Fair Value Measurements

Fair Value Hierarchy—Our financial instruments measured at fair value either on a recurring or a non-recurring basis are classified in a hierarchy for disclosure purposes consisting of three levels based on the observability of inputs in the market place as discussed below:


•	Level 1: Fair value measurements that are quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets.

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Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.


•	Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability.

The fair value of interest rate caps is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rates of the caps. The variable interest rates used in the calculation of projected receipts on the caps are based on an expectation of future interest rates derived from observable market interest rate curves (LIBOR forward curves) and volatilities (the Level 2 inputs). We also incorporate credit valuation adjustments (the Level 3 inputs) to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk.

Fair value of credit default swaps are obtained from a third party who publishes various information including the index composition and price data (Level 2 inputs). The fair value of credit default swaps does not contain credit-risk-related adjustments as the change in fair value is settled net through posting cash collateral or reclaiming cash collateral between us and our counterparty.

The fair value of interest rate floors is calculated using a third-party discounted cash flow model based on future cash flows that are expected to be received over the remaining life of the floor. These expected future cash flows are probability-weighted projections based on the contract terms, accounting for both the magnitude and likelihood of potential payments, which are both computed using the appropriate LIBOR forward curve and market implied volatilities as of the valuation date (Level 2 inputs).

The fair value of options on futures contracts is determined based on the last reported settlement price as of the measurement date (Level 1 inputs). These exchange-traded options are centrally cleared, and a clearinghouse stands in between all trades to ensure that the obligations involved in the trades are satisfied.

When a majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. However, when the valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and our counterparties, which we consider significant (10% or more) to the overall valuation of our derivatives, the derivative valuations in their entirety are classified in Level 3 of the fair value hierarchy. Transfers of inputs between levels are determined at the end of each reporting period. In determining the fair values of our derivatives at June 30, 2019, the LIBOR interest rate forward curve (Level 2 inputs) assumed a downtrend from 2.398% to 1.440% for the remaining term of our derivatives. Credit spreads (Level 3 inputs) used in determining the fair values of hedge and non-hedge designated derivatives assumed an uptrend in nonperformance risk for us and all of our counterparties through the maturity dates.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present our assets and liabilities measured at fair value on a recurring basis aggregated by the level within which measurements fall in the fair value hierarchy (in thousands):



	Quoted Market Prices (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Counterparty and Cash Collateral Netting⁽¹⁾			Total
June 30, 2019
Assets
Derivative assets:
Interest rate derivatives - floors	$	—	$	908		$	—	$	(624	)	$	284
Interest rate derivatives - caps	—		1			—		—			1
Credit default swaps	—		(228		)	—		854			626
	—		681			—		230			911		⁽²⁾
Non-derivative assets:
Investment in Ashford Inc.	6,195		—			—		—			6,195
Total	$	6,195	$	681		$	—	$	230		$	7,106



	Quoted Market Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Counterparty and Cash Collateral Netting⁽¹⁾		Total
December 31, 2018
Assets
Derivative assets:
Interest rate derivatives - floors	$	—	$	76	$	—	$	73	$	149
Interest rate derivatives - caps	—		20		—		—		20
Credit default swaps	—		546		—		57		603
	—		642		—		130		772		⁽²⁾
Non-derivative assets:
Investment in Ashford Inc.	10,114		—		—		—		10,114
Total	$	10,114	$	642	$	—	$	130	$	10,886

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⁽¹⁾	Represents net cash collateral posted between us and our counterparties.


⁽²⁾	Reported as “derivative assets” in our condensed consolidated balance sheets.

Effect of Fair Value Measured Assets and Liabilities on Condensed Consolidated Statements of Operations

The following table summarizes the effect of fair value measured assets and liabilities on our condensed consolidated statements of operations (in thousands):



	Gain (Loss) Recognized in Income
	Three Months Ended June 30,								Six Months Ended June 30,
	2019				2018				2019				2018
Assets
Derivative assets:
Interest rate derivatives - floors	$	734			$	(57	)		$	666			$	(84	)
Interest rate derivatives - caps	(10		)		(256		)		(81		)		(261		)
Credit default swaps	(145		)	⁽¹⁾	15			⁽¹⁾	(943		)	⁽¹⁾	120			⁽¹⁾
Total derivative assets	$	579			$	(298	)		$	(358	)		$	(225	)

Non-derivative assets:
Investment in Ashford Inc.	(4,626		)		(6,024		)		(3,919		)		(5,496		)
Total	$	(4,047	)		$	(6,322	)		$	(4,277	)		$	(5,721	)
Total combined
Interest rate derivatives - floors	$	809			$	(57	)		$	806			$	(84	)
Interest rate derivatives - caps	(10		)		(256		)		(81		)		(261		)
Credit default swaps	(145		)		15				(943		)		120
Unrealized gain (loss) on derivatives	654				(298		)		(218		)		(225		)
Realized gain (loss) on interest rate floors	(75		)	⁽²⁾	—				(140		)	⁽²⁾	—
Unrealized gain (loss) on investment in Ashford Inc.	(4,626		)		(6,024		)		(3,919		)		(5,496		)
Net	$	(4,047	)		$	(6,322	)		$	(4,277	)		$	(5,721	)

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⁽¹⁾	Excludes costs associated with credit default swaps of $63 for both the three months ended June 30, 2019 and 2018 and $126 for both the six months ended June 30, 2019 and 2018, respectively, that’s included in “other income (expense)” in our condensed consolidated statements of operations.


⁽²⁾	Included in “other income (expense)” in our condensed consolidated statements of operations.