Fair Value of Assets and Liabilities

Items Measured at Fair Value on a Recurring Basis:

The following table presents certain of our assets that are measured at fair value on a recurring basis at December 31, 2018 categorized by the level of inputs used in the valuation of each asset or liability.



							Significant
	Total as of		Quoted Prices in Active		Significant Other		Unobservable
	December 31,		Markets for Identical		Observable Inputs		Inputs
Description	2018		Assets (Level 1)		(Level 2)		(Level 3)
Recurring Fair Value Measurements
Assets:
Investment in RMR Inc. ⁽¹⁾	$	139,994	$	139,994	$	—	$	—
Investment in Five Star ⁽²⁾	$	2,033	$	2,033	$	—	$	—

(1)

Our 2,637,408 shares of class A common stock of RMR Inc., which are included in investments in equity securities in our consolidated balance sheets, are reported at fair value which is based on quoted market prices (Level 1 inputs). Our historical cost basis for these shares is $69,826 as of year ended December 31, 2018. During the year ended December 31, 2018, we recorded an unrealized loss of $16,404 to adjust the carrying value of our investment in RMR Inc. class A common shares to their fair value.

(2)

Our 4,235,000 common shares of Five Star, which are included in investments in equity securities in our consolidated balance sheets, are reported at fair value which is based on quoted market prices (Level 1 inputs). Our adjusted cost basis for these shares is $6,353 as of the year ended December 31, 2018. During the year ended December 31, 2018, we recorded an unrealized loss of $4,320, to adjust the carrying value of our investment in Five Star common shares to their fair value.

Items Measured at Fair Value on a Nonrecurring Basis:

In addition to items that are measured at fair value on a recurring basis, we also have assets in our consolidated balance sheets that are measured at fair value on a nonrecurring basis. As of December 31, 2018, these assets included 13 MOBs located in Massachusetts where the tenant has notified us of its intention to not renew the master lease upon the expiration of the lease in May 2019. Two of these properties are under agreement to sell as of December 31, 2018 and are classified as held for sale in our consolidated balance sheet. We recorded impairment charges of $2,728 to reduce the carrying value of the two properties held for sale to their sales price less estimated costs to sell of $1,928. We recorded impairment charges of $44,069 for the remaining 11 properties to their estimated aggregate fair value of $11,167. The valuation techniques and significant unobservable inputs used in the valuation of these 11 properties are considered Level 3 inputs as defined in the fair value hierarchy under GAAP. We estimated the fair value of real estate for these 11 properties using the income approach and unobservable inputs such as estimated market rent, leasing and capital improvement costs, absorption time and capitalization and discount rates. We also engaged an external third party to assist us in our estimation of fair value. We used estimated market rents between $12.00 - $16.00 per square foot ($14.00 weighted average), leasing and capital improvements costs of $40.00 per square foot, absorption time of 18 months, capitalization rates between 9% - 10% (8% weighted average) and discount rates between 10% - 11% (9% weighted average) as a part of our fair value analysis. The estimated fair value of these assets as of December 31, 2018 were as follows:



							Significant
	Total as of		Quoted Prices in Active		Significant Other		Unobservable
	December 31,		Markets for Identical		Observable Inputs		Inputs
Description	2018		Assets (Level 1)		(Level 2)		(Level 3)
Non-Recurring Fair Value Measurements
Assets:
Real estate properties held for sale	$	1,928	$	—	$	1,928	$	—
Real estate properties at fair value	$	11,167	$	—	$	—	$	11,167

In addition to the assets described in the table above, our financial instruments at December 31, 2018 and December 31, 2017 included cash and cash equivalents, restricted cash, other assets, our revolving credit facility, term loans, senior unsecured notes, secured debt and capital leases and other unsecured obligations and liabilities. The fair values of these financial instruments approximated their carrying values in our consolidated financial statements as of such dates, except as follows:



	As of December 31, 2018				As of December 31, 2017
Description	Carrying Amount ⁽¹⁾		Estimated Fair Value		Carrying Amount ⁽¹⁾		Estimated Fair Value
Senior unsecured notes	$	2,216,945	$	2,138,202	$	1,725,662	$	1,810,882
Secured debt ⁽²⁾	744,186		723,003		805,404		794,047
	$	2,961,131	$	2,861,205	$	2,531,066	$	2,604,929


(1)	Includes unamortized debt issuance costs, premiums and discounts.

(2)

We assumed certain of these secured debts in connection with our acquisitions of certain properties. We recorded the assumed mortgage notes at estimated fair value on the date of acquisition and we are amortizing the fair value adjustments, if any, to interest expense over the respective terms of the mortgage notes to reduce interest expense to the estimated market interest rates as of the date of acquisition.

We estimated the fair value of our two issuances of senior unsecured notes due 2042 and 2046 based on the closing price on Nasdaq (Level 1 input) as of December 31, 2018. We estimated the fair values of our five issuances of senior unsecured notes due 2019, 2020, 2021, 2024 and 2028 using an average of the bid and ask price on or about December 31, 2018 (Level 2 inputs as defined in the fair value hierarchy under GAAP). We estimated the fair values of our secured debts by using discounted cash flows analyses and currently prevailing market terms as of the measurement date (Level 3 inputs as defined in the fair value hierarchy under GAAP). Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.