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Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2022

A three-level valuation hierarchy exists for disclosure of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. The three levels are defined as follows:

Level 1 — quoted prices are available in active markets for identical investments as of the measurement date. We do not adjust the quoted price for these investments.

Level 2 — quoted prices are available in markets that are not active or model inputs are based on inputs that are either directly or indirectly observable as of the measurement date.

Level 3 — pricing inputs are unobservable and include instances where there is minimal, if any, market activity for the investment. These inputs require significant judgment or estimation by management or third parties when determining fair value and generally represent anything that does not meet the criteria of Levels 1 and 2. Due to the inherent uncertainty of these estimates, these values may differ materially from the values that would have been used had a ready market for these investments existed.

Valuation of Financial Instruments Measured at Fair Value

The following table details our financial instruments measured at fair value on a recurring basis:


	September 30, 2022								December 31, 2021
$ in thousands	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Investments in real estate-related securities	$	6,771	$	17,625	$	—	$	24,396	$	407	$	12,278	$	—	$	12,685
Investment in commercial loan	—		—		21,800		21,800		—		—		—		—
Interest rate caps	—		6,925		—		6,925		—		—		—		—
Interest rate swap	—		2,288		—		2,288		—		—		—		—
Total	$	6,771	$	26,838	$	21,800	$	55,409	$	407	$	12,278	$	—	$	12,685

Our investment in commercial loan consists of a floating rate mezzanine loan we originated and have classified as Level 3. The commercial loan is carried at fair value based on significant unobservable inputs. The following table details our investment in commercial loan:


$ in thousands	Investment in Commercial Loan
Balance as of December 31, 2021	$	—
Loan originations	21,800
Net unrealized gain (loss)	—
Balance as of September 30, 2022	$	21,800

The following table shows the quantitative information about unobservable inputs related to the Level 3 fair value measurement of our investment in commercial loan as of September 30, 2022. As of December 31, 2021, we did not have an investment in a commercial loan.

Type

Asset Class

Valuation Technique

Unobservable Input

Rate

Commercial loan

Retail

Discounted cash flow

Discount rate

7.21%

The discount rate above is subject to change based on changes in economic and market conditions both current and anticipated, in addition to changes in use or timing of exit if applicable. These rates are also based on the location, type and nature of each property and related industry publications. Changes in discount rates result in increases or decreases in the fair values of these investments. The discount rates encompass, among other things, uncertainties in the valuation models with respect to terminal capitalization rates and the amount and timing of cash flows. It is not possible for us to predict the effect of future economic or market conditions based on our estimated fair values.

Valuation of Financial Instruments Not Carried at Fair Value

The following table presents the carrying value and estimated fair value of our financial instruments that are not carried at fair value on the condensed consolidated balance sheets:


	September 30, 2022				December 31, 2021
$ in thousands	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Revolving credit facility	$	88,500	$	88,500	$	75,500	$	75,500
Mortgage notes payable(1)	378,532		373,526		163,500		163,500
Financing obligation(1)	54,000		54,000		54,000		54,000
Total	$	521,032	$	516,026	$	293,000	$	293,000

(1)The mortgage notes payable and financing obligation do not include unamortized debt issuance costs.

The fair value of our borrowings is estimated by modeling the cash flows required by our debt agreements and discounting them back to present value using the appropriate discount rate. Additionally, we consider current market rates and conditions by evaluating similar borrowing agreements with comparable loan-to-value ratios and credit profiles. The inputs used in determining the fair value of our borrowings are considered Level 3.

- 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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