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 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 significant inputs and assumptions used to determine the fair value of the Trust’s loan securities include prepayment rates, probability of default, loss severity and yield to maturity percentages.

Recurring Measurements

The table below presents the Trust’s assets measured at fair value on a recurring basis as of June 30, 2013 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	$	10,360	$	—	$	—	$	10,360
Loan securities carried at fair value		—		—		226		226
Interest rate hedges		—		139		—		139

	$	10,360	$	139	$	226	$	10,725

The table below presents the Trust’s assets measured at fair value on a recurring basis as of December 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	$	19,694	$	—	$	—	$	19,694
Loan securities carried at fair value		—		—		11		11
Interest rate caps		—		8		—		8

	$	19,694	$	8	$	11	$	19,713

During the six months ended June 30, 2013 and June 30, 2012 there were no transfers between Level 1 and Level 2 fair value assets and liabilities.

The table below includes a roll forward of the balance sheet amounts from January 1, 2013 to June 30, 2013 and from January 1, 2012 to June 30, 2012 including the change in fair value, for financial instruments classified by the Trust within Level 3 of the valuation hierarchy (in thousands). 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	Six Months Ended June 30, 2013		Six Months Ended June 30, 2012

Fair value, January 1	$	11	$	5,309
Net unrealized gain		215		76

Fair value, June 30	$	226	$	5,385


The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	215	$	76

Quantitative Information about Level 3 Fair Value Measurements

At June 30, 2013 the Trust held only one loan security which is valued at $226,000, or 20% of face value. The valuation reflects assumptions that would be considered by market participants along with management’s assessment of collectible future cash flows.

Non-Recurring Measurements

Non-recurring measurements of fair value of assets or liabilities would typically include investments in real estate, assets held for sale and equity investments. During the three and six months ended June 30, 2013 the Trust recognized an impairment charge of $154,000 on its Denton, Texas property which is included in assets held for sale. The Trust did not recognize any valuation adjustments as a result of non-recurring measurements for the three and six months ended June 30, 2012.

During the quarter ended June 30, 2013 the Trust entered into a purchase and sale agreement on its Denton, Texas property. At June 30, 2013 the purchase deposit was non-refundable and it was probable that the sale would be consummated. As a result the property was classified as held for sale at June 30, 2013. A fair value measurement was prepared based on the purchase contract and $154,000 impairment charge was recorded at June 30, 2013.

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 (in thousands):


	June 30, 2013
	Carrying Amount				Fair value hierarchy level
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3

Loans receivable	$	113,308	$	124,636		—		—	$	124,636
Mortgage loans payable		325,026		315,888		—		—		315,888
Senior notes payable		86,250		90,252		90,252		—		—
Secured financings		29,150		29,406		—		—		29,406
Notes payable		1,645		1,645		—		—		1,645

	December 31, 2012
	Amount				Fair value hierarchy level
	Amount		Fair Value		Level 1		Level 2		Level 3

Loans receivable	$	211,250	$	222,246	$	—	$	—	$	222,246
Mortgage loans payable		280,576		270,923		—		—		270,923
Senior notes payable		86,250		89,183		89,183		—		—
Secured financings		52,920		53,253		—		—		53,253
Notes payable		1,676		1,676		—		—		1,676

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 these securities, during the three months ended June 30, 2013 and 2012, the Trust recognized net unrealized losses of $1,645,000 and $879,000, respectively. For the six months ended June 30, 2013 and 2012, the Trust recognized net unrealized gains of $73,000 and $4,217,000, respectively. The change in fair value of the REIT securities and loan securities for which the fair value option was elected is recorded as an unrealized gain or loss in the Trust’s Consolidated Statements of Operations. Income related to securities carried at fair value is recorded as interest and dividend income.

The following table presents as of June 30, 2013 and December 31, 2012 the Trust’s financial assets for which the fair value option was elected (in thousands):


Financial Instruments at Fair Value	June 30, 2013		December 31, 2012
Assets
Securities carried at fair value:
REIT common shares	$	10,360	$	19,694
Loan securities carried at fair value		226		11

	$	10,586	$	19,705

The table below presents as of June 30, 2013 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 June 30, 2013		Amount Due Upon Maturity		Difference
Assets
Loan securities carried at fair value	$	226	$	1,130	$	904

	$	226	$	1,130	$	904