FAIR VALUE DISCLOSURES

Financial Instruments

The fair value for certain financial instruments is derived using a combination of market quotes, pricing models and other valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments.

Financial instruments for which actively quoted prices or pricing parameters are available and whose markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments whose markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or when market transactions are not orderly. The carrying values of cash and cash equivalents, restricted cash, accounts payable, accrued liabilities and the Credit Facility are reasonable estimates of fair value because of the short-term maturities of these instruments. Fair values for other financial instruments are derived as follows:

Loans receivable: These instruments are presented on the accompanying consolidated balance sheets at their amortized cost and not at fair value. The fair values of the loans receivable were estimated using an internal valuation model that considered the expected cash flows for the loans receivable, as well as the underlying collateral value and other credit enhancements as applicable. As such, the Company classifies these instruments as Level 3.

Preferred equity investments: These instruments are presented on the accompanying consolidated balance sheets at their cost and not at fair value. The fair values of the preferred equity investments were estimated using an internal valuation model that considered the expected future cash flows for the preferred equity investment, the underlying collateral value and other credit enhancements. As such, the Company classifies these instruments as Level 3.

Derivative instruments: The Company’s derivative instruments are presented at fair value on the accompanying consolidated balance sheets. The Company estimates the fair value of derivative instruments, including its interest rate swaps and cross currency swaps, using the assistance of a third party using inputs that are observable in the market, which include forward yield curves and other relevant information. Although the Company has determined that the majority of the inputs used to value its derivative financial instruments fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivative financial instruments utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. The Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivative financial instruments. As a result, the Company has determined that its derivative financial instruments valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Senior Notes: These instruments are presented on the accompanying consolidated balance sheets at their outstanding principal balance, net of unamortized deferred financing costs and premiums/discounts and not at fair value. The fair values of the Senior Notes were determined using third-party market quotes derived from orderly trades. As such, the Company classifies these instruments as Level 2.

Secured indebtedness: These instruments are presented on the accompanying consolidated balance sheets at their outstanding principal balance, net of unamortized deferred financing costs and premiums/discounts and not at fair value. The fair values of the Company’s secured debt were estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. As such, the Company classifies these instruments as Level 3.

The following are the face values, carrying amounts and fair values of the Company’s financial instruments as of December 31, 2017 and 2016 whose carrying amounts do not approximate their fair value (in thousands):



	December 31, 2017						December 31, 2016
	Face Value ⁽¹⁾		Carrying Amount ⁽²⁾		Fair Value		Face Value ⁽¹⁾		Carrying Amount ⁽²⁾		Fair Value
Financial assets:
Loans receivable	$	91,280	$	65,907	$	65,892	$	53,484	$	50,846	$	51,914
Preferred equity investments	48,035		48,483		47,064		44,882		45,190		48,332
Financial liabilities:
Senior Notes	1,300,000		1,306,286		1,329,191		700,000		688,246		709,500
Secured indebtedness	259,202		256,430		246,461		163,638		160,752		150,091


⁽¹⁾	Face value represents amounts contractually due under the terms of the respective agreements.


⁽²⁾	Carrying amount represents the book value of financial instruments, including unamortized premiums/discounts and deferred financing costs.

The Company determined the fair value of financial instruments as of December 31, 2017 whose carrying amounts do not approximate their fair value with valuation methods utilizing the following types of inputs (in thousands):



			Fair Value Measurements Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Loans receivable	$	65,892	$	—	$	—	$	65,892
Preferred equity investments	47,064		—		—		47,064
Financial liabilities:
Senior Notes	1,329,191		—		1,329,191		—
Secured indebtedness	246,461		—		—		246,461

Disclosure of the fair value of financial instruments is based on pertinent information available to the Company at the applicable dates and requires a significant amount of judgment. Despite increased capital market and credit market activity, transaction volume for certain financial instruments remains relatively low. This has made the estimation of fair values difficult and, therefore, both the actual results and the Company’s estimate of fair value at a future date could be materially different.

Items Measured at Fair Value on a Recurring Basis

During the year ended December 31, 2017, the Company recorded the following amounts measured at fair value (in thousands):



			Fair Value Measurements Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring Basis:
Financial assets:
Interest rate swap	$	25,221	$	—	$	25,221	$	—
Cross currency swap	674		—		674		—

The Company entered into contingent consideration arrangements that were outstanding during the year ended December 31, 2017 in connection with three acquisitions of real estate (see Note 4, “Real Estate Properties Held for Investment”). During the year ended December 31, 2017, one earn-out arrangement expired and resulted in a $0 payout, and a second earn-out arrangement was terminated in connection with the transition of the eight senior housing communities to Senior Housing - Managed communities. In order to determine the fair value of the Company’s remaining contingent consideration arrangement, the Company used significant inputs not observable in the market to calculate the contingent consideration. The Company used financial information provided by the facility to calculate the contingent consideration liability of $0.4 million, which was paid in November 2017.

The following reconciliation provides the details of activity for the contingent consideration liability recorded at fair value using Level 3 inputs (in thousands):



Balance as of December 31, 2015	$	2,700
Decrease in contingent consideration liability	(1,876		)
Foreign currency translation	(6		)
Balance as of December 31, 2016	$	818

Decrease in contingent consideration liability	(426		)
Payment of contingent consideration liability	(382		)
Foreign currency translation	(10		)
Balance as of December 31, 2017	$	—

The following reconciliation provides the details of activity for the contingent consideration asset recorded at fair value using Level 3 inputs (in thousands):



Balance as of December 31, 2015	$	350
Decrease in contingent consideration asset	(350		)
Balance as of December 31, 2016	$	—

Corresponding amounts equal to the decreases in the contingent consideration liability and contingent consideration asset are included in other income on the accompanying consolidated statements of income for the years ended December 31, 2017 and 2016 as applicable.