Financial Instruments and Fair Value Measurements

The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities, and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments including interest rate caps and interest rate swaps; and Level 3, for financial instruments or other assets/liabilities that do not fall into Level 1 or Level 2 and for which little or no market data exists, therefore requiring the Company to develop its own assumptions.

Items Measured at Fair Value on a Recurring Basis

The methods and assumptions described below were used to estimate the fair value of each class of financial instrument. For significant Level 3 items, the Company has also provided the unobservable inputs along with their weighted-average ranges.

Money Market Funds — The Company has money market funds, which are included in Cash and cash equivalents in the consolidated financial statements, are comprised of government securities and/or U.S. Treasury bills. These funds were classified as Level 1 as we used quoted prices from active markets to determine their fair values.

Derivative Assets — The Company has derivative assets, which are included in Other assets, net in the consolidated financial statements, are comprised of interest rate swaps and caps. The derivative instruments were measured at fair value using readily observable market inputs, such as quotations on interest rates, and were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market. See “Derivative Financial Instruments,” below.

Derivative Liabilities — The Company has derivative liabilities, which are included in Accounts payable and other liabilities in the consolidated financial statements, are comprised of interest rate swaps and caps. These derivative instruments were measured at fair value using readily observable market inputs, such as quotations on interest rates, and were classified as Level 2 because they are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market. See “Derivative Financial Instruments,” below.

The Company did not have any transfers into or out of Level 1, Level 2, and Level 3 measurements during the three months ended March 31, 2018 or 2017.

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis (in thousands):



	March 31, 2018						December 31, 2017
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets
Money Market Funds	$	105	$	—	$	—	$	3	$	—	$	—
Derivative financial instruments	—		9,958		—		—		4,402		—
Liabilities
Derivative financial instruments	—		1,238		—		—		1,467		—

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’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.

Items Measured at Fair Value on a Nonrecurring Basis (Including Impairment Charges)

The Company did not record any impairment charges during the three months ended March 31, 2018 or 2017.

Derivative Financial Instruments

The Company had the following interest rate swaps for the periods presented (dollars in thousands):



	Aggregate Notional Amount				Strike Rate			Balance Sheet Location	Fair Value
Derivative Instrument	Aggregate Notional Amount		Effective Date	Maturity Date	Low		High	Balance Sheet Location	March 31, 2018			December 31, 2017
Core
Interest Rate Swaps	$	69,864	October 2011 - March 2018	July 2018 - March 2028	2.9%	—	3.77%	Other Liabilities	$	(1,238	)	$	(1,438	)
Interest Rate Swaps	336,823		February 2013 - December 2017	November 2018 - July 2027	1.24%	—	3.77%	Other Assets	8,458			4,076
	$	406,687							$	7,220		$	2,638

Fund II
Interest Rate Swap	$	19,503	October 2014	November 2021	2.88%	—	2.88%	Other Assets	$	155		$	—
Interest Rate Swaps	—		October 2014	November 2021	2.88%	—	2.88%	Other Liabilities	—			(29		)
Interest Rate Cap	29,500		April 2013	April 2018	4.00%	—	4.00%	Other Assets	—			—
	$	49,003							$	155		$	(29	)

Fund III
Interest Rate Cap	$	58,000	December 2016	January 2020	3.00%	—	3.00%	Other Assets	$	48		$	14

Fund IV
Interest Rate Swaps	$	86,517	May 2014 - November 2017	May 2019 - April 2022	1.78%	—	2.11%	Other Assets	$	1,222		$	295
Interest Rate Caps	108,900		July 2016 - November 2016	August 2019 - December 2019	3.00%	—	3.00%	Other Assets	65			17
	$	195,417							$	1,287		$	312

Fund V
Interest Rate Swaps	$	16,900	January 2018	February 2021	2.41%	—	2.41%	Other Assets	$	10		$	—

Total asset derivatives									$	9,958		$	4,402
Total liability derivatives									$	(1,238	)	$	(1,467	)

All of the Company’s derivative instruments have been designated as cash flow hedges and hedge the future cash outflows on variable-rate debt (Note 7). It is estimated that approximately $1.1 million included in accumulated other comprehensive (loss) income related to derivatives will be reclassified to interest expense in the 2018 results of operation. As of March 31, 2018 and December 31, 2017, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated hedges.

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. 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, from time to time, through the use of derivative financial instruments. The Company enters into derivative financial instruments to manage exposures that result in the receipt or payment of future known and uncertain cash amounts, the values 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 receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.

The Company is exposed to credit risk in the event of non-performance by the counterparties to the Swaps if the derivative position has a positive balance. The Company believes it mitigates its credit risk by entering into Swaps with major financial institutions. The Company continually monitors and actively manages interest costs on its variable-rate debt portfolio and may enter into additional interest rate swap positions or other derivative interest rate instruments based on market conditions. The Company has not entered, and does not plan to enter, into any derivative financial instruments for trading or speculative purposes.

The following table presents the location in the financial statements of the income (losses) recognized related to the Company’s cash flow hedges (in thousands):



	Three Months Ended March 31,
	2018		2017
Amount of (loss) income related to the effective portion recognized in other comprehensive income	$	5,653	$	118
Amount of loss related to the effective portion subsequently reclassified to earnings	—		—
Amount of gain (loss) related to the ineffective portion and amount excluded from effectiveness testing	—		—

Credit Risk-Related Contingent Features

The Company has agreements with each of its Swap counterparties that contain a provision whereby if the Company defaults on certain of its unsecured indebtedness the Company could also be declared in default on its swaps, resulting in an acceleration of payment under the swaps.

Other Financial Instruments

The Company’s other financial instruments had the following carrying values and fair values as of the dates shown (dollars in thousands):



		March 31, 2018				December 31, 2017
	Level	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Notes Receivable^(a)	3	$	108,959	$	105,985	$	153,829	$	151,712
Mortgage and Other Notes Payable^(a)	3	923,287		912,968		921,261		921,891
Investment in non-traded equity securities ^(b)	3	—		22,824		—		22,824
Unsecured notes payable and Unsecured line of credit^(c)	2	544,425		544,506		517,125		515,330

__________

(a)

The Company determined the estimated fair value of these financial instruments using a discounted cash flow model with rates that take into account the credit of the borrower or tenant, where applicable, and interest rate risk. The Company also considered the value of the underlying collateral, taking into account the quality of the collateral, the credit quality of the borrower, the time until maturity and the current market interest rate environment.


(b)	Represents Fund II’s cost-method investment in Albertson’s supermarkets (Note 4).

(c)

The Company determined the estimated fair value of the unsecured notes payable and unsecured line of credit using quoted market prices in an open market with limited trading volume where available. In cases where there was no trading volume, the Company determined the estimated fair value using a discounted cash flow model using a rate that reflects the average yield of similar market participants.

The Company’s cash and cash equivalents, restricted cash, accounts receivable, accounts payable and certain financial instruments included in other assets and other liabilities had fair values that approximated their carrying values at March 31, 2018.