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Fair Value of Financial Instruments | 9 Months Ended
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Sep. 30, 2018
Fair Value Disclosures [Abstract] |
Fair Value of Financial Instruments | Fair Value of Financial Instruments The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. This alternative approach also reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The guidance defines three levels of inputs that may be used to measure fair value: Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date. Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability and those inputs are significant. Level 3 — Unobservable inputs that reflect the entity's own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques. The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. 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 falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of September 30, 2018 and December 31, 2017, 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 the Company's derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. The valuation of derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company's potential nonperformance risk and the performance risk of the counterparties. Financial Instruments Measured at Fair Value on a Recurring Basis The following table presents information about the Company's assets and liabilities (including derivatives that are presented net) measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017, aggregated by the level in the fair value hierarchy within which those instruments fall.
(In thousands) |  | Quoted Prices in Active Markets Level 1 |  | Significant Other Observable Inputs Level 2 |  | Significant Unobservable Inputs Level 3 |  | Total
September 30, 2018 |  |  |  |  |  |  |  |
Cross currency swaps, net (GBP & EUR) |  | $ | — |  |  | $ | 1,170 |  |  | $ | — |  |  | $ | 1,170 |
Foreign currency forwards, net (GBP & EUR) |  | $ | — |  |  | $ | 2,797 |  |  | $ | — |  |  | $ | 2,797 |
Interest rate swaps, net (GBP & EUR) |  | $ | — |  |  | $ | 3,369 |  |  | $ | — |  |  | $ | 3,369 |
Put options (GBP & EUR) |  | $ | — |  |  | $ | 34 |  |  | $ | — |  |  | $ | 34 |
2018 OPP (see Note 12) |  | $ | — |  |  | $ | — |  |  | $ | 27,600 |  |  | $ | 27,600 |
December 31, 2017 |  |  |  |  |  |  |  |
Cross currency swaps, net (GBP & EUR) |  | $ | — |  |  | $ | (4,511 | ) |  | $ | — |  |  | $ | (4,511 | )
Foreign currency forwards, net (GBP & EUR) |  | $ | — |  |  | $ | (2,737 | ) |  | $ | — |  |  | $ | (2,737 | )
Interest rate swaps, net (GBP & EUR) |  | $ | — |  |  | $ | (6,450 | ) |  | $ | — |  |  | $ | (6,450 | )
Put options (GBP & EUR) |  | $ | — |  |  | $ | 63 |  |  | $ | — |  |  | $ | 63 |
2015 OPP (see Note 12) |  | $ | — |  |  | $ | — |  |  | $ | (1,600 | ) |  | $ | (1,600 | )
The valuation of the 2018 OPP and 2015 OPP were determined using a Monte Carlo simulation. This analysis reflected the contractual terms of the 2018 OPP and 2015 OPP, including the performance periods and total return hurdles, as well as observable market-based inputs, including interest rate curves, and unobservable inputs, such as expected volatility. As a result, the Company determined that the 2018 OPP and 2015 OPP valuations in their entireties were classified in Level 3 of the fair value hierarchy. A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain assets. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2018. Level 3 Valuations The following is a reconciliation of the beginning and ending balances for the changes in the instrument with Level 3 inputs in the fair value hierarchy for the nine months ended September 30, 2018:
(In thousands) |  | 2018 OPP |  | 2015 OPP
Beginning Balance as of December 31, 2017 |  | $ | — |  |  | $ | 1,600 |
Fair value adjustment |  | 27,600 |  |  | (1,600 | )
Ending balance as of September 30, 2018 |  | $ | 27,600 |  |  | $ | — |
The following discussion provides a description of the impact on a fair value measurement of a change in each unobservable input in isolation. For the relationship described below, the inverse relationship would also generally apply. Expected volatility is a measure of the variability in possible returns for an instrument, parameter or market index given how much the particular instrument, parameter or index changes in value over time. Generally, the higher the expected volatility of the underlying instrument, parameter or market index, the wider the range of potential future returns. An increase in expected volatility, in isolation, would generally result in an increase in the fair value measurement of an instrument. Financial Instruments not Measured at Fair Value on a Recurring Basis The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate value. The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, due to/from related parties, prepaid expenses and other assets, accounts payable, deferred rent and dividends payable approximate their carrying value on the consolidated balance sheets due to their short-term nature. The fair values of the Company's remaining financial instruments that are not reported at fair value on the consolidated balance sheets are reported below.
|  |  |  | September 30, 2018 |  | December 31, 2017
(In thousands) |  | Level |  | Carrying Amount |  | Fair Value |  | Carrying Amount |  | Fair Value
Mortgage notes payable (1) (2) (3) |  | 3 |  | $ | 983,634 |  |  | $ | 982,535 |  |  | $ | 988,490 |  |  | $ | 963,751 |
Revolving Credit Facility (4) |  | 3 |  | $ | 455,556 |  |  | $ | 457,538 |  |  | $ | 298,909 |  |  | $ | 297,890 |
Term Loan (4) |  | 3 |  | $ | 282,463 |  |  | $ | 286,623 |  |  | $ | 229,905 |  |  | $ | 233,916 |
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(1) | Carrying value includes $1.0 billion gross mortgage notes payable and $0.7 million mortgage discounts, net as of September 30, 2018.
(2) | Carrying value includes $1.0 billion gross mortgage notes payable and $1.9 million mortgage discounts, net as of December 31, 2017.
(3) | Mortgage notes payable are presented net of deferred financing costs of $8.4 million and $5.5 million as of September 30, 2018 and December 31, 2017, respectively.
(4) | Both facilities are part of the Credit Facility (see Note 5 — Credit Facilities for more information).
The fair value of the gross Mortgage notes payable, the Revolving Credit Facility and the Term Loan are estimated using a discounted cash flow analysis, based on the Advisor's experience with similar types of borrowing arrangements.

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- 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. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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