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Fair Value Disclosure
 3 Months Ended
Mar. 31, 2013
Fair Value Disclosures [Abstract]  
Fair Value Disclosure

Note 3 – Fair Value Disclosure

GAAP establishes a hierarchy of valuation techniques based on observable inputs utilized in measuring financial instruments at fair values. Market based or observable inputs are the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:

Level I — Quoted prices in active markets for identical assets or liabilities.

 

Level II — Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk and others.

Level III — Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used.

While the Company anticipates that its valuation methods will be appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The Company will use inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.

The estimated fair value of the CMBS portfolio is determined by reference to market prices provided by certain dealers who make a market in these financial instruments. Broker quotes are only indicative of fair value and may not necessarily represent what the Company would receive in an actual trade for the applicable instrument. Management performs additional analysis on prices received based on broker quotes to validate the prices and adjustments are made as deemed necessary by management to capture current market information. The estimated fair values of the Company’s securities are based on observable market parameters and are classified as Level II in the fair value hierarchy.

The estimated fair values of the Company’s derivative instruments are determined using a discounted cash flow analysis on the expected cash flows of each derivative. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The fair values of interest rate caps are determined 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 caps. The variable interest rates used in the calculation of projected cash flows are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. The Company’s derivative instruments are classified as Level II in the fair value hierarchy.

The following table summarizes the levels in the fair value hierarchy into which the Company’s financial instruments were categorized as of March 31, 2013:

 

     Fair Value as of March 31, 2013  
     Level I      Level II     Level III      Total  

AAA-rated CMBS (Available-for-Sale)

    $ —         $ 64,216      $ —         $ 64,216   

AAA-rated CMBS (Fair Value Option)

      —           125,338        —           125,338   

CMBS – Hilton (Fair Value Option)

      —           73,119        —           73,119   

Interest rate swaps

      —           (84 )      —           (84 ) 

Interest rate caps

      —           1        —           1   
  

 

 

     

 

 

    

 

 

     

 

 

  

Total

    $ —         $ 262,590      $ —         $ 262,590   
  

 

 

     

 

 

    

 

 

     

 

 

  

The following table summarizes the levels in the fair value hierarchy into which the Company’s financial instruments were categorized as of December 31, 2012:

 

     Fair Value as of December 31, 2012  
     Level I      Level II     Level III      Total  

AAA-rated CMBS (Available-for-Sale)

    $ —         $ 67,079      $ —         $ 67,079   

AAA-rated CMBS (Fair Value Option)

      —           138,248        —           138,248   

CMBS – Hilton (Fair Value Option)

      —           73,561        —           73,561   

Interest rate swaps

      —           (156 )      —           (156 ) 

Interest rate caps

      —           1        —           1   
  

 

 

     

 

 

    

 

 

     

 

 

  

Total

    $ —         $ 278,733      $ —         $ 278,733