Note 10 - Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2022

Notes to Financial Statements

Fair Value Measurement and Measurement Inputs, Recurring and Nonrecurring [Text Block]

10. Fair Value of Financial Instruments

Fair-value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering market-participant assumptions in fair-value measurements, ASC 820 establishes a fair-value hierarchy that distinguishes between market-participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market-participant assumptions (unobservable inputs classified within Level 3 of the hierarchy):

● Level 1 inputs are adjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

● Level 2 inputs are other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar instruments in active markets and inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves, that are observable at commonly quoted intervals.

● Level 3 inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, related market activity for the asset or liability.

The Company’s assessment of the significance of a particular input to the fair-value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Derivative Financial Instruments and Hedging Activities

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash payments principally related to the Company’s borrowings. In order to minimize counterparty credit risk, the Company enters into and expects to enter into hedging arrangements only with major financial institutions that have high credit ratings.

The Company’s main objective in using interest rate derivatives is to add stability to interest expense related to floating rate debt. To accomplish this objective, the Company primarily uses interest rate caps as part of its interest rate risk management strategy. Interest rate caps involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. On December 30, 2021, the Company, through a subsidiary, entered into a $32.5 million interest rate cap agreement at a strike rate of 2.29% to hedge the variable cash flows associated with the Company's floating rate debt. The interest rate cap terminates on June 1, 2024. 

Financial Instruments Carried at Fair Value

See Note 2 and Notes 4 through 6 for additional information.

Financial Instruments Not Carried at Fair Value

The fair values of cash and cash equivalents, accrued interest and dividends, accounts payable and other accrued liabilities and accrued interest payable approximated their carrying values because of the short-term nature of these instruments. The estimated fair values of other financial instruments were determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company would realize on the disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.

Long-term indebtedness is carried at amounts that reasonably approximate their fair value. In calculating the fair value of its long-term indebtedness, the Company used interest rate and spread assumptions that reflect current creditworthiness and market conditions available for the issuance of long-term debt with similar terms and remaining maturities. These financial instruments utilize Level 2 inputs.

Amounts borrowed under master repurchase agreements are based on their contractual amounts that reasonably approximate their fair value given the short to moderate term and floating rate nature.

The carrying values and fair values of the Company’s financial assets and liabilities recorded at fair value on a recurring basis, as well as other financial instruments not carried at fair value as of  September 30, 2022 (in thousands):

			Fair Value
	Carrying Value		Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents	$	22,100	$	22,100	$	—	$	—	$	22,100
Restricted cash		4,382		4,382		—		—		4,382
Real estate investment, net		59,940		—		—		59,940		59,940
Loans, held-for-investment, net		283,866		—		—		288,954		288,954
Common stock investments, at fair value		83,619		—		27,885		55,734		83,619
Mortgage loans, held-for-investment, net		729,004		—		—		730,152		730,152
Accrued interest		13,691		13,691		—		—		13,691
Mortgage loans held in variable interest entities, at fair value		6,980,129		—		6,980,129		—		6,980,129
CMBS structured pass-through certificates, at fair value		49,758		—		49,758		—		49,758
MSCR notes, at fair value		10,218		—		10,218		—		10,218
Mortgage backed securities, at fair value		33,650		—		33,650		—		33,650
Accounts receivable and other assets		1,575		1,575		—		—		1,575
Proceeds held in escrow for unsettled purchase		3,990		—		3,990		—		3,990
	$	8,275,922	$	41,748	$	7,105,630	$	1,134,780	$	8,282,158
Liabilities
Secured financing agreements, net	$	688,502	$	—	$	—	$	700,877	$	700,877
Master repurchase agreements		351,037		—		—		351,037		351,037
Unsecured notes, net		198,242		—		182,779		—		182,779
Mortgages payable, net		32,212		—		—		27,213		27,213
Accounts payable and other accrued liabilities		6,131		6,131		—		—		6,131
Accrued interest payable		8,249		8,249		—		—		8,249
Due to brokers for unsecured notes purchased, not yet settled		7,980		7,980						7,980
Bonds payable held in variable interest entities, at fair value		6,488,498		—		6,488,498		—		6,488,498
	$	7,780,851	$	22,360	$	6,671,277	$	1,079,127	$	7,772,763

The significant unobservable inputs used in the fair value measurement of the Company’s investment in NSP are the discount rate and terminal capitalization rate. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. The following is a summary of significant unobservable inputs used in the fair valuation of the Company's Level 3 assets carried at fair value on the Consolidated Balance Sheets (in thousands): 

	Carrying Value		Valuation Technique	Unobservable Inputs	Input Values
Common stock investment, at fair value	$	55,734	Discounted cash flow	Terminal cap rate		5.38	%
				Discount rate		8.50	%

The table below reflects a summary of changes for the Company's Level 3 assets carried at fair value on the Consolidated Balance Sheets for the nine months ended September 30, 2022:

	Balance as of 12/31/21		Change in Unrealized Gains/(Losses)			Balance as of 9/30/22
Common stock investment, at fair value	$	58,460	$	(2,726	)	$	55,734

Other Financial Instruments Carried at Fair Value

Redeemable noncontrolling interests in the OP have a redemption feature and are marked to their redemption value if such value exceeds the carrying value of the redeemable noncontrolling interests in the OP (see Note 13). The redemption value is based on the fair value of the Company’s common stock at the redemption date and therefore is calculated based on the fair value of the Company’s common stock at the balance sheet date. Since the valuation is based on observable inputs, such as quoted prices for similar instruments in active markets, redeemable noncontrolling interests in the OP are classified as Level 2 if they are adjusted to their redemption value. At September 30, 2022, the redeemable noncontrolling interests in the OP are valued at their carrying value on the Consolidated Balance Sheets (see Note 13).