Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements

Fair Value Measurements

4.             Fair Value Measurements

Fair value, as defined by GAAP, is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined 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 that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the fair value hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the fair value hierarchy) has been established.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Derivative financial instruments

Currently, we use interest rate swaps and caps to manage our interest rate risk.  The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis of 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 and caps 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.

We incorporate credit valuation adjustments (“CVAs”) to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the CVAs 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.  However, as of September 30, 2012, we have assessed the significance of the impact of the CVAs on the overall valuation of our derivative positions and have determined that they are not significant.  As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.  Unrealized gains or losses on derivatives are recorded in OCI within equity at each measurement date.

Our derivative financial instruments are included in “prepaid expenses and other assets” and “other liabilities” on our condensed consolidated balance sheets.

The following table sets forth our financial assets and liabilities measured at fair value on a recurring basis, which equals book value, by level within the fair value hierarchy as of September 30, 2012 and December 31, 2011 (in thousands).

				Basis of Fair Value Measurements
				Quoted Prices		Significant
				In Active		Other			Significant
				Markets for		Observable			Unobservable
	Total			Identical Items		Inputs			Inputs
Description	Fair Value			(Level 1)		(Level 2)			(Level 3)
as of September 30, 2012
Assets:
Derivative financial instruments	$	—		$	—	$	—		$	—
Liabilities:
Derivative financial instruments	$	(1,604	)	$	—	$	(1,604	)	$	—

				Basis of Fair Value Measurements
				Quoted Prices		Significant
				In Active		Other			Significant
				Markets for		Observable			Unobservable
	Total			Identical Items		Inputs			Inputs
Description	Fair Value			(Level 1)		(Level 2)			(Level 3)
as of December 31, 2011
Assets:
Derivative financial instruments	$	31		$	—	$	31		$	—
Liabilities:
Derivative financial instruments	$	(621	)	$	—	$	(621	)	$	—

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Impairment of Real Estate Related Assets

We have recorded non-cash impairment charges related to a reduction in the fair value of certain of our assets.  The inputs used to calculate the fair value of these assets included projected cash flows and a risk-adjusted rate of return that we estimated would be used by a market participant in valuing these assets, third-party broker valuation estimates, bona fide purchase offers or the expected sales price of an executed sales agreement.  The following table summarizes those assets which were measured at fair value and impaired during the periods presented (in thousands):

			Basis of Fair Value Measurements
			Quoted Prices		Significant
			In Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair Value		Identical Items		Inputs		Inputs		Total
Description	of Assets		(Level 1)		(Level 2)		(Level 3)		Losses (1) (2)
as of September 30, 2012
Real estate	$	40,154	$	—	$	—	$	40,154	$	(24,487	)
as of December 31, 2011
Real estate	$	178,500	$	—	$	31,900	$	146,600	$	(53,970	)
Investments in unconsolidated entitites	$	6,304	$	—	$	—	$	6,304	$	(276	)

(1) Excludes approximately $0.6 million and $38.8 million in impairment losses of our discontinued operations as of September 30, 2012 and December 31, 2011, respectively.

(2) The December 31, 2011 amount includes approximately $2.1 million in impairment losses for properties that were disposed of and included in discontinued operations subsequent to December 31, 2011.

The following table sets forth quantitative information about the unobservable inputs of our Level 3 real estate, which is recorded at fair value as of September 30, 2012 (in thousands):

	Fair Value at		Valuation	Unobservable
	September 30, 2012		Technique	Input	Range
Real estate on which impairment losses were recognized	$	40,154	Discounted Cash Flow	Discount rate	9.53% - 13.00%
				Terminal capitalization rate	8.28% - 10.00%
				Market rent growth rate	0% - 3.00%
				Expense growth rate	0% - 3.00%

Fair Value Disclosures

Financial Instruments not Reported at Fair Value

Financial instruments held at September 30, 2012 and December 31, 2011 but not measured at fair value on a recurring basis include cash and cash equivalents, restricted cash, accounts receivable, notes payable, accounts payable, payables to related parties, distributions payable, accrued liabilities and other liabilities.  With the exception of notes payable, the financial statement carrying amounts of these items approximate their fair values due to their short-term nature. Estimated fair values for notes payable have been determined using recent trading activity and/or bid-ask spreads and are classified as Level 2 in the fair value hierarchy. Carrying amounts and the related estimated fair value of our notes payable as of September 30, 2012 and December 31, 2011 are as follows (in thousands):

	September 30, 2012				December 31, 2011
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Notes Payable	$	2,173,749	$	2,157,714	$	2,367,401	$	2,269,235