Fair Value of Assets and Liabilities

3 Months Ended

Mar. 31, 2016

Fair Value of Assets and Liabilities

Fair Value of Assets and Liabilities

Note 8.   Fair Value of Assets and Liabilities

The table below presents certain of our assets measured at fair value at March 31, 2016, 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)	$	30,368	$	30,368	$	—	$	—
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 class A common stock of The RMR Group Inc., or RMR Inc., which are included in other assets in our condensed 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 March 31, 2016.  The net unrealized gain of $3,480 for these shares as of March 31, 2016 is included in cumulative other comprehensive income (loss) in our condensed consolidated balance sheets.

⁽²⁾ We estimated the fair value of this property at March 31, 2016 based upon broker estimates of value less estimated sale costs (Level 3 inputs as defined in the fair value hierarchy under GAAP).

In addition to the assets described in the table above, 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 March 31, 2016 and December 31, 2015, the fair values of our financial instruments approximated their carrying values in our condensed consolidated financial statements due to their short term nature or variable interest rates, except as follows:

	As of March 31, 2016				As of December 31, 2015
	Carrying Amount (1)		Fair Value		Carrying Amount (1)		Fair Value
Senior unsecured notes, 3.75% interest rate, due in 2019	$	346,095	$	358,376	$	345,809	$	351,692
Mortgage note payable, 6.21% interest rate, due in 2016(2) (3)		—		—		23,476		24,038
Mortgage note payable, 5.55% interest rate, due in 2016(2) (4)		—		—		83,375		83,457
Mortgage note payable, 5.88% interest rate, due in 2021(2)		13,994		14,921		14,045		14,678
Mortgage note payable, 7.00% interest rate, due in 2019(2)		9,055		9,600		9,145		9,645
Mortgage note payable, 8.15% interest rate, due in 2021(2)		6,004		6,506		6,258		6,711
	$	375,148	$	389,403	$	482,108	$	490,221

⁽¹⁾ Carrying amount includes certain unamortized debt issuance costs and unamortized premiums and discounts.

⁽²⁾ We assumed these mortgages in connection with our acquisitions of the encumbered 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.

⁽³⁾ This mortgage note was repaid, at par, in February 2016.

⁽⁴⁾ This mortgage note was repaid, at par, in March 2016.

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.