Fair Value Measurements

6 Months Ended

Jun. 30, 2022

Note 7. Fair Value Measurements

ASC 820, “Fair Value Measurement and Disclosures” establishes a framework for measuring fair value as well as disclosures about fair value measurements. It emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use when pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, the standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability other than quoted prices, such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. 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 fall is based on the lowest level input that is significant to the fair value measurement in its entirety. Our 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.

Financial Instruments Reported at Fair Value

The fair value of our interest rate cap is determined by using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the interest rate cap. The variable interest rates used in the calculation of projected receipts on the interest rate cap are based on a third party expert's expectation of future interest rates derived from observable market interest rate curves and volatilities. Our interest rate cap is classified as Level 2 in the fair value hierarchy and is valued at $2.8 million at June 30, 2022 and $0 at December 31, 2021.

Financial Instruments Not Reported at Fair Value

The carrying value and estimated fair value of financial instruments not recorded at fair value on a recurring basis but required to be disclosed at fair value were as follows ($ in thousands):


	June 30, 2022
							Fair Value Hierarchy Level
	Carrying Value		Unpaid Principal Balance		Fair Value		Level 1		Level 2		Level 3
Loans receivable held-for-investment, net	$	7,029,856	$	7,139,571	$	7,043,862	$	-	$	-	$	7,043,862
Repurchase agreements		3,918,703		3,918,703		3,918,703		-		-		3,918,703
Loan participations sold, net		273,487		274,252		273,856		-		-		273,856
Notes payable, net		98,107		100,512		100,275		-		-		100,275
Secured term loan, net		738,180		758,904		724,753		-		-		724,753
Debt related to real estate owned, net		289,852		290,000		280,473		-		-		280,473


	December 31, 2021
							Fair Value Hierarchy Level
	Carrying Value		Unpaid Principal Balance		Fair Value		Level 1		Level 2		Level 3
Loans receivable held-for-investment, net	$	6,340,295	$	6,441,238	$	6,434,157	$	-	$	-	$	6,434,157
Interests in loans receivable held-for- investment, net		161,850		161,566		161,883		-		-		161,883
Repurchase agreements		3,489,511		3,489,511		3,484,834		-		-		3,484,834
Loan participations sold, net		167,744		168,322		168,738		-		-		168,738
Notes payable, net		48,000		48,000		48,000		-		-		48,000
Secured term loan, net		739,762		762,717		762,717		-		-		762,717
Debt related to real estate owned, net		289,806		290,000		281,723		-		-		281,723

- 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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