Fair Value Measurements

12 Months Ended

Dec. 31, 2012

Fair Value Measurements

Note 9 — Fair Value Measurements

The Company has established processes for determining fair value measurements. Fair value is based on quoted market prices, where available. If listed prices or quotes are not available, then fair value is based upon internally developed models that primarily use inputs that are market-based or independently-sourced market parameters.

An asset or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of valuation hierarchy are defined as follows:

Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following describes the valuation methodologies used for the Company’s assets and liabilities measured at fair value, as well as the general classification of such pursuant to the valuation hierarchy.

Real estate — The estimated fair value of tangible and intangible assets and liabilities recorded in connection with real estate properties acquired are based on Level 3 inputs. We estimated fair values utilizing income and market valuation techniques. The Company may estimate fair values using market information such as recent sales data for similar assets, income capitalization, or discounted cash flow models. Capitalization rates and discount rates utilized in these models are estimated by management based upon rates that management believes to be within a reasonable range of current market rates for the respective properties based upon an analysis of factors such as property and tenant quality, geographical location and local supply and demand observations.

Investments in loans — The estimated fair value of loans is determined utilizing either internal modeling using Level 3 inputs or third party appraisals. The methodology used to value the loans is based on collateral performance, credit risk, interest rate spread movements, and market data. Loans of the type which the Company invests are infrequently traded and market quotes are not widely available and disseminated.

Obligation to issue operating partnership units — Prior to the sale of our interest in the Cambridge Portfolio, the fair value of our obligation to issue the OP Units associated with the Cambridge acquisition was based on internally developed valuation models, as quoted market prices were not available nor were quoted prices available for similar liabilities. Our model involved the use of management estimates as well as some Level 2 inputs. The variables in the model prior to April 15, 2011 included the estimated release dates of the shares out of escrow, based on the expected performance of the underlying properties, a discount factor of approximately 21%, and the market price and expected quarterly dividend of Care’s common shares at each measurement date. As discussed above in Note 5 to the consolidated financial statements, pursuant to the Omnibus Agreement, as of April 15, 2011, the number of OP Units outstanding was reduced to 200,000 and the terms of such OP Units were altered to eliminate any conversion right and provided for forfeiture of the OP Units upon the occurrence of certain events. Under the modified terms, the variables (Level 3 inputs) in the model include the expected life of the OP Units, and the expected dividend rate on our common stock and a discount factor of 12%. The obligation with respect to OP Units was eliminated in conjunction with the sale of the Cambridge Portfolio.

U.S. Treasury Short-Position — The estimated fair value of our position in a 10-Year U.S. treasury note is based on market quoted prices, a Level 1 input. For the purposes of determining fair value we obtain market quotes from at least two independent sources.

ASC 820 requires disclosure of the amounts of significant transfers among levels of the fair value hierarchy and the reasons for the transfers. In addition, ASC 820 requires entities to separately disclose, in their roll-forward reconciliation of Level 3 fair value measurements, changes attributable to transfers in and/or out of Level 3 and the reasons for those transfers. Significant transfers into a level must be disclosed separately from transfers out of a level. We had no transfers among levels for the years ended December 31, 2012 and 2011.

Recurring Fair Value Measurement

As of December 31, 2012 and 2011, we had no assets or liabilities measured at fair value on a recurring basis on the consolidated balance sheets. As of March 31, 2012, we maintained a short-position on the 10-Year US treasury note due November 2021 and recorded an unrealized gain of approximately $0.4 million in the first quarter of 2012. During the three months ended June 30, 2012, the position was closed whereby the approximately $0.4 million unrealized gain was reversed and an approximately $0.1 gain was realized (see Note 7 to the consolidated financial statements).

The table below (in millions) presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant Level 3 inputs during the year ended December 31, 2011 (for the year ended December 31, 2012 we had no such assets or liabilities). Level 3 instruments presented in the tables include a liability to issue OP Units, which were carried at fair value. The Level 3 instruments were valued using internally developed valuation models that, in management’s judgment, reflect the assumptions a marketplace participant would utilize:

Level 3 Instruments Fair Value Measurements	Obligation  to Issue Partnership Units
Balance, December 31, 2010	$	(2.1	)
Modification of OP Units (offset against investment)		1.9
Net change in unrealized loss from obligations in Q1 2011		(0.3	)
Cancelation of OP Units in conjunction with sale of Cambridge Portfolio		0.5
Balance, December 31, 2011	$	—

The Company is exposed to certain interest rate risks relating to its ongoing business. The primary risk that may be managed by using derivative instruments is interest rate risk. We may enter into interest rate swaps, caps, floors or similar instruments, including selling short U.S. Treasury securities in anticipation of entering into a fixed- rate mortgage of similar duration, to manage interest rate risk associated with the Company’s borrowings. The Company had no interest rate derivatives in place as of December 31, 2012 or 2011.

We are required to recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position. We have not designated any derivative instruments as hedging instruments. As of December 31, 2012 and 2011, we did not have any derivative instruments outstanding. As discussed in Note 5 to the consolidated financial statements, Cambridge forfeited all of its rights and interests in the OP Units upon the closing of the purchase of Care’s interest in the Cambridge Portfolio on November 30, 2011.

Our consolidated financial statements include the following gains and losses associated with the aforementioned Cambridge OP Units and our 2012 and 2011 10-Year U.S. Treasury Note short-positions:

	Amount of Gain (Loss) Recognized in Income on Derivatives  (in millions)
Derivatives not designated as hedging instruments	Location of (Gain)  Loss Recognized in Income on Derivative	Year Ended December 31, 2012		Year Ended December 31, 2011
Operating partnership units	Unrealized loss on derivative instruments	$	—	$	(0.3)
Operating partnership units	Realized gain on derivative instruments	$	—	$	0.5
10-Year U.S. Treasury Note (short sale)	Realized gain on derivative instruments	$	0.1	$	0.6

Nonrecurring Fair Value Measurements

The Company recognized impairment on investments of its partially owned entities of approximately $0.1 million for the year ended December 31, 2011 related to the Company’s SMC investment due to lower occupancy in the remaining SMC property. The fair value of the Company’s SMC investment at the time the impairment was recognized was approximately $2.6 million. The calculation of the impairment was based on the sales price of the three SMC properties sold in May 2011 (Level 3 measurement).

Estimates of other assets and liabilities in financial statements

We are required to disclose fair value information about financial instruments, whether or not recognized in the financial statements, for which it is practical to estimate that value. In cases where quoted market prices are not available, fair value is based upon the application of discount rates to estimated future cash flows based on market yields or other appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

In addition to the amounts reflected in the financial statements at fair value as provided above, cash and cash equivalents, restricted cash, accrued interest receivable, accounts payable and other liabilities reasonably approximate their fair values due to the short maturities of these items. The fair value of the debt was calculated by determining the present value of the agreed upon interest and principal payments at a discount rate reflective of financing terms currently available in the market for collateral with the similar credit and quality characteristics (based on Level 2 measurements). The mortgage notes payable that were used to finance the acquisitions of the Bickford properties have a combined fair value of approximately $82.6 million and $84.8 million as of December 31, 2012 and 2011, respectively. As of December 31, 2012, the combined fair value of the Greenfield Loans was approximately $15.6 million. The Bridge Loan used to consummate the Greenfield acquisition was a floating rate facility which closed on September 20, 2011. The Bridge Loan was subsequently refinanced by the Greenfield Loans on April 24, 2012. Due to the short-term nature of the Bridge Loan and the fact that it had a floating interest rate, the carrying value of the Bridge Loan approximated fair market value as of December 31, 2011. We determined that the fair value of our loan investment, computed based on the weighted average fair value of the remaining approximately two-thirds interest in the loan investment that we purchased on March 1, 2013, was approximately $8.0 million at December 31, 2012 and approximately equal to the carrying value at December 31, 2011.