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 December 31, 2018 and 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 December 31, 2018 and 2017, aggregated by the level in the fair value hierarchy level 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
December 31, 2018
Foreign currency forwards, net (GBP & EUR)	$	—	$	5,472		$	—		$	5,472
Interest rate swaps, net (GBP & EUR)	$	—	$	(628	)	$	—		$	(628	)
2018 OPP ⁽¹⁾	$	—	$	—		$	(18,804	)	$	(18,804	)
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
2015 OPP (see Note 13)	$	—	$	—		$	(1,600	)	$	(1,600	)

⁽¹⁾Effective with the adoption of ASU 2018-07 on January 1, 2019, the 2018 OPP will no longer be measured at fair market value on a recurring basis (see Note 2 — Summary of Significant Accounting Policies — Recently Issued Accounting Pronouncements and see Note 13 — Share-Based Compensation for additional information).

The valuation of the 2018 OPP and 2015 OPP were determined using a Monte Carlo simulation. This analysis reflected the contractual terms of the 2018 OPP and 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 2018 OPP and 2015 OPP valuations in its entireties were classified in Level 3 of the fair value hierarchy.

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 years ended December 31, 2018 or 2017.

Level 3 Valuations

The following is a reconciliation of the beginning and ending balance for the changes in instruments with Level 3 inputs in the fair value hierarchy for the year ended December 31, 2018:



(In thousands)	2018 OPP			2015 OPP
Beginning Value as of December 31, 2017	$	—		$	1,600
Initial value	27,600			—
Fair value adjustment	(8,796		)	(1,600		)
Ending Value as of December 31, 2018	$	18,804		$	—

The following table provides quantitative information about the significant Level 3 inputs used (in thousands):



Financial Instrument	Fair Value at December 31, 2018		Principal Valuation Technique	Unobservable Inputs	Input Value
	(In thousands)
2018 OPP	$	18,804	Monte Carlo Simulation	Expected volatility	23.0%

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, due to/from affiliates, accounts payable and dividends payable approximates 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 audited consolidated balance sheets are reported below.



		December 31, 2018				December 31, 2017
(In thousands)	Level	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Mortgage notes payable ^{(1) (2)}	3	$	1,129,807	$	1,157,710	$	984,876	$	963,751
Revolving Credit Facility⁽³⁾	3	$	363,894	$	365,591	$	298,909	$	297,890
Term Loan ⁽³⁾ ⁽⁴⁾	3	$	278,727	$	283,558	$	229,905	$	233,916

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⁽¹⁾ Carrying value includes $1,140.1 million gross mortgage notes payable less $0.6 million of mortgage discounts and $9.7 million of deferred financing costs as of December 31, 2018.

⁽²⁾ Carrying value includes $992.3 million gross mortgage notes payable less $1.9 million of mortgage discounts and $5.5 million of deferred financing costs as of December 31, 2017.

⁽³⁾ Both the Revolving Credit Facility and Term Loan are part of the Credit Facility (see Note 6 - Credit Facilities for more information).

⁽⁴⁾Carrying value includes $282.1 million and $233.2 million gross Term Loan payable less $3.3 million and $3.3 million of deferred financing costs as of December 31, 2018 and 2017, respectively.

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