FAIR VALUE OF FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2017

Fair Value Disclosures [Abstract]

FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 7: FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

FASB ASC Topic 825, “Financial Instruments” requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The fair value of investments in mortgages, loans, preferred equity interests, CDO notes payable, convertible senior notes, junior subordinated notes, warrants and investor share appreciation rights, or SARs, and derivative assets and liabilities is based on significant observable and unobservable inputs. The fair value of cash and cash equivalents, restricted cash, CMBS facilities, and other indebtedness approximates their carrying amount or unpaid principal balance due to the nature of these instruments.

The following table summarizes the carrying amount and the fair value of our financial instruments as of September 30, 2017:

Financial Instrument	Carrying Amount		Estimated Fair Value
Assets
Total investment in mortgages and loans, net	$	1,235,206	$	1,230,733
Cash and cash equivalents		46,019		46,019
Restricted cash		142,489		142,489
Derivative assets		93		93
Liabilities
Recourse indebtedness:
7.0% convertible senior notes		833		525
4.0% convertible senior notes		116,310		111,801
7.625% senior notes		54,809		45,893
7.125% senior notes		67,803		62,409
Senior secured notes		12,578		13,199
Junior subordinated notes, at fair value		9,254		9,254
Junior subordinated notes, at amortized cost		25,100		10,135
CMBS facilities		123,355		123,919
Non-recourse indebtedness:
CDO notes payable, at amortized cost		332,014		286,556
CMBS securitizations		547,895		553,900
Loans payable on real estate		97,087		100,211
Other indebtedness		40,909		40,830
Derivative liabilities		—		—
Warrants and investor SARs		26,000		26,000

The following table summarizes the carrying amount and the fair value of our financial instruments as of December 31, 2016: 

Financial Instrument	Carrying Amount		Estimated Fair Value
Assets
Total investment in mortgages and loans, net	$	1,280,285	$	1,256,342
Cash and cash equivalents		110,531		110,531
Restricted cash		190,179		190,179
Derivative assets		206		206
Liabilities
Recourse indebtedness:
7.0% convertible senior notes		831		890
4.0% convertible senior notes		120,271		116,861
7.625% senior notes		55,568		53,231
7.125% senior notes		69,188		69,118
Senior secured notes		58,233		62,620
Junior subordinated notes, at fair value		11,822		11,822
Junior subordinated notes, at amortized cost		25,100		13,099
CMBS facilities		24,908		26,421
Non-recourse indebtedness:
CDO notes payable, at amortized cost		534,501		477,032
CMBS securitizations		641,077		646,642
Loans payable on real estate		185,668		188,525
Other indebtedness		23,915		24,321
Derivative liabilities		-		-
Warrants and investor SARs		30,400		30,400

Fair Value Measurements

The following tables summarize information about our assets and liabilities measured at fair value on a recurring basis as of September 30, 2017, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:

Assets:	Quoted Prices in Active Markets for Identical Assets (Level 1) (1)		Significant Other Observable Inputs (Level 2) (1)		Significant Unobservable Inputs (Level 3) (1)		Balance as of September 30, 2017
Derivative assets	$	—	$	93	$	—	$	93
Total assets	$	—	$	93	$	—	$	93

Liabilities:	Quoted Prices in Active Markets for Identical Assets (Level 1) (1)		Significant Other Observable Inputs (Level 2) (1)		Significant Unobservable Inputs (Level 3) (1)		Balance as of September 30, 2017
Junior subordinated notes, at fair value	$	—	$	—	$	9,254	$	9,254
Derivative liabilities		—		—		—		—
Warrants and investor SARs		—		—		26,000		26,000
Total liabilities	$	—	$	—	$	35,254	$	35,254

(1) During the nine months ended September 30, 2017, there were no transfers between Level 1 and Level 2, and there were no transfers into and/or out of Level 3.

The following tables summarize information about our assets and liabilities measured at fair value on a recurring basis as of December 31, 2016, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:

Assets:	Quoted Prices in Active Markets for Identical Assets (Level 1) (1)		Significant Other Observable Inputs (Level 2) (1)		Significant Unobservable Inputs (Level 3) (1)		Balance as of December 31, 2016
Derivative assets	$	—	$	206	$	—	$	206
Total assets	$	—	$	206	$	—	$	206

Liabilities:	Quoted Prices in Active Markets for Identical Assets (Level 1) (1)		Significant Other Observable Inputs (Level 2) (1)		Significant Unobservable Inputs (Level 3) (1)		Balance as of December 31, 2016
Junior subordinated notes, at fair value	$	—	$	—	$	11,822	$	11,822
Warrants and investor SARs		—		—		30,400		30,400
Total liabilities	$	—	$	—	$	42,222	$	42,222

(1) During the year ended December 31, 2016, there were no transfers between Level 1 and Level 2, and there were no transfers into and/or out of Level 3.

When estimating the fair value of our Level 3 financial instruments, management uses various observable and unobservable inputs. These inputs include yields, credit spreads, duration, effective dollar prices and overall market conditions on not only the exact financial instrument for which management is estimating the fair value, but also financial instruments that are similar or issued by the same issuer when such inputs are unavailable. Generally, an increase in the yields, credit spreads or estimated duration will decrease the fair value of our financial instruments. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value, as determined by management, may fluctuate from period to period and any ultimate liquidation or sale of the investment may result in proceeds that may be significantly different than fair value.  

For the fair value of our junior subordinated notes, at fair value, and warrant and investor SARs classified as Level 3 liabilities, we estimate the fair value of these financial instruments using significant unobservable inputs.  For the junior subordinated notes, at fair value, we use a discounted cash flow model as the valuation technique and the significant unobservable inputs as of September 30, 2017 include discount rates ranging from 15.5% to 15.8% and as of December 31, 2016 include discount rates ranging from 11.5% to 11.8%.  For the warrants and investor SARs, we utilized a third party valuation firm who used a binomial model as the valuation technique and the significant unobservable inputs as of September 30, 2017 and December 31, 2016 include 85.0% and 51.0%, respectively, for the annual volatility of our common shares of beneficial interest over the term of the warrants and investor SARs, 12.5% and 10.0%, respectively, for the credit adjusted discount rate on our unsecured debt that may be issued in satisfaction of the warrants and investor SARs, and 18.9% and 10.0%, respectively, for the dividend rate and future dividend rate on our common shares of beneficial interest.

The following table summarizes additional information about assets and liabilities that are measured at fair value on a recurring basis for which we have utilized level 3 inputs to determine fair value for the nine months ended September 30, 2017: 

Liabilities	Warrants and investor SARS			Junior Subordinated Notes, at Fair Value			Total Level 3 Liabilities
Balance, as of December 31, 2016	$	30,400		$	11,822		$	42,222
Change in fair value of financial instruments		(4,400	)		(2,568	)		(6,968	)
Balance, as of September 30, 2017	$	26,000		$	9,254		$	35,254

The following table summarizes additional information about assets and liabilities that are measured at fair value on a recurring basis for which we have utilized level 3 inputs to determine fair value for the three months ended September 30, 2017:

Liabilities	Warrants and investor SARS			Junior Subordinated Notes, at Fair Value			Total Level 3 Liabilities
Balance, as of June 30, 2017	$	27,500		$	12,524		$	40,024
Change in fair value of financial instruments		(1,500	)		(3,270	)		(4,770	)
Balance, as of September 30, 2017	$	26,000		$	9,254		$	35,254

Non-Recurring Fair Value Measurements

As of September 30, 2017, we measured three real estate assets at a fair value of $80,000 in our consolidated balance sheets as they were impaired.  The fair values were based on executed letters of intent for the real estate assets and were classified within Level 2 of the fair value hierarchy.  The significant input was the purchase price agreed to with the potential buyer.  

As of September 30, 2017, we measured one real estate asset at a fair value of $33,411 in our consolidated balance sheets as it was impaired.  The fair value was based on our broker’s opinion of value for the real estate asset and was classified within Level 3 of the fair value hierarchy.  The significant inputs were a terminal capitalization rate of 7.25% and a discount rate of 11.6%.

Our other non-recurring fair value measurements relate primarily to our commercial real estate loans that are considered impaired and for which we maintain an allowance for loss. In determining the allowance for losses, we estimate the fair value of the respective commercial real estate loan and compare that fair value to our total investment in the loan. When estimating the fair value of the commercial real estate loan, management uses discounted cash flow analyses and capitalization rates on the underlying property’s net operating income. The discounted cash flow analyses and capitalization rates are based on market information and comparable sales of similar properties.  These methodologies are classified in Level 3 of the fair value hierarchy.

Fair Value of Financial Instruments

The following tables summarize the valuation technique and the level of the fair value hierarchy for financial instruments that are not fair valued in the accompanying consolidated balance sheets but for which fair value is required to be disclosed. The fair value of cash and cash equivalents, restricted cash, secured credit facilities, CMBS facilities, commercial mortgage facilities and other indebtedness approximates cost due to the nature of these instruments and are not included in the tables below.

	Carrying Amount as of September 30, 2017		Estimated Fair Value as of September 30, 2017		Valuation Technique	Level in Fair Value Hierarchy
Total investment in mortgages and loans, net	$	1,235,206	$	1,230,733	Discountedcash flows	Three
7.0% convertible senior notes		833		525	Trading price	Two
4.0% convertible senior notes		116,310		111,801	Trading price	Two
7.625% senior notes		54,809		45,893	Trading price	Two
7.125% senior notes		67,803		62,409	Trading price	Two
Senior secured notes		12,578		13,199	Discounted cash flows	Three
Junior subordinated notes, at amortized cost		25,100		10,135	Discounted cash flows	Three
CDO notes payable, at amortized cost		332,014		286,556	Discounted cash flows	Three
CMBS securitizations		547,895		553,900	Discounted cash flows	Three
Loans payable on real estate		97,087		100,211	Discounted cash flows	Three
Other indebtedness		40,909		40,830	Discounted cash flows	Three

	Carrying Amount as of December 31, 2016		Estimated Fair Value as of December 31, 2016		Valuation Technique	Level in Fair Value Hierarchy
Total investment in mortgages and loans, net	$	1,280,285	$	1,256,342	Discountedcash flows	Three
7.0% convertible senior notes		831		890	Trading price	One
4.0% convertible senior notes		120,271		116,861	Trading price	One
7.625% senior notes		55,568		53,231	Trading price	One
7.125% senior notes		69,188		69,118	Trading price	One
Senior secured notes		58,233		62,620	Discounted cash flows	Three
Junior subordinated notes, at amortized cost		25,100		13,099	Discounted cash flows	Three
CDO notes payable, at amortized cost		534,501		477,032	Discounted cash flows	Three
CMBS securitization		641,077		646,642	Discounted cash flows	Three
Loans payable on real estate		185,668		188,525	Discounted cash flows	Three
Other indebtedness		23,915		24,321	Discounted cash flows	Three

The following table summarizes realized and unrealized gains and losses on assets and liabilities for which we elected the fair value option of FASB ASC Topic 825, “Financial Instruments” and derivatives as reported in change in fair value of financial instruments in the accompanying consolidated statements of operations:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
Description	2017			2016			2017			2016
Change in fair value of junior subordinated notes	$	3,270			(735	)	$	2,568		$	(1,020	)
Change in fair value of derivatives		(17	)		160			(275	)		(2,135	)
Change in fair value of warrants and investors SARs		1,500			(800	)		4,400			(3,900	)
Change in fair value of financial instruments	$	4,753		$	(1,375	)	$	6,693		$	(7,055	)

The changes in the fair value for the junior subordinated notes for which the fair value option was elected for the three and nine months ended September 30, 2017 and 2016 was primarily attributable to changes in interest rates and instrument specific credit risks. The changes in the fair value of derivatives for the three and nine months ended September 30, 2017 and 2016 was primarily attributable to changes in interest rates. The changes in fair value of the warrants and investor SARs for the three and nine months ended September 30, 2017 and 2016 was primarily attributable to changes in the reference stock price and volatility.