Fair Values

12 Months Ended

Dec. 31, 2012

Fair Values

Fair Values

Note 12. Fair Values

Assets and Liabilities Recorded at Fair Value

Certain of our assets and liabilities are measured at fair value either (i) on a recurring basis, as of each quarter-end, or (ii) on a nonrecurring basis, as a result of impairment or other events. Generally, loans held-for-sale, real estate held-for-sale, the investment in CT Legacy Asset, and interest rate swaps are measured at fair value on a recurring basis, while impaired loans and securities are measured at fair value on a nonrecurring basis. These fair values are determined using a variety of inputs and methodologies, which are detailed below.

As discussed in Note 2, the “Fair Value Measurement and Disclosures” Topic of the Codification establishes a fair value hierarchy that prioritizes the inputs used in determining fair value under GAAP, which includes the following classifications, in order of priority:

·   Level 1 generally includes only unadjusted quoted prices in active markets for identical assets or liabilities as of the reporting date.

·   Level 2 inputs are those which, other than Level 1 inputs, are observable for identical or similar assets or liabilities. These include:

o   Quoted prices in active markets for similar instruments,

o   Quoted prices in less active or inactive markets for identical or similar instruments, and

o   Other observable inputs such as interest rates, yield curves, credit risks, and default rates.

·   Level 3 inputs generally include anything which does not meet the criteria of Levels 1 and 2, particularly any unobservable inputs. These include:

o   Information provided by third-parties in cases where the third-party has relied on significant unobservable inputs, and

o   Internally-generated unobservable inputs.

The following table summarizes our assets and liabilities, including those of CT Legacy REIT and our consolidated securitization vehicles, which are recorded at fair value as of December 31, 2012 (in thousands):

			Fair Value Measurements Using
			Quoted Prices		Other		Significant
	Total		in Active		Observable		Unobservable
	Fair Value at		Markets		Inputs		Inputs
	December 31, 2012		(Level 1)		(Level 2)		(Level 3)
Measured on a recurring basis:
Investment in CT Legacy Asset		$132,000		$—		$—		$132,000
Measured on a nonrecurring basis:
Securitization vehicles' impaired loans receivable (1) :
Subordinate interests in mortgages		$2,000		$—		$—		$2,000

(1) Loans receivable against which we have recorded a provision for loan losses as of December 31, 2012.

The following table reconciles the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs (in thousands):

	Loans			Real Estate			Investment in
	Held-for-Sale			Held-for-Sale			CT Legacy Assets
December 31, 2011		$30,875			$10,342			$—
Deconsolidation of CT Legacy Asset		(30,875	)		(10,342	)		89,676
Contributions to CT Legacy Asset		—			—			112,505
Distributions from CT Legacy Asset		—			—			(122,085	)
Adjustments to fair value included in earnings:
Fair value adjustment on investment in CT Legacy Asset		—			—			51,904
December 31, 2012		$—			$—			$132,000

 

The fair values of each type of asset recorded at fair value using Level 3 inputs are determined by an internal committee comprised of members of senior management of our Manager, including our chief executive officer, chief financial officer and our chief credit officer and head of asset management. The following methods and assumptions were used to estimate the fair value of each type of asset and liability which was recorded at fair value as of December 31, 2012:

Investment in CT Legacy Asset: We have elected the fair value option of accounting for CT Legacy REIT’s investment in CT Legacy Asset, pursuant to which we record this investment at fair value rather than at our historical cost investment amount. We made this election due to our determination that the fair value of the investment in CT Legacy Asset, as a net liquidating portfolio of assets subject to a non-recourse repurchase facility, is more meaningful and indicative of our interests in CT Legacy Asset than equity method accounting. Consequently, we arrive at the fair value of our Investment in CT Legacy Asset by discounting the net cash flows expected to be distributed to its equity holders after the repayment of the repurchase facility. To determine the net cash flows of CT Legacy Asset, our Manager estimates the timing and recovery amount for each of its assets, and then applies the proceeds to first satisfy the repurchase facility. The remaining cash flows are discounted to their present value to arrive at the fair value of CT Legacy Asset. The key assumptions for significant unobservable inputs are: (i) a discount rate of 15% and (ii) loss severities applied to the underlying assets. A change in the discount rate used by 100 basis points would change the fair value of CT Legacy REIT’s investment in CT Legacy Asset by approximately $2.6 million.

The following table details the range of loss severity assumptions applied to the underlying assets of CT Legacy Assets as of December 31, 2012 (dollars in thousands):

	Assets with Loss Severities as of December 31, 2012 Ranging from:
	(no. of assets/aggregate principal balance)
Asset Type	0-25%	26-50%	51-75%	76-100%	Total
Senior mortgages	2 / $32,869	- / $-	- / $-	- / $-	2 / $32,869
Subordinate interests in mortgages	3 / 52,483	1 / 1,212	- / -	2 / 43,448	6 / 97,143
Mezzanine loans	5 / 73,729	- / -	- / -	1 / 54,824	6 / 128,553
Securities	5 / 17,114	- / -	- / -	7 / 118,266	12 / 135,380
Total	15 / $176,195	1 / $1,212	- / $-	10 / $216,538	26 / $393,945

Impaired loans: The loans identified for impairment are collateral dependent loans. Impairment on these loans is measured by comparing our Manager’s estimation of fair value of the underlying collateral to the book value of the respective loan. These valuations require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders and other factors deemed necessary by our Manager. The table above includes all impaired loans, regardless of the period in which impairment was recognized.

Additional details of our consolidated securitization vehicles’ loans which were recorded at fair value as of December 31, 2012 are described below:

Subordinate interests in mortgages: Three of our consolidated securitization vehicles’ subordinate interests in mortgage loans with an aggregate principal balance of $24.7 million are reported at fair value as of December 31, 2012, including two hotel loans ($18.1 million), and one office loan ($6.6 million). The hotel loans are in maturity default, and the office loan matures in February 2013. These loans have a weighted average coupon of 4.2% per annum as of December 31, 2012.

The following table lists the range of key assumptions used for arriving at the fair value of each of these types of loans.

	Assumption Ranges for Significant Unobservable Inputs (Level 3)
Collateral Type	Capitalization Rate	Occupancy	Loss Severity (1)
Office	N/A	N/A	70%
Hotel	9% - 15%	75% - 83%	N/A

(1) In certain cases a loss severity based on inputs from third-parties including appraisals on, and bids for, underlying collateral were utilized to compute the fair value of the impaired loans.

 

Fair Value of Financial Instruments

In addition to the above disclosures for assets and liabilities which are recorded at fair value, GAAP also requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial position, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are estimated using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the estimated market discount rate and the estimated future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in an immediate settlement of the instrument. Rather, these fair values reflect the amounts that our Manager believes are realizable in an orderly transaction among willing parties. These disclosure requirements exclude certain financial instruments and all non-financial instruments.

The following table details the carrying amount, face amount, and approximate fair value of the financial instruments described above (in thousands). All fair value estimates are measured using significant unobservable inputs, or Level 3 inputs as further described above.

Fair Value of Financial Instruments
	December 31, 2012						December 31, 2011
	Carrying Amount		Face Amount		Fair Value		Carrying Amount		Face Amount		Fair Value
Financial assets:
Cash and cash equivalents		$15,423		$15,423		$15,423		$34,818		$34,818		$34,818
Restricted cash		14,246		14,246		14,246		12,985		12,985		12,985
Investment in CT Legacy Asset		132,000		N/A		132,000		—		—		—
Securities held-to-maturity		—		—		—		361,574		520,191		351,818
Loans receivable, net		141,500		164,180		133,682		838,394		1,270,971		768,729
Financial liabilities:
Secured notes		8,497		8,497		7,374		7,847		7,847		6,436
Repurchase obligations		—		—		—		58,464		58,464		54,556
Mezzanine loan		—		—		—		55,111		55,111		71,475
Securitized debt obligations		139,184		139,184		89,880		1,211,407		1,210,992		767,619
Participations sold		—		—		—		116,747		116,747		17,354

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments, excluding those described above that are carried at fair value, for which it is practicable to estimate that value:

Cash and cash equivalents: The carrying amount of cash on deposit and in money market funds is considered to be a reasonable estimate of fair value.

Restricted cash: The carrying amount of restricted cash is considered to be a reasonable estimate of fair value.

Securities held-to-maturity: These investments, other than securities that have been other-than-temporarily impaired, are recorded on an amortized cost basis and not at fair value. The fair values presented above have been estimated by a combination of (i) obtaining assessments from third-party dealers and, (ii) in cases where such assessments are unavailable or, in the opinion of our Manager, deemed not to be indicative of fair value, discounting expected cash flows using internal cash flow models and estimated market discount rates. The expected cash flows of each security are based on our Manager’s assumptions regarding the collection of principal and interest on the underlying loans and securities.

Loans receivable, net: Other than impaired loans, these assets are recorded at their amortized cost and not at fair value. The fair values presented above were estimated by our Manager taking into consideration factors including capitalization rates, leasing, occupancy rates, availability and cost of financing, exit plan, sponsorship, actions of other lenders and indications of market value from other market participants.

Secured notes: These notes are recorded at their aggregate principal balance and not at fair value. The fair value was estimated based on the rate at which a similar credit facility would be priced today.

Repurchase obligations: These facilities were recorded at their aggregate principal balance and not at fair value. The fair value was estimated based on the rate at which a similar credit facility would be priced today.

Mezzanine loan: This instrument was recorded at its amortized cost and not at fair value. The fair value was estimated based on the rate at which a similar credit facility would be priced today.

Securitized debt obligations: These obligations are recorded at the face value of outstanding obligations to third-parties and not at fair value.The fair values presented above have been estimated by obtaining assessments from third-party dealers.

Participations sold: These liabilities are recorded at their amortized cost and not at fair value. The fair values presented above are consistent with those presented for the related loan assets.