Fair Value

12 Months Ended

Dec. 31, 2011

Fair Value

7. Fair Value

The Company is required to disclose fair value information about all of its financial instruments (as defined under prevailing accounting guidance), whether or not these instruments are measured at fair value on the Company’s Consolidated Balance Sheet. Under such guidance, substantially all of the Company’s assets and liabilities other than its owned property investments are classified as financial instruments.

The Company estimates that the fair values of cash and cash equivalents, other assets, accounts payable and other liabilities, and dividends and distributions payable approximate their carrying values due to the short-term maturities of these items.

The carrying amounts, notional or face amounts and estimated fair values of the Company’s other financial instruments (as defined under GAAP) at December 31, 2011 and December 31, 2010, are as follows:

	Carrying Amount				Notional Amount				Estimated Fair Value
	12/31/2011		12/31/2010		12/31/2011		12/31/2010		12/31/2011		12/31/2010
Assets:
Loans held for investment	$	33,209	$	210,441	$	37,622	$	214,049	$	35,120	$	223,099
Commercial mortgage-backed securities		59,435		145,965		84,405		189,187		59,435		127,164
Liabilities:
Mortgages on real estate investments	$	972,924	$	928,429	$	969,004	$	925,264	$	1,002,247	$	979,570
Collateralized debt obligations		–		254,210		–		254,361		–		220,907
Credit agreement		70,668		105,345		70,668		105,345		70,668		105,345
Secured term loan		88,142		101,880		88,142		101,880		78,302		95,145
Convertible senior notes		34,522		33,926		35,009		35,009		34,997		35,004
Other long-term debt		30,930		30,930		30,930		30,930		29,421		28,095

The fair values indicated above are indicative of the interest rate and credit spread environment as of December 31, 2011 and December 31, 2010, respectively, and may not take into consideration the effects of subsequent interest rate, credit spread fluctuations, or changes in the ratings of the underlying tenants on the related leases. The methodologies used and key assumptions made to estimate fair values are as follows:

Loans held for investment—The fair value of the Company’s fixed-rate loan portfolio is estimated with a discounted cash flow analysis, utilizing scheduled cash flows and discount rates estimated by management to approximate those that a willing buyer and seller might use.

Commercial mortgage-backed securities—The fair values of the securities reflect management’s best estimate and require a considerable amount of judgment and assumptions. Management evaluates a variety of inputs and then estimates fair value based on those inputs. The primary inputs evaluated by management are broker quotations, collateral values, subordination levels, and liquidity of the security.

Credit agreement—Management believes that the stated interest rate (which floats based on short-term interest rates) approximates market rates (when compared to similar credit facilities with similar credit risk). As such, the fair value of these obligations is estimated to be equal to the outstanding principal amount.

Mortgages on real estate investments, collateralized debt obligations and secured term loan —The fair value of mortgages payable on real estate investments, collateralized debt obligations and the secured term loan is estimated using a discounted cash flow analysis, based on management’s estimates of market interest rates. For mortgages where the Company has an early prepayment right, management also considers the prepayment amount to evaluate the fair value.

Convertible senior notes —The carry value of convertible senior notes reflects the impact of accounting guidance for the notes adopted as of January 1, 2009. See Note 9. The fair value is estimated using a discounted cash flow analysis, based on management’s estimates of market interest rates, and indications of market yields, where available.

Other long-term debt—The fair value of the Company’s other long-term debt is estimated using a discounted cash flow analysis, based on management’s estimates of market interest rates.

On January 1, 2008, the Company adopted accounting guidance (codified at FASB ASC 820) that defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. The guidance does not impose any new requirements around which assets and liabilities are to be measured at fair value, and instead applies to asset and liability balances required or permitted to be measured at fair value under existing accounting pronouncements.

The guidance applies principally to the Company’s securities investments, all of which are classified as available for sale for accounting purposes and, as such, are measured at fair value on a recurring basis on the Company’s financial statements.

FASB ASC 820 establishes a valuation hierarchy based on the transparency of inputs used in the valuation of an asset or liability. Classification is based on the lowest level of inputs that is significant to the fair value measurement. The valuation hierarchy contains three levels:

· Level 1 – Quoted prices are available in active markets for identical assets or liabilities at the reporting date. As of December 31, 2011, the Company has not classified any of its securities as Level 1.

· Level 2 – Pricing inputs other than quoted prices included within Level 1 that are observable for substantially the full term of the asset or liability. Level 2 assets include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. As of December 31, 2011, the Company has classified two certificated mortgage loans (one with CVS Corporation as underlying tenant and the other with Koninklijke Ahold, N.V. as underlying tenant), as well as its sole remaining generic commercial mortgage-backed security investment (BACM 2006-4, Class H), as Level 2.

· Level 3 – Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. These valuations require a considerable amount of judgment and assumptions. As of December 31, 2011, the Company has classified all of its securities that are backed primarily by single tenant loan collateral, other than the CVS and Ahold backed certificated loans discussed above, as Level 3. Management evaluates a variety of inputs and then estimates fair value based on those inputs. The primary inputs evaluated by management are broker quotations (observable), collateral values (observable), subordination levels (observable), and liquidity of the security (unobservable). These inputs are the factors employed by management and to its knowledge other parties in determining where to price actual transactions. The Company’s securities available for sale that are classified as Level 3are unique in that in most cases the Company owns the entire bond class. As a result, the broker quotes obtained by the Company reflect expected pricing rather than actual trades and may also reflect transactions in inactive markets. Therefore, the Company believes Level 3 is the appropriate classification in the fair value hierarchy for the Company’s available for sale securities.

The table below presents the fair value of the Company’s securities as of December 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall.

	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31,2011
Assets
Securities available for sale	$	–	$	26,622	$	32,813	$	59,435

The table below presents the fair value of the Company’s securities classified as available for sale as of December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall. As of December 31, 2010, only the Company’s securities financed pursuant to the credit agreement discussed at Note 9 were classified as available for sale.

	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31,2010
Assets
Securities available for sale	$	–	$	–	$	13,797	$	13,797

The following table summarizes the change in the fair value for Level 3 items for the years ended December 31, 2011 and December 31, 2010:

	Year ended December 31, 2011			Year ended December 31, 2010
Securities available for sale
Beginning balance	$	13,797		$	13,044
Gains (losses) included in net income (loss):
Included in gains (loss) on investments		–			(208	)
Included in interest income		391			309
Gains (losses) included in other comprehensive income		(585	)		1,758
Purchases, sales, issuances and settlements (net)		(2,123	)		(1,106	)
Transfers in (out) of Level 3		21,333			–
Ending balance	$	32,813		$	13,797