Fair Value of Financial Instruments

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. This alternative approach also reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The 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 and those inputs are significant.

Level 3 — Unobservable inputs that 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. However, the Company expects that changes in classifications between levels will be rare.

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. As of June 30, 2018 and December 31, 2017, 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 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.

Financial Instruments Measured at Fair Value on a Recurring Basis

The following table presents information about the Company's assets and liabilities (including derivatives that are presented net) measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017, aggregated by the level in the fair value hierarchy within which those instruments fall.



(In thousands)	Quoted Prices in Active Markets Level 1		Significant Other Observable Inputs Level 2			Significant Unobservable Inputs Level 3			Total
June 30, 2018
Cross currency swaps, net (GBP & EUR)	$	—	$	333		$	—		$	333
Foreign currency forwards, net (GBP & EUR)	$	—	$	1,598		$	—		$	1,598
Interest rate swaps, net (GBP & EUR)	$	—	$	(402	)	$	—		$	(402	)
Put options (GBP & EUR)	$	—	$	63		$	—		$	63
Multi-year outperformance agreement (see Note 12)	$	—	$	—		$	—		$	—
December 31, 2017
Cross currency swaps, net (GBP & EUR)	$	—	$	(4,511	)	$	—		$	(4,511	)
Foreign currency forwards, net (GBP & EUR)	$	—	$	(2,737	)	$	—		$	(2,737	)
Interest rate swaps, net (GBP & EUR)	$	—	$	(6,450	)	$	—		$	(6,450	)
Put options (GBP & EUR)	$	—	$	63		$	—		$	63
Multi-year outperformance agreement (see Note 12)	$	—	$	—		$	(1,600	)	$	(1,600	)

The valuation of the Company's multi-year outperformance agreement entered into with the Advisor in June 2015 (as amended, the "2015 OPP") was determined using a Monte Carlo simulation. See Note 12 — Share Based Compensation for more information about the 2015 OPP. This analysis reflects the contractual terms of the 2015 OPP, including the performance periods and total return hurdles, as well as observable market-based inputs, including interest rate curves, and unobservable inputs, such as expected volatility. As a result, the Company has determined that the 2015 OPP valuation in its entirety is classified in Level 3 of the fair value hierarchy. The 2015 OPP was replaced by the 2018 OPP, which was effective as of June 2, 2018. See Note 14 — Subsequent Events for more information about the 2018 OPP.

A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain assets. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 30, 2018.

Level 3 Valuations

The following is a reconciliation of the beginning and ending balances for the changes in the instrument with Level 3 inputs in the fair value hierarchy for the six months ended June 30, 2018:



(In thousands)	OPP
Beginning Balance as of December 31, 2017	$	1,600
Fair value adjustment	(1,600		)
Ending balance as of June 30, 2018	$	—

The following table provides quantitative information about the significant Level 3 input used:



Financial Instrument	Fair Value at June 30, 2018		Principal Valuation Technique	Unobservable Inputs	Input Value
	(In thousands)
2015 OPP	$	—	Monte Carlo Simulation	Expected volatility	20.0%

The following discussion provides a description of the impact on a fair value measurement of a change in each unobservable input in isolation. For the relationship described below, the inverse relationship would also generally apply.

Expected volatility is a measure of the variability in possible returns for an instrument, parameter or market index given how much the particular instrument, parameter or index changes in value over time. Generally, the higher the expected volatility of the underlying instrument, parameter or market index, the wider the range of potential future returns. An increase in expected volatility, in isolation, would generally result in an increase in the fair value measurement of an instrument.

Financial Instruments not Measured at Fair Value on a Recurring Basis

The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate value. The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, due to/from related parties, prepaid expenses and other assets, accounts payable, deferred rent and dividends payable approximate their carrying value on the consolidated balance sheets due to their short-term nature. The fair values of the Company's remaining financial instruments that are not reported at fair value on the consolidated balance sheets are reported below.



		June 30, 2018				December 31, 2017
(In thousands)	Level	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Mortgage notes payable ^{(1) (2) (3)}	3	$	982,725	$	979,642	$	988,490	$	963,751
Revolving Credit Facility ⁽⁴⁾	3	$	458,880	$	461,143	$	298,909	$	297,890
Term Facility ⁽⁴⁾	3	$	224,510	$	228,406	$	229,905	$	233,916

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⁽¹⁾	Carrying value includes $1.0 billion gross mortgage notes payable and $1.4 million mortgage discounts, net as of June 30, 2018.


⁽²⁾	Carrying value includes $1.0 billion gross mortgage notes payable and $1.9 million mortgage discounts, net as of December 31, 2017.


⁽³⁾	Mortgage notes payable are presented net of deferred financing costs of $5.4 million and $5.5 million as of June 30, 2018 and December 31, 2017, respectively.


⁽⁴⁾	Both facilities are part of the Credit Facility (see Note 5 — Credit Facilities for more information).

The fair value of the gross Mortgage notes payable, the Revolving Credit Facility and the Term Facility are estimated using a discounted cash flow analysis, based on the Advisor's experience with similar types of borrowing arrangements.