Fair Value Measurements

12 Months Ended

Dec. 31, 2011

Fair Value Measurements [Abstract]

Fair Value Measurements

3. Fair Value Measurements

The accounting standards establish a framework for measuring fair value as well as disclosures about fair value measurements. They emphasize that fair value is a market based measurement, not an entity-specific measurement. Therefore a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the standards establish 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 utilize unadjusted quoted prices in active markets for identical assets or liabilities that the Trust has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability other than quoted prices, such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. 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 Trust’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.

Level 1 financial investments include highly liquid government bonds, mortgage products and exchange-traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain derivative financial instruments. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Securities classified within Level 3 include, for example, residual interests in securitizations and other less liquid securities, investments in joint ventures and real estate investments.

The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Recurring Measurements

Securities Carried at Fair Value

Securities carried at fair value are classified within Level 1 of the fair value hierarchy.

Loan Securities Carried at Fair Value

The Trust uses a third party pricing model to establish values for the loan securities in its portfolio. The Trust also performs further analysis of the performance of the loans and collateral underlying the securities, the estimated value of the collateral supporting such loans and a consideration of local, industry and broader economic trends and factors. Significant judgment is utilized in the ultimate determination of fair value. The significant assumptions used in this analysis include market interest rates and interest rate spreads. This valuation methodology has been characterized as Level 3 in the fair value hierarchy.

Derivative Financial Instruments

The Trust uses interest rate swaps and interest rate caps to manage its interest rate risk. The valuation of these instruments is determined using both quantitative and qualitative valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative as well as potential credit risks with the swap counterparty. This analysis 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 fair values of interest rate swaps and interest rate caps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

The Trust incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Trust has considered the impact of netting as well as any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Although the Trust 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 its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. However, the Trust 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 its derivatives. As a result, the Trust has determined that the derivative valuations in their entirety should be classified in Level 2 of the fair value hierarchy.

The table below presents the Trust’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2011, according to the level in the fair value hierarchy within which those measurements fall (in thousands):

		September 30,		September 30,		September 30,		September 30,
Recurring Basis	Quoted Prices in  Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets
Securities carried at fair value	$	28,856	$	—	$	—	$	28,856
Loan securities carried at fair value		—		—		5,309		5,309
Interest Rate Cap		—		85		—		85
	$	28,856	$	85	$	5,309	$	34,250

The table below presents the Trust’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2010, according to the level in the fair value hierarchy within which those measurements fall (in thousands):

		September 30,		September 30,		September 30,		September 30,
Recurring Basis	Quoted Prices in  Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets
Securities carried at fair value	$	33,032	$	—	$	—	$	33,032
Loan securities carried at fair value		—		—		11,981		11,981
	$	33,032	$	—	$	11,981	$	45,013
Liabilities
Interest rate swap	$	—	$	63	$	—	$	63

During the years ended December 31, 2011 and 2010 there were no transfers between Level 1 and Level 2 fair value assets and liabilities.

The table below includes a roll forward (in thousands) of the balance sheet amounts from January 1, 2009 to December 31, 2011, including the change in fair value, for financial instruments classified by the Trust within Level 3 of the valuation hierarchy. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement.

		September 30,			September 30,
	Securities Carried at Fair Value			Loan Securities Carried at Fair Value
Fair value, January 1, 2009	$	—		$	—
Purchases		692			1,661
Transfers in/and or out of Level 3		—			—
Fair value, January 1, 2010		692			1,661
Purchases		—			7,112
Sale repayment		(692	)		(2,272	)
Realized gain		—			469
Unrealized gain, net		—			5,011
Transfers in/and or out of Level 3		—			—
Fair value, January 1, 2011		—			11,981
Purchases		—			—
Sale repayment		—			(662	)
Payoff at par		—			(8,748	)
Realized gain					—
Unrealized gain, net		—			2,738
Transfers in/and or out of Level 3		—			—
Fair value, December 31, 2011	$	—		$	5,309

Non-Recurring Measurements

Equity and Preferred Equity Investments

Equity and preferred equity investments are assessed for other-than-temporary impairment when the carrying value of the Trust’s investment exceeds its fair value. The fair value of equity investments is determined using an income capitalization approach considering prevailing market capitalization rates. The Trust reviews each investment based on the highest and best use of the investment and market participation assumptions. The significant assumptions used in this analysis include rental revenues, operating expenses, inflation rates, market absorption rates, tenanting costs, the discount rate and capitalization rates used in the income capitalization valuation. The Trust has determined that the significant inputs used to value its Marc Realty, Sealy, and Lex-Win Concord, LLC equity investments fall within Level 3. The Trust recognized other-than-temporary impairment losses of $21,058,000, $0 and $34,170,000 on these investments during the years ended December 31, 2011, 2010 and 2009, respectively.

The Trust has determined that the significant inputs used to value certain of its preferred equity investments fall within Level 3. The Trust recorded impairment losses of $2,186,000 on these preferred equity investments during the year ended December 31, 2009. Due to the restructuring of the Trust’s investment in the Marc Realty properties, these preferred equity investments were reclassified as equity investments as of July 1, 2009.

Investments in Real Estate and Assets Held For Sale

During 2011, 2010, and 2009 the Trust recognized impairment charges of $7,600,000, $2,720,000 and $10,000,000, respectively, relative to investments in real estate and assets held for sale. The Trust assesses the assets in its portfolio for recoverability based upon its estimate of undiscounted future cash flows expected to result from the use and disposition of the assets. For those assets deemed not to be fully recoverable, the Trust determines the fair value of those assets using an income capitalization approach based on assumptions it believes a market participant would utilize. Significant inputs used to value these investments fall within Level 3. Significant assumptions used in this analysis include rental revenues, operating expenses, inflation rates, market absorption rates, tenanting costs, the discount rate and capitalization rates used in the income capitalization valuation. The Trust records impairment charges equal to the difference between its carrying value and the estimated fair value of the asset. In July 2011 the Trust satisfied its $23,773,000 first mortgage loan on its wholly owned Lisle, Illinois properties for a discounted payoff of $14,500,000. Subsequent to the discounted payoff and as a result of continued declines in occupancy at these properties, the Trust re-evaluated its business plan and holding periods for these properties. The Trust determined that as a result of the anticipated shorter holding period and higher lease up costs, the carrying value of the 701 Arboretum property was no longer fully recoverable. In addition, in September 2011 the Trust entered into a settlement agreement with the former tenant at its Churchill, Pennsylvania property. The Trust re-evaluated its business plan and holding period for this property and determined that the carrying value of the Churchill property was no longer fully recoverable.

The table below presents as of December 31, 2011 the Trust’s assets and liabilities measured at fair value as events dictate, according to the level in the fair value hierarchy within which those measurements fall (in thousands):

		September 30,		September 30,		September 30,		September 30,
Non-Recurring Basis	Quoted Prices in  Active Markets for  Identical Assets  and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Equity investments	$	—	$	—	$	28,135	$	28,135
Investments in real estate		—		—		10,794		10,794
	$	—	$	—	$	38,929	$	38,929

The table below presents as of December 31, 2010 the Trust’s assets and liabilities measured at fair value as events dictate, according to the level in the fair value hierarchy within which those measurements fall (in thousands):

		September 30,		September 30,		September 30,		September 30,
Non-Recurring Basis	Quoted Prices in  Active Markets for  Identical Assets  and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Equity investments	$	—	$	—	$	—	$	—
Assets held for sale		—		—		2,209		2,209
Investments in real estate		—		—		—		—
	$	—	$	—	$	2,209	$	2,209

Fair Value Option

The current accounting guidance for fair value measurement provides a fair value option election that allows companies to irrevocably elect fair value as the measurement attribute for certain financial assets and liabilities. Changes in fair value for assets and liabilities for which the election is made are recognized in earnings on a quarterly basis based on the then market price regardless of whether such assets or liabilities have been disposed of at such time. The fair value option guidance permits the fair value option election to be made on an instrument by instrument basis when it is initially recorded or upon an event that gives rise to a new basis of accounting for that asset or liability. The Trust has elected the fair value option for all loan securities and REIT securities.

The Trust recognized a net unrealized gain of $5,526,000, $10,071,000, and $17,862,000 for the years ended December 31, 2011, 2010, and 2009 respectively, as a result of the change in fair value of the securities and loan securities carried at fair value, which is recorded as an unrealized gain in the Trust’s Statements of Operations. Income related to securities carried at fair value is recorded as interest and dividend income.

The following table presents as of December 31, 2011 and December 31, 2010 the Trust’s financial assets for which the fair value option was elected (in thousands):

		September 30,		September 30,
Financial Instruments at Fair Value	December 31, 2011		December 31, 2010
Assets
Securities carried at fair value:
REIT Preferred shares	$	4,277	$	28,547
REIT Common shares		24,579		4,485
Loan securities carried at fair value		5,309		11,981
	$	34,165	$	45,013

The table below presents as of December 31, 2011 the difference between fair values and the aggregate contractual amounts due for which the fair value option has been elected (in thousands):

		September 30,		September 30,		September 30,
	Fair Value at December 31, 2011		Amount Due Upon Maturity		Difference
Assets
Loan securities carried at fair value	$	5,309	$	7,494	$	2,185
	$	5,309	$	7,494	$	2,185