Fair Value Measurements

3 Months Ended

Mar. 31, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

3. Fair Value Measurements

REIT securities, loan securities and derivative financial instruments are reported at fair value. 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).

The Trust’s Level 3 loan securities carried at fair value primarily consist of non-agency mortgage-related securities. The non-agency mortgage-related securities market continued to be illiquid during the first quarter of 2012, with low transaction volumes, wide credit spreads, and limited transparency. The Trust values the loan securities carried at fair value it holds based primarily on prices received from a pricing service. The techniques used by the pricing service to develop the prices generally are either: (a) a comparison to transactions involving instruments with similar collateral and risk profiles; or (b) industry standard modeling, such as a discounted cash flow model. The models and related assumptions used by the pricing service are owned and managed by the service. However, the Trust has an understanding of the processes used to develop the prices provided to it based on its ongoing due diligence. The Trust periodically has discussions with the pricing service to maintain a current understanding of the processes and inputs used to develop prices.

Recurring Measurements

The table below presents the Trust’s assets measured at fair value on a recurring basis as of March 31, 2012, according to the level in the fair value hierarchy within which those measurements fall (in thousands):

Recurring Basis	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets
Securities carried at fair value	$	33,700	$	—	$	—	$	33,700
Loan securities carried at fair value		—		—		5,473		5,473
Interest rate caps		—		124		—		124
	$	33,700	$	124	$	5,473	$	39,297

The table below presents the Trust’s assets 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):

Recurring Basis	Quoted Prices in Active Markets for Identical Assets (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 Caps		—		85		—		85
	$	28,856	$	85	$	5,309	$	34,250

The table below includes a roll forward of the balance sheet amounts from January 1, 2012 to March 31, 2012, 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.

Loan Securities Carried at Fair Value	Three Months Ended March 31, 2012		Three Months Ended March 31, 2011
Fair value, January 1	$	5,309	$	11,981
Unrealized gain, net		164		2,813
Sales		—		(662	)
Fair value, March 31	$	5,473	$	14,132

During the quarter ended March 31, 2012 there were no transfers between Level 1 and Level 2 fair value assets and liabilities.

Quantitative Information about Level 3 Fair Value Measurements

The following table provides quantitative information about the significant unobservable inputs used for recurring fair value measurements categorized within Level 3. Refer to “Assets measured at fair value on a recurring basis” for a complete valuation hierarchy summary.

	Assets Measured at Fair Value		Valuation Technique	Unobservable Input	Input Range (Weighted Average)
Loan Securities	$	5,473	Discounted cash flow	Constant prepayment rate	0 (0)
				Probability of default	0 (0)
				Loss severity	0 (0)
				Yield to maturity	6.25% -11.88% (9.27%)

Prepayment rates, probability of default, loss severity and yield to maturity percentage are used to determine the fair value of the loan securities. Increases or decreases in these inputs could cause the fair value of the assets to significantly decrease or increase respectively.

Non-Recurring Measurements

The Trust did not have any non-recurring measurements of fair value of assets or liabilities during the three months ended March 31, 2011 and 2012. These items would typically include investments in real estate and equity investments.

Financial Instruments Not Reported at Fair Value

The carrying value and estimated fair value of financial instruments not recorded at fair value on a recurring basis but required to be disclosed at fair value were as follows:

	March 31, 2012
	Carrying						Fair value hierarchy level
	amount			Fair value			Level 1		Level 2		Level 3
									(in thousands)
Assets (liabilities)
Loans receivable		116,399			123,954			—		—		123,954
Mortgage loans payable		(230,257	)		(218,117	)		—		—		(218,117	)

	December 31, 2011
	Carrying amount			Fair value
	(in thousands)
Assets (liabilities)
Receivable		114,333			123,630
Mortgage loans payable		(230,940	)		(218,336	)

Loans Receivable and Mortgage Loans Payable

Fair values of loans receivable and mortgage loans payable are primarily determined by discounting the expected cash flows at current interest rates plus an applicable risk spread, which reflects credit quality and maturity of the loans. The risk spread is based on loans with comparable credit quality, maturities and risk profile. Loans receivable may also be based on the fair value of the underlying real estate collateral less cost to sell, which is estimated using appraised values. These are classified as Level 3.

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 elected the fair value option for all loan securities and REIT securities acquired.

For the three months ended March 31, 2012 and 2011, the Trust recognized net unrealized gains of $5,096,000 and $3,699,000, respectively, as a result of the change in fair value of the REIT securities and loan securities for which the fair value option was elected, which is recorded as an unrealized gain or loss in the Trust’s Statement of Operations. Income related to securities carried at fair value is recorded as interest and dividend income.

The following table presents as of March 31, 2012 and December 31, 2011 the Trust’s financial assets for which the fair value option was elected (in thousands):

Financial Instruments at Fair Value	March 31, 2012		December 31, 2011
Assets
Securities carried at fair value:
REIT Preferred shares	$	—	$	4,277
REIT Common shares		33,700		24,579
Loan securities carried at fair value		5,473		5,309
	$	39,173	$	34,165

The table below presents as of March 31, 2012 the difference between fair values and the aggregate contractual amounts due for which the fair value option has been elected (in thousands):

	Fair Value at March 31, 2012		Amount Due Upon Maturity		Difference
Assets
Loan securities carried at fair value	$	5,473	$	7,494	$	2,021
	$	5,473	$	7,494	$	2,021