Fair Value Measures

The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. U.S. GAAP guidance defines three levels of inputs that may be used to measure fair value:

Level 1 – Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.

Level 3 – Unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.

The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. Changes in the type of inputs may result in a reclassification for certain assets. There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the three months ended March 31, 2016. The Company expects that changes in classifications between levels will be infrequent.

Items Measured at Fair Value on a Recurring Basis

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis, based on market rates of the Company’s positions and other observable interest rates as discussed in Note 6 – Investment Securities, at Fair Value and Note 11 – Derivatives and Hedging Activities, as of March 31, 2016 and December 31, 2015, aggregated by the level in the fair value hierarchy within which those instruments fall (in thousands):



	Level 1		Level 2			Level 3		Balance as of March 31, 2016
Assets:
CMBS	$	—	$	—		$	48,162	$	48,162
Liabilities:
Derivative liabilities	$	—	$	(13,800	)	$	—	$	(13,800	)

	Level 1		Level 2			Level 3		Balance as of December 31, 2015
Assets:
CMBS	$	—	$	—		$	53,304	$	53,304
Derivative assets	—		1,892			—		1,892
Total assets	$	—	$	1,892		$	53,304	$	55,196
Liabilities:
Derivative liabilities	$	—	$	(6,922	)	$	—	$	(6,922	)

CMBS – The Company’s CMBS are carried at fair value and are valued using Level 3 inputs. The Company used estimated non-binding quoted market prices from the trading desks of financial institutions that are dealers in such securities for similar CMBS tranches that actively participate in the CMBS market. Broker quotes are only indicative of fair value and may not necessarily represent what the Company would receive in an actual trade for the applicable instrument. Management determines that the prices are representative of fair value through its knowledge of and experience in the market. The significant unobservable input used in valuing the CMBS is the discount rate or market yield used to discount the estimated future cash flows expected to be received from the underlying investment, which include both future principal and interest payments. Significant increases or decreases in the discount rate or market yield would result in a decrease or increase in the fair value measurement. The following risks are included in the consideration and selection of discount rates or market yields: risk of default, rating of the investment and comparable company investments.

Derivative Assets and Liabilities – The Company’s derivative financial instruments relate to interest rate swaps, discussed in Note 11 – Derivatives and Hedging Activities. The valuation of derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company’s potential nonperformance risk and the performance risk of the counterparties.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of March 31, 2016, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company’s derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, due to affiliates and accounts payable approximate their carrying value in the accompanying consolidated balance sheets due to their short-term nature and are classified as Level 1 under the fair value hierarchy.

The following are reconciliations of the changes in assets and liabilities with Level 3 inputs in the fair value hierarchy for the three months ended March 31, 2016 and 2015 (in thousands):



	CMBS
Beginning balance, December 31, 2015	$	53,304
Total gains and losses:
Unrealized loss included in other comprehensive income, net	(1,961		)
Purchases, issuances, settlements and amortization:
Principal payments received	(3,217		)
Amortization included in net income	36
Ending Balance, March 31, 2016	$	48,162



	CMBS
Beginning balance, December 31, 2014	$	58,646
Total gains and losses:
Unrealized gain included in other comprehensive income, net	796
Purchases, issuances, settlements and amortization:
Principal payments received	(2,949		)
Ending Balance, March 31, 2015	$	56,493

The fair values of the Company’s financial instruments that are not reported at fair value in the consolidated balance sheets are reported below (dollar amounts in thousands):



	Level	Carrying Amount at March 31, 2016		Fair Value at March 31, 2016		Carrying Amount at December 31, 2015		Fair Value at December 31, 2015
Assets:
Mortgage notes receivable	3	$	23,559	$	32,008	$	24,238	$	31,842

Liabilities⁽¹⁾:
Mortgage notes payable and other debt, net	2	$	3,049,340	$	3,131,489	$	3,133,005	$	3,240,153
Corporate bonds, net	2	2,547,452		2,578,973		2,547,255		2,580,786
Convertible debt, net	2	983,422		1,014,744		982,217		1,007,042
Credit facilities	2	1,280,000		1,282,200		1,460,000		1,536,264
Total liabilities		$	7,860,214	$	8,007,406	$	8,122,477	$	8,364,245

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(1)	Current and prior period liabilities’ carrying and fair values exclude net deferred financing costs.

Mortgage notes receivable – The fair value of the Company’s fixed-rate loan portfolio is estimated with a discounted cash flow analysis, utilizing scheduled cash flows and discount rates estimated by management to approximate market interest rates.

Debt – The fair value is estimated by an independent third party using a discounted cash flow analysis, based on management’s estimates of observable market interest rates.

Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)

Certain financial and nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.

Real Estate Assets

As discussed in Note 5 – Real Estate Investments, during the three months ended March 31, 2016, real estate assets related to 125 properties were deemed to be impaired and their carrying values were reduced to their estimated fair value of $462.5 million, resulting in impairment charges of $160.5 million. During the three months ended March 31, 2015, no impairment charges were recorded. The Company estimates fair values using Level 3 inputs and using a combined income and market approach, specifically using discounted cash flow analysis and recent comparable sales transactions. The evaluation of real estate assets for potential impairment requires the Company’s management to exercise significant judgment and to make certain key assumptions, including, but not limited to, the following: (1) capitalization rate; (2) discount rates; (3) number of years property will be held; (4) property operating expenses; and (5) re-leasing assumptions including number of months to re-lease, market rental income and required tenant improvements. There are inherent uncertainties in making these estimates such as market conditions and performance and sustainability of the Company’s tenants. For our impairment tests for the real estate assets during the three months ended March 31, 2016, we used a range of discount rates from of 7.5% to 9.0% with a weighted-average rate of 8.1% and capitalization rates from 7.0% to 12.5% with a weighted-average rate of 7.8%.

The following table presents the impairment charges by asset class recorded during the three months ended March 31, 2016 (dollar amounts in thousands):



	Three Months Ended March 31,
	2016
Properties impaired	125

Asset classes impaired:
Investment in real estate assets, net	$	160,721
Below-market lease liabilities, net	(204		)
Total impairment loss	$	160,517

Goodwill and Intangible Assets

During the three months ended March 31, 2016 or 2015, no events or changes in circumstances were identified where management determined it is more likely than not that the fair value of a reporting unit is less than its carrying value. As such, we did not have any non-recurring fair value measurements related to goodwill and intangible assets during these periods.