Fair Value of Assets and Liabilities

12 Months Ended

Dec. 31, 2015

Fair Value of Assets and Liabilities

Note 9. Fair Value of Assets and Liabilities

Our financial instruments include cash and cash equivalents, restricted cash, rents receivable, mortgage notes payable, accounts payable, senior unsecured notes, an unsecured revolving credit facility, unsecured term loans, amounts due to related persons, other accrued expenses and security deposits. At December 31, 2015 and December 31, 2014, the fair values of our financial instruments approximated their carrying values in our consolidated financial statements due to their short term nature or variable interest rates, except as follows:


	As of December 31, 2015				As of December 31, 2014
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Senior unsecured notes, 3.75% interest rate, due in 2019	$	347,981	$	351,692	$	347,423	$	356,129
Mortgage note payable, 5.55% interest rate, due in 2016(1)		83,441		83,457		85,167		85,171
Mortgage note payable, 6.21% interest rate, due in 2016(1)		23,499		24,038		23,833		25,394
Mortgage note payable, 5.88% interest rate, due in 2021(1)		14,160		14,678		14,374		15,249
Mortgage note payable, 7.00% interest rate, due in 2019(1)		9,199		9,645		9,563		10,275
Mortgage note payable, 8.15% interest rate, due in 2021(1)		6,344		6,711		7,339		7,956
Mortgage note payable, 5.73% interest rate, due in 2015(1)		—		—		47,418		48,233
	$	484,624	$	490,221	$	535,117	$	548,407

⁽¹⁾

We assumed these mortgages in connection with our acquisitions of certain properties. The stated interest rates for these mortgage debts are the contractually stated rates. We recorded the assumed mortgages at estimated fair value on the date of acquisition and we are amortizing the fair value premiums, if any, to interest expense over the respective terms of the mortgages to reduce interest expense to the estimated market interest rates as of the date of acquisition.

We estimate the fair value of our senior unsecured notes using an average of the bid and ask price of the notes as of the measurement date (Level 2 inputs as defined in the fair value hierarchy under GAAP). We estimate the fair values of our mortgage notes payable by using discounted cash flow analyses and currently prevailing market terms as of the measurement date (Level 3 inputs as defined in the fair value hierarchy under GAAP). Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.

The table below presents certain of our assets measured at fair value at December 31, 2015, categorized by the level of inputs, as defined in the fair value hierarchy under GAAP, used in the valuation of each asset:


				Fair Value at Reporting Date Using
				Quoted Prices in				Significant
		Estimated		Active Markets for		Significant Other		Unobservable
		Fair		Identical Assets		Observable Inputs		Inputs
Description		Value		(Level 1)		(Level 2)		(Level 3)
Recurring Fair Value Measurements
	Assets:
	Investment in RMR Inc. (1)	$	17,497	$	17,497	$	—	$	—
Non-Recurring Fair Value Measurements
	Assets:
	Property held for sale and classified as discontinued operations (2)	$	12,260	$	—	$	—	$	12,260

(1) Our 1,214,225 shares of RMR Inc. which are included in other assets in our consolidated balance sheets, are reported at fair value which is based on quoted market prices (Level 1 inputs). Our historical cost basis for these shares is $26,888 as of December 31, 2015. The unrealized loss of $9,391 for these shares as of December 31, 2015 is included in cumulative other comprehensive income (loss) in our consolidated balance sheets.

We evaluated the decline in the fair value of the RMR Inc. shares and determined that based on the severity and duration of the decline, and our ability and intent to hold the investment for a reasonable period of time sufficient for a forecasted recovery of fair value, we do not consider the investment to be other-than-temporarily impaired at December 31, 2015.

(2) We estimated the fair value of this property at December 31, 2015 and 2014, based upon broker estimates of value less estimated sales costs (Level 3 inputs as defined in the fair value hierarchy under GAAP).

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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