniversary of the agreement. Contemporaneously, the Company and Blackwells entered into a joint venture arrangement for the purpose of acquiring, holding and disposing of the Company's class A common stock. Pursuant to the arrangement, the Company contributed its class A common stock, valued at $14.7 million by the venture, and Blackwells contributed $1.47 million of cash that was then distributed to the Company, resulting in a net capital contribution of $13.23 million by the Company in the venture. All of the class A common stock held in the venture was repurchased by the Company in March 2020 (Note 9). Distributions from the joint venture arrangement upon dissolution effectively represent a settlement of the proxy contest with Blackwells. The initial fair value of the arrangement was recorded as a settlement loss on the statement of operations in March 2020, with a corresponding liability on the balance sheet, subject to remeasurement at each period end. The settlement liability represents the fair value of the disproportionate allocation of profits distribution to Blackwells pursuant to the joint venture arrangement. The profits are derived from dividend payments and appreciation in value of the Company's class A common stock, allocated between the Company and Blackwells based upon specified return hurdles. In June 2021, Blackwells terminated the arrangement and the joint venture was dissolved. The profits distribution allocated to Blackwells was valued at $47.0 million and paid in the form of 5.95 million shares of the Company's class A common stock, with $22.8 million recognized in 2021 through termination as other loss on the consolidated statement of operations. Prior to dissolution of the arrangement, the settlement liability, classified as a Level 3 fair value, was measured using a Monte Carlo simulation under a risk-neutral premise, assuming that the final distribution would occur at the end of the third year in March 2023. At December 31, 2020, the settlement liability was valued at $24.3 million, applying the following assumptions: (a) expected volatility of the Company's class A common stock of 67.2% based upon a combination of historical and implied volatility of the Company's class A common stock; (b) zero expected dividend yield given the Company's suspension of its common stock dividend beginning the second quarter of 2020; and (c) risk free rate of 0.14% per annum based upon a compounded zero-coupon U.S. Treasury yield. During 2020, the settlement liability increased approximately $20.4 million from inception in March 2020, recorded as other loss on the consolidated statement of operations. Fair Value Option Equity Method Investments Equity method investments for which the fair value option was elected are carried at fair value on a recurring basis. Fair values are determined using either indicative sales price, NAV of the underlying funds, or discounted future cash flows based upon expected income and realization events of the underlying assets. Fair value of equity method investments are classified as Level 3 of the fair value hierarchy. Changes in fair value of equity method investments under the fair value option are recorded in equity method earnings (losses). Loans Receivable Loans receivable consist of mortgage loans, mezzanine loans and non-mortgage loans carried at fair value under the fair value option. Loans held for disposition are measured at their selling price. Fair value of loans held for investment is determined by comparing the current yield to the estimated yield of newly originated loans with similar credit risk or the market yield at which a third party might expect to purchase such investment, or based upon discounted cash flow projections of principal and interest expected to be collected, which include, but are not limited to, consideration of the financial standing of the borrower or sponsor as well as operating results and/or value of the underlying collateral. Loans that are 90 days or more past due as to principal or interest, or where reasonable doubt exists as to timely collection, are generally considered nonperforming and placed on nonaccrual status, all of which are held for disposition as presented in the table below. Such loans include distressed loan portfolios that are held for disposition, previously acquired by the Company at a discount (classified as purchased credit-impaired loans prior to the election of fair value option). September 30, 2021 December 31, 2020 (In thousands) Fair Value Unpaid Principal Balance Fair Value less Unpaid Principal Balance Fair Value Unpaid Principal Balance Fair Value less Unpaid Principal Balance 90 days or more past due or nonaccrual Loans held for disposition $ 224,274 $ 1,173,066 $ (948,792) $ 873,205 $ 2,159,538 $ (1,286,333) Level 3 Recurring Fair Values Quantitative information about recurring Level 3 fair value assets are as follows. Valuation Technique Key Unobservable Inputs Input Value Effect on Fair Value from Increase in Input Value (2) Financial Instrument Fair Value (In thousands) Weighted Average (1) (Range) September 30, 2021 AFS debt securities held for disposition $ 37,108 Discounted cash flows Discount rate 23.4% Decrease Fair Value Option: Loans held for investment 112,252 Discounted cash flows Discount rate 8.0% Decrease Loans held for disposition 387,664 Transaction price (4) N/A N/A N/A Equity method investments held for disposition 1,553 NAV (3) N/A N/A N/A Equity method investments held for disposition 114,200 Transaction price (4) N/A N/A N/A December 31, 2020 AFS debt securities held for disposition $ 28,576 Discounted cash flows Discount rate 28.9% (18.3% - 57.8%) Decrease Fair Value Option: Loans held for investment 36,797 Discounted cash flows Discount rate 8.7% (7.2% - 8.9%) Decrease Loans held for disposition 1,258,539 Discounted cash flows Discount rate 13.3% Decrease Equity method investments 28,540 Discounted cash flows Discount rate 30% Decrease Equity method investments held for disposition 2,472 NAV (3) N/A N/A N/A Equity method investments held for disposition 8,383 Discounted cash flows Discount rate 19.3% (19.0% - 20.0%) Decrease Equity method investments held for disposition 142,404 Transaction price (4) N/A N/A N/A __________ (1) Weighted average discount rates are calculated based upon undiscounted cash flows. (2) Represents the directional change in fair value that would result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the reverse effect. Significant increases or decreases in these inputs in isolation could result in significantly higher or lower fair value measures. (3) Fair value was estimated based upon underlying NAV of the respective funds on a quarter lag, adjusted as deemed appropriate by management, considering the cash flows provided by the general partners of the funds and the implied yields of the funds. (4) Based upon actual or indicative transaction values of the respective loans, investments or underlying assets of the investee. At December 31, 2020, acquisition price was deemed to approximate fair value for investee engaged in real estate development during the development stage. The following table presents changes in recurring Level 3 fair value assets. Loans receivable and equity method investments under the fair value option are predominantly held for disposition. Realized and unrealized gains (losses) are included in AOCI for AFS debt securities and in other gain (loss) on the consolidated statement of operations for other assets carried at fair value. Fair Value Option (In thousands) AFS Debt Securities Loans Held for Investment and Held for Disposition Equity Method Investments (including Held for Disposition) Fair value at December 31, 2019 $ 54,859 $ — $ 222,875 Election of fair value option on January 1, 2020 — 1,556,131 — Reclassification of accrued interest on January 1, 2020 — 13,504 — Purchases, drawdowns, contributions and accretion 2,979 156,179 4,614 Paydowns, distributions and sales (4,542) (131,365) (900) Change in accrued interest and capitalization of paid-in-kind interest — 32,544 — Transfer to held for disposition — (42,985) — Allowance for credit losses (23,973) — — Realized and unrealized losses in earnings, net — (289,283) (66,418) Other comprehensive income (loss) (1) (1,425) 30,419 5,599 Fair value at September 30, 2020 $ 27,898 $ 1,325,144 $ 165,770 Net unrealized losses on instruments held at September 30, 2020 In earnings $ — $ (280,822) $ (66,418) In other comprehensive loss $ (1,425) N/A N/A Fair value at December 31, 2020 $ 28,576 $ 1,295,337 $ 181,799 Purchases, drawdowns, contributions and accretion 11,120 92,967 8 Paydowns, distributions and sales (2,063) (436,502) (18,128) Change in accrued interest and capitalization of paid-in-kind interest — 11,630 Change in accounting method for equity interest — — (27,626) Deconsolidation of investment entities (Note 21 ) — (341,577) — Allowance for credit losses (194) — — Realized and unrealized losses in earnings, net — (91,981) (13,846) Other — 4,834 — Other comprehensive loss (1) (331) (34,792) (6,454) Fair value at September 30, 2021 $ 37,108 $ 499,916 $ 115,753 Net unrealized losses on instruments held at September 30, 2021 In earnings $ — $ (42,148) $ (23,031) In other comprehensive loss $ (331) N/A N/A __________ (1) Amounts recorded in OCI for loans receivable and equity method investments represent foreign currency translation differences on the Company's foreign subsidiaries that hold the respective foreign currency denominated investments. Investments Carried at Fair Value Using Net Asset Value Investments in Company-sponsored private fund and non-traded REIT, and limited partnership interest in a third party real estate private fund, all of which are held for disposition (Note 11), are valued using NAV of the respective vehicles. September 30, 2021 December 31, 2020 (In thousands) Fair Value Unfunded Commitments Fair Value Unfunded Commitments Private fund—real estate $ 12,064 $ 7,117 $ 15,680 $ 8,026 Non-traded REIT—real estate 26,041 — 18,272 — Private fund—emerging market private equity 2,172 — 2,224 — The Company's interests in the private funds are not subject to redemption, with distributions to be received through liquidation of underlying investments of the funds. The private funds each have eight ten No secondary market currently exists for shares of the non-traded REIT and the Company does not currently expect to seek liquidity of its shares of the non-traded REIT. Subject to then-existing market conditions, the board of directors of the non-traded REIT, along with the Company, as sponsor, are expected to consider alternatives for providing liquidity to the non-traded REIT shares beginning 2021, five years from completion of the offering stage, but with no definitive date by which it must do so. In addition, the Company has agreed that any right to have its shares redeemed is subordinated to third party stockholders for so long as its advisory agreement is in effect. Nonrecurring Fair Values The Company measures fair value of certain assets on a nonrecurring basis when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Adjustments to fair value generally result from the application of lower of amortized cost or fair value accounting for assets held for disposition or otherwise, write-down of asset values due to impairment. Impairment is discussed in Note 11 for real estate, Notes 5 and 11 for equity method investments, and Notes 6 and 11 for intangible assets, including goodwill. Fair Value Information on Financial Instruments Reported at Cost Carrying amounts and estimated fair value of financial instruments reported at amortized cost are presented below. Fair Value Measurements Carrying Value (In thousands) Level 1 Level 2 Level 3 Total September 30, 2021 Liabilities Debt at amortized cost Secured fund fee revenue notes $ — $ — $ 290,939 $ 290,939 $ 290,939 Convertible and exchangeable senior notes 1,055,861 — — 1,055,861 490,855 Secured debt — — 3,789,416 3,789,416 3,789,416 Debt related to assets held for disposition — — 3,443,376 3,443,376 3,443,376 December 31, 2020 Liabilities Debt at amortized cost Convertible and exchangeable senior notes $ 898,231 $ — $ — $ 898,231 $ 520,522 Secured debt — — 3,407,175 3,407,175 3,410,467 Debt related to assets held for disposition — 13,095 7,055,237 7,068,332 7,352,828 Debt —Senior notes were valued using the last trade price in active markets or unadjusted quoted price in non-active market for the senior note that is held for disposition. Fair value of the secured fund fee revenue notes and secured debt, including amounts held for disposition, was estimated by discounting expected future cash outlays at interest rates available to the Company for similar instruments. Junior subordinated debt that is held for disposition was valued based upon unadjusted quotations from a third party valuation firm, with such quotes derived using a combination of internal valuation models, comparable trades in non-active markets and other market data. |
