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Fair Value Measurements
 6 Months Ended
Jun. 30, 2013
Fair Value Measurements  
Fair Value Measurements

Note 12 - Fair Value Measurements

 

The Company measures the fair value of financial instruments based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions.  In accordance with the fair value hierarchy, Level 1 assets/liabilities are valued based on quoted prices for identical instruments in active markets, Level 2 assets/liabilities are valued based on quoted prices in active markets for similar instruments, on quoted prices in less active or inactive markets, or on other “observable” market inputs and Level 3 assets/liabilities are valued based significantly on “unobservable” market inputs.

 

The carrying amounts of cash and cash equivalents, escrow, deposits and other assets and receivables, and accrued expenses and other liabilities are not measured at fair value on a recurring basis, but are considered to be recorded at amounts that approximate fair value.

 

At June 30, 2013, the $235,825,000 estimated fair value of the Company’s mortgages payable is more than their carrying value by approximately $7,972,000 assuming a blended market interest rate of 4.5% based on the 8.6 year weighted average remaining term of the mortgages.  At December 31, 2012, the $233,170,000 estimated fair value of the Company’s mortgages payable is more than their carrying value by approximately $7,199,000 assuming a blended market interest rate of 4.8% based on the 9.2 year weighted average remaining term of the mortgages.

 

The fair value of the Company’s mortgages payable was estimated using unobservable inputs such as available market information and discounted cash flow analysis based on borrowing rates the Company believes it could obtain with similar terms and maturities. These fair value measurements fall within Level 3 of the fair value hierarchy.

 

Considerable judgment is necessary to interpret market data and develop estimated fair value.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

Financial Instruments Measured at Fair Value

 

The fair value of the Company’s available-for-sale securities and derivative financial instruments were determined using the following inputs (dollars in thousands):

 

 

 

 

 

Carrying and

 

Fair Value Measurements
Using Fair Value Hierarchy
on a Recurring Basis

 

 

 

As of

 

Fair Value

 

Level 1

 

Level 2

 

Financial assets:

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

June 30, 2013

 

$

280

 

$

280

 

$

—

 

Equity securities

 

December 31, 2012

 

278

 

278

 

—

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

June 30, 2013

 

140

 

—

 

140

 

 

 

December 31, 2012

 

—

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

June 30, 2013

 

702

 

 

 

702

 

 

 

December 31, 2012

 

1,470

 

—

 

1,470

 

 

The Company does not currently own any financial instruments that are classified as Level 3.

 

Available-for-sale securities

 

At June 30, 2013, the Company’s available-for-sale securities are as follows: (i) a $260,000 investment in BRT Realty Trust and (ii) a $20,000 investment in other equity securities (included in other assets on the balance sheet). The aggregate cost of these securities was $138,000 and unrealized gains on such securities were $142,000. Such unrealized gains were included in accumulated other comprehensive loss on the balance sheet.  Fair values are approximated on current market quotes from financial sources that track such securities.

 

Derivative financial instruments

 

Fair values are approximated using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities.

 

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 it use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparty.  As of June 30, 2013, 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 its derivatives.  As a result, the Company has determined that its derivative valuation is classified in Level 2 of the fair value hierarchy.

 

As of June 30, 2013, the Company had entered into eight interest rate derivatives related to eight outstanding mortgage loans, all interest rate swaps, with an approximate aggregate $36,217,000 notional amount and a weighted average maturity of 4.7 years.  Such interest rate swaps, all of which were designated as cash flow hedges, converted Libor based variable rate mortgages to fixed annual rate mortgages with interest rates ranging from 3.55% to 6.5% (weighted average interest rate of 4.9%). The fair value of the Company’s derivatives designated as hedging instruments in asset and liability positions, respectively, reflected as other assets or other liabilities on the consolidated balance sheets were $140,000 and $702,000 at June 30, 2013 and $0 and $1,470,000 at December 31, 2012.

 

Two of the Company’s unconsolidated joint ventures, in which a wholly owned subsidiary of the Company is a 50% partner, had a $3,838,000 interest rate derivative outstanding at June 30, 2013. The interest rate derivative, which was entered into in March 2011, has an interest rate of 5.81% and matures in April 2018.

 

The following table presents the effect of the Company’s derivative financial instruments on the statement of income for the periods presented (dollars in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Consolidated

 

 

 

 

 

 

 

 

 

Amount of gain (loss) recognized on derivatives in Other comprehensive (loss)

 

$

574

 

$

(533

)

$

600

 

$

(650

)

Amount of (loss) reclassification from Accumulated other comprehensive (loss) into Interest expense

 

(156

)

(132

)

(308

)

(238

)

 

 

 

 

 

 

 

 

 

 

Joint Ventures (Company’s share)

 

 

 

 

 

 

 

 

 

Amount of gain (loss) recognized on derivative in Other comprehensive (loss)

 

$

37

 

$

(49

)

$

33

 

$

(52

)

Amount of (loss) reclassification from Accumulated other comprehensive (loss) into Equity in earnings of unconsolidated joint ventures

 

(14

)

(14

)

(28

)

(28

)

 

No gain or loss was recognized with respect to hedge ineffectiveness or to amounts excluded from effectiveness testing on the Company’s cash flow hedges for the three and six months ended June 30, 2013 and 2012.  During the twelve months ending June 30, 2014, the Company estimates an additional $604,000 will be reclassified from other comprehensive income as an increase to interest expense.

 

As of June 30, 2013, the Company believes it has no significant risk associated with non-performance of the financial institutions which are the counterparties to its derivatives contracts.  Additionally, based on the rates in effect as of June 30, 2013, if a counterparty were to default, the Company would receive a net interest benefit.

 

The derivative agreements in effect at June 30, 2013 provide that if the wholly owned subsidiary of the Company which is a party to the agreement defaults or is capable of being declared in default on any of its indebtedness, then a default can be declared on such subsidiary’s derivative obligation. In addition, the Company is a party to one of the derivative agreements and if the subsidiary defaults on the loan subject to such agreement and if there are swap breakage losses on account of the derivative being terminated early, the Company could be held liable for interest rate swap breakage losses, if any.

 

As of June 30, 2013, the fair value of the derivatives in a liability position, including accrued interest, and excluding any adjustments for nonperformance risk, was approximately $757,000.  In the unlikely event that the Company breaches any of the contractual provisions of the derivative contracts, it would be required to settle its obligations thereunder at their termination liability value of $757,000.