Financial Instruments and Fair Values

12 Months Ended

Dec. 31, 2015

Derivative Financial Instruments

We use derivative financial instruments primarily to manage interest rate risk and such derivatives are not considered speculative. These derivative instruments are typically in the form of interest rate swap and forward agreements and the primary objective is to minimize interest rate risks associated with investing and financing activities. The counterparties of these arrangements are major financial institutions with which we may also have other financial relationships. We are exposed to credit risk in the event of non-performance by these counterparties; however, we currently do not anticipate that any of the counterparties will fail to meet their obligations.

We have agreements with our derivative counterparties that contain a provision where if we either default or are capable of being declared in default on any of our indebtedness, then we could also be declared in default on our derivative obligations. As of December 31, 2015, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $2.0 million. If we had breached any of these provisions at December 31, 2015, we could have been required to settle our obligations under the agreements at their termination value of $2.0 million.

As of December 31, 2015, we have three interest rate LIBOR swaps with an aggregate notional value of $465.0 million. The notional value does not represent exposure to credit, interest rate or market risks. The fair value of these derivative instruments, which is included in accounts payable and accrued expenses on the consolidated balance sheet, amounted to $1.9 million at December 31, 2015. These interest rate swaps have been designated as cash flow hedges and hedge the future cash outflows on our mortgage debt and also on our term loan facility that is subject to a floating interest rate. As of December 31, 2015, these cash flow hedges are deemed effective and an unrealized loss of $1.9 million is reflected in the consolidated statements of comprehensive income (loss). Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on these debt. We estimate that no amount of the current balance held in accumulated other comprehensive loss will be reclassified into interest expense within the next 12 months.

The table below summarizes the terms of agreements and the fair values of our derivative financial instruments as of December 31, 2015 and 2014 (dollar amounts in thousands):



	As of December 31, 2015							December 31, 2015					December 31, 2014
Derivative	Notional Amount		Receive Rate	Pay Rate		Effective Date	Expiration Date	Asset		Liability			Asset		Liability
Interest rate swap	$	265,000	1 Month LIBOR	2.1485	%	August 31, 2017	August 24, 2022	$	—	$	(1,620	)	$	—	$	—
Interest rate swap	100,000		3 Month LIBOR	2.5050	%	July 5, 2017	July 5, 2027	—		(148		)	—		—
Interest rate swap	100,000		3 Month LIBOR	2.5050	%	July 5, 2017	July 5, 2027	—		(154		)	—		—
								$	—	$	(1,922	)	$	—	$	—

The table below shows the effect of our derivative financial instruments designated as cash flow hedges for the years ended December 31, 2015 and 2014 (amounts in thousands):



Effects of Cash Flow Hedges	December 31, 2015			December 31, 2014
Amount of gain loss) recognized in other comprehensive income (loss) - effective portion	$	(1,922	)	—
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense - effective portion	—			—
Amount of gain (loss) recognized in other Income/expense - ineffective portion	—			—

Fair Valuation

The estimated fair values at December 31, 2015 and 2014 were determined by management, using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The fair value of derivative instruments, which is classified as Level 2, and measured on a recurring basis, is determined using widely accepted valuation techniques, including 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, and uses observable market-based inputs, including interest rate curves and implied volatilities. 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 variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

The fair value of borrowings, which is classified as Level 3, is estimated by discounting the contractual cash flows of each debt to their present value using adjusted market interest rates, which is provided by a third-party specialist.

The following tables summarize the carrying and estimated fair values of our financial instruments as of December 31, 2015 and 2014 (amounts in thousands):



	December 31, 2015
	Carrying Value		Estimated Fair Value
	Carrying Value		Total		Level 1		Level 2		Level 3
Interest rate swaps included in accounts payable and accrued expenses	$	1,922	$	1,922	$	—	$	1,922	$	—
Mortgage notes payable	747,661		752,350		—		—		752,350
Senior unsecured notes - exchangeable	238,208		251,391		—		—		251,391
Senior unsecured notes - Series A, B, and C	348,810		344,501		—		—		344,501
Unsecured revolving credit facility	35,192		40,000		—		—		40,000
Unsecured term loan facility	262,545		265,000		—		—		265,000



	December 31, 2014
	Carrying Value		Estimated Fair Value
	Carrying Value		Total		Level 1		Level 2		Level 3
Mortgage notes payable	$	898,998	$	912,365	$	—	$	—	$	912,365
Senior unsecured notes - exchangeable	234,980		253,469		—		—		253,469
Term loan and credit facility	464,676		470,000		—		—		470,000

Disclosure about the fair value of financial instruments is based on pertinent information available to us as of December 31, 2015 and 2014. Although we are not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.

- 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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