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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2024
Fair Value Disclosures [Abstract] |
Fair Value Measurements | Fair Value Measurements Fair Value Hierarchy—For disclosure purposes, financial instruments, whether measured at fair value on a recurring or nonrecurring basis or not measured at fair value, are classified in a hierarchy consisting of three levels based on the observability of valuation inputs in the marketplace as discussed below: •Level 1: Fair value measurements that are quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities. Market price data generally are obtained from exchange or dealer markets. •Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. •Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. The fair value of interest rate caps is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rose above the strike rates of the caps. Variable interest rates used in the calculation of projected receipts and payments on the caps are based on an expectation of future interest rates derived from observable market interest rate curves (SOFR forward curves) and volatilities (Level 2 inputs). We also incorporate credit valuation adjustments (Level 3 inputs) to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk. When a majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. However, when valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties, which we consider significant (10% or more) to the overall valuation of our derivatives, the derivative valuations in their entirety are classified in Level 3 of the fair value hierarchy. Transfers of inputs between levels are determined at the end of each reporting period. In determining the fair values of our derivatives at September 30, 2024, the SOFR interest rate forward curve (Level 2 inputs) assumed a downtrend from 4.846% to 3.013% for the remaining term of our derivatives. Credit spreads (Level 3 inputs) used in determining the fair values of derivatives assumed an uptrend in nonperformance risk for us and all of our counterparties through the maturity dates. The Company initially recorded an embedded debt derivative of $43.7 million, which was attributed to the compound embedded derivative liability associated with the Oaktree term loan. The compound embedded derivative liability is considered a Level 3 measurement due to the utilization of significant unobservable inputs in the valuation, which were based on ‘with and without’ valuation models. Based on the terms and provisions of the Oaktree Credit Agreement, with the assistance of a valuation specialist, the Company utilized a risk neutral model to estimate the fair value of the embedded derivative features requiring bifurcation as of the respective issuance dates and as of the September 30, 2024 reporting date. The risk neutral model is designed to utilize market data and the Company’s best estimate of the timing and likelihood of the settlement events that are related to the embedded derivative features in order to estimate the fair value of the respective notes with these embedded derivative features. The fair value of the notes with the derivative features is compared to the fair value of a plain vanilla note (excluding the derivative features), which is calculated based on the present value of the future default adjusted expected cash flows. The difference between the two values represents the fair value of the bifurcated derivative features as of each respective valuation date. The key inputs to the valuation models that were utilized to estimate the fair value of the embedded debt derivative are described as follows: •the default probability-weighted exit fee and prepayment cash flows are based on the contractual terms of the Oaktree Credit Agreement and the expectation of an acceleration event, including default, of the Company; •the risk-free rate of 3.89% was the discount rate utilized in the valuation and was determined based on reference to market yields for U.S. treasury debt instruments with similar terms; •the recovery rate of 47.0% assumed upon occurrence of a default event was estimated based upon recovery rate data published by credit rating agencies specific to the seniority of the notes; and •the probabilities and timing of a default-related acceleration event of 39.5% were estimated using an annualized probability of default which was implied from the debt issuance proceeds as of the issuance date, and updated utilizing relevant market data including market observed option-adjusted spreads as of September 30, 2024. The following table includes a summary of the compound embedded derivative liabilities measured at fair value using significant unobservable (Level 3) inputs (in thousands):
|  | Fair Value
Balance at December 31, 2022 |  | $ | 23,687 |
Re-measurement of fair value |  | 934 |
Balance at March 31, 2023 |  | 24,621 |
Re-measurement of fair value |  | (1,961) |
Balance at June 30, 2023 |  | 22,660 |
Re-measurement of fair value |  | 436 |
Balance at September 30, 2023 |  | 23,096 |
Re-measurement of fair value |  | 600 |
Balance at December 31, 2023 |  | 23,696 |
Re-measurement of fair value |  | (2,624) |
Balance at March 31, 2024 |  | 21,072 |
Re-measurement of fair value |  | 128 |
Balance at June 30, 2024 |  | 21,200 |
Re-measurement of fair value |  | 1,200 |
Balance at September 30, 2024 |  | $ | 22,400 |
Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table presents our assets and liabilities measured at fair value on a recurring basis aggregated by the level within which measurements fall in the fair value hierarchy (in thousands):
| Quoted Market Prices (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  |  |  | Total |
September 30, 2024: |  |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |  |
Derivative assets: |  |  |  |  |  |  |  |  |  |
Interest rate derivatives - caps | $ | — |  |  | $ | 4,074 |  |  | $ | — |  |  |  |  | $ | 4,074 |  | (1)
Total | $ | — |  |  | $ | 4,074 |  |  | $ | — |  |  |  |  | $ | 4,074 |  |
Liabilities |  |  |  |  |  |  |  |  |  |
Embedded debt derivative | $ | — |  |  | $ | — |  |  | $ | (22,400) |  |  |  |  | $ | (22,400) |  | (2)
Net | $ | — |  |  | $ | 4,074 |  |  | $ | (22,400) |  |  |  |  | $ | (18,326) |  |
December 31, 2023: |  |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |  |
Derivative assets: |  |  |  |  |  |  |  |  |  |
Interest rate derivatives - caps | $ | — |  |  | $ | 13,696 |  |  | $ | — |  |  |  |  | $ | 13,696 |  | (1)
Total | $ | — |  |  | $ | 13,696 |  |  | $ | — |  |  |  |  | $ | 13,696 |  |
Liabilities |  |  |  |  |  |  |  |  |  |
Embedded debt derivative | $ | — |  |  | $ | — |  |  | $ | (23,696) |  |  |  |  | $ | (23,696) |  | (2)
Net | $ | — |  |  | $ | 13,696 |  |  | $ | (23,696) |  |  |  |  | $ | (10,000) |  |
____________________________________ (1) Reported as “derivative assets” in our consolidated balance sheets. (2) Reported in “indebtedness, net” in our consolidated balance sheets. Effect of Fair Value Measured Assets and Liabilities on Consolidated Statements of Operations The following table summarizes the effect of fair value measured assets and liabilities on our consolidated statements of operations (in thousands):
| Gain (Loss) Recognized in Income |  |  |  |
| Three Months Ended September 30, |  |  |  |
| 2024 |  | 2023 |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |  |  |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives - caps | $ | (5,002) |  |  | $ | (2,242) |  |  |  |  |  |  |  |  |
Total | $ | (5,002) |  |  | $ | (2,242) |  |  |  |  |  |  |  |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |
Embedded debt derivative | $ | (1,200) |  |  | $ | (436) |  |  |  |  |  |  |  |  |
Net | $ | (6,202) |  |  | $ | (2,678) |  |  |  |  |  |  |  |  |
Total combined |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives - caps | $ | (12,259) |  |  | $ | (12,567) |  |  |  |  |  |  |  |  |
Embedded debt derivative | (1,200) |  |  | (436) |  |  |  |  |  |  |  |  |
Unrealized gain (loss) on derivatives | (13,459) |  | (1) | (13,003) |  | (1) |  |  |  |  |  |  |
Realized gain (loss) on interest rate caps | 7,257 |  | (1) (2) | 10,325 |  | (1) (2) |  |  |  |  |  |  |
Net | $ | (6,202) |  |  | $ | (2,678) |  |  |  |  |  |  |  |  |
____________________________________ (1) Reported as “realized and unrealized gain (loss) on derivatives” in our consolidated statements of operations. (2) Represents settled and unsettled payments from counterparties on interest rate caps.
| Gain (Loss) Recognized in Income |  |  |  |  |  |  |  |
| Nine Months Ended September 30, |  |  |  |  |  |  |  |
| 2024 |  | 2023 |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |  |  |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives - caps | $ | (1,380) |  |  | $ | 3,899 |  |  |  |  |  |  |  |  |
Total | $ | (1,380) |  |  | $ | 3,899 |  |  |  |  |  |  |  |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |
Embedded debt derivative | $ | 1,296 |  |  | $ | 591 |  |  |  |  |  |  |  |  |
Net | $ | (84) |  |  | $ | 4,490 |  |  |  |  |  |  |  |  |
Total combined |  |  |  |  |  |  |  |  |  |  |
Interest rate derivatives - caps | $ | (24,709) |  |  | $ | (26,891) |  |  |  |  |  |  |  |  |
Embedded debt derivative | 1,296 |  |  | 591 |  |  |  |  |  |  |  |  |
Unrealized gain (loss) on derivatives | (23,413) |  | (1) | (26,300) |  | (1) |  |  |  |  |  |  |
Realized gain (loss) on interest rate caps | 23,329 |  | (1) (2) | 30,790 |  | (1) (2) |  |  |  |  |  |  |
Net | $ | (84) |  |  | $ | 4,490 |  |  |  |  |  |  |  |  |
____________________________________ (1) Reported as “realized and unrealized gain (loss) on derivatives” in our consolidated statements of operations. (2) Represents settled and unsettled payments from counterparties on interest rate caps.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/exampleRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 55 -Paragraph 107 -Publisher FASB -URI https://asc.fasb.org/1943274/2147482078/820-10-55-107 Reference 2: http://www.xbrl.org/2003/role/exampleRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 55 -Paragraph 100 -Publisher FASB -URI https://asc.fasb.org/1943274/2147482078/820-10-55-100 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Subparagraph (c)(3) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-2 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6A -Subparagraph (a) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2E -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-2E Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6A -Subparagraph (h) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6A -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6A -Subparagraph (e) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 6A -Subparagraph (d) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-6A Reference 10: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Subparagraph (h) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-2 Reference 11: http://www.xbrl.org/2003/role/disclosureRef -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Subparagraph (g) -Publisher FASB -URI https://asc.fasb.org/1943274/2147482106/820-10-50-2 Reference 12: http://www.xbrl.org/2003/role/disclosureRef -Topic 940 -SubTopic 820 -Name Accounting Standards Codification -Section 50 -Paragraph 1 -Subparagraph (a) -Publisher FASB -URI https://asc.fasb.org/1943274/2147478119/940-820-50-1 + Details
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