Fair Value of Assets and Liabilities

9 Months Ended

Sep. 30, 2020

The following table presents certain of our assets that are measured at fair value at September 30, 2020, categorized by the level of inputs as defined in the fair value hierarchy under GAAP, used in the valuation of each asset.


			Fair Value at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Total		(Level 1)		(Level 2)		(Level 3)
Recurring Fair Value Measurements Assets:
Investment in Five Star (1)	$	54,207	$	54,207	$	—	$	—
Non-Recurring Fair Value Measurements Assets:
Real estate properties held for sale (2)	$	56,673	$	—	$	56,673	$	—
Real estate properties at fair value (3)	$	31,010	$	—	$	—	$	31,010

(1)Our 10,691,658 shares of common stock of Five Star Senior Living Inc., or Five Star, are included in other assets, net in our condensed consolidated balance sheets, and are reported at fair value, which is based upon quoted market prices on The Nasdaq Stock Market LLC, or Nasdaq, (Level 1 inputs). On April 1, 2019, we entered into a transaction agreement with Five Star, or the Transaction Agreement, to restructure our business arrangements with Five Star, or the Restructuring Transaction. Pursuant to the Transaction Agreement, on January 1, 2020, Five Star issued 10,268,158 Five Star common shares to us. The fair value and initial cost basis of the Five Star common shares issued to us on January 1, 2020 was $38,095. Our adjusted cost basis inclusive of the 423,500 Five Star common shares we owned as of December 31, 2019 and the 10,268,158 Five Star common shares issued to us on January 1, 2020 was $44,448 as of September 30, 2020. During the three and nine months ended September 30, 2020, we recorded unrealized gains of $12,510 and $14,541, respectively, which is included in gains and losses on equity securities, net in

our condensed consolidated statements of comprehensive income (loss), to adjust the carrying value of our investment in Five Star common shares to their fair value. See Note 12 for further information about our investment in Five Star.

(2)We have assets in our condensed consolidated balance sheets that are measured at fair value on a nonrecurring basis. During the nine months ended September 30, 2020, we recorded impairment charges of $1,524 to reduce the carrying value of one medical office property that is classified as held for sale to its estimated sales price, less estimated costs to sell of $160, based on the sales price under a purchase and sale agreement that we have entered into with a third party buyer for this medical office property of $3,875. We also recorded impairment charges of $33,356 to reduce the carrying value of 14 senior living communities that are classified as held for sale to their estimated sales price, less estimated costs to sell of $1,142, based on the aggregate sales prices under the purchase and sale agreements that we have entered into with third party buyers for these senior living communities of $54,100. See Note 3 for further information about impairment charges and these and other properties we have classified as held for sale.

(3)We recorded impairment charges of $59,847 to reduce the carrying value of nine of our senior living communities scheduled for closure and/or sale to their estimated fair value of $31,010 based upon a combination of the market approach and the income approach and unobservable inputs such as estimated market rent, operating expense assumptions, vacancy data and capitalization rates. We also engaged an external third party to assist us in our estimation of fair value of these communities. The valuation techniques and significant unobservable inputs used in the valuation of these communities are considered Level 3 inputs as defined in the fair value hierarchy under GAAP.

In addition to the assets described in the table above, our financial instruments at September 30, 2020 and December 31, 2019 included cash and cash equivalents, restricted cash, other assets, our revolving credit facility, term loans, senior unsecured notes, secured debt and finance leases and other unsecured obligations and liabilities. The fair values of these financial instruments approximated their carrying values in our condensed consolidated financial statements as of such dates, except as follows:


	As of September 30, 2020				As of December 31, 2019
Description	Carrying Amount (1)		Estimated Fair Value		Carrying Amount (1)		Estimated Fair Value
Senior unsecured notes	$	2,606,550	$	2,558,483	$	1,820,681	$	1,890,386
Secured debts(2) (3)	692,385		705,503		697,729		697,142
	$	3,298,935	$	3,263,986	$	2,518,410	$	2,587,528

(1)Includes unamortized debt issuance costs, premiums and discounts.

(2)We assumed certain of these secured debts in connection with our acquisition of certain properties. We recorded the assumed mortgage notes at estimated fair value on the date of acquisition and we are amortizing the fair value adjustments, if any, to interest expense over the respective terms of the mortgage notes to adjust interest expense to the estimated market interest rates as of the date of acquisition.

(3)Includes $3,015 of principal mortgage obligations and $25 of unamortized debt issuance costs for properties classified as held for sale as of December 31, 2019. These debts are included in liabilities of properties held for sale in our condensed consolidated balance sheet as of December 31, 2019.

We estimated the fair value of our two issuances of senior unsecured notes due 2042 and 2046 based on the closing price on Nasdaq (Level 1 input) as of September 30, 2020. We estimated the fair values of our four issuances of senior unsecured notes due 2021, 2024, 2025 and 2028 using an average of the bid and ask price on Nasdaq on or about September 30, 2020 (Level 2 inputs as defined in the fair value hierarchy under GAAP). We estimated the fair values of our secured debts by using discounted cash flows analyses and currently prevailing market terms as of the measurement date (Level 3 inputs as defined in the fair value hierarchy under GAAP). Because Level 3 inputs are unobservable, our estimated fair values may differ materially from the actual fair values.

Realized and unrealized gains and losses for our equity securities for the three and nine months ended September 30, 2020 and 2019 were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Realized gains and losses on equity securities sold (1)	$	—	$	—	$	—	$	(41,436)
Unrealized gains and losses on equity securities held	12,510		40		14,541		(40)
Gains and losses on equity securities, net	$	12,510	$	40	$	14,541	$	(41,476)

(1)This amount relates to our sale of our former investment in The RMR Group Inc., or RMR Inc., on July 1, 2019. For further information about our former investment in RMR Inc. see our Annual Report.

- 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.

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