Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2013

4. Fair Value of Financial Instruments

The Company estimates the fair value of its debt by discounting the future cash flows of each instrument at estimated market rates consistent with the maturity of the debt obligation with similar credit terms and credit characteristics, which are Level 3 inputs. Market rates take into consideration general market conditions and maturity. As of September 30, 2013, the carrying value and estimated fair value of the Company’s debt was approximately $280.4 million and $290.6 million. As of December 31, 2012, the carrying value and estimated fair value of the Company’s debt was $264.0 million and $275.4 million.

As of September 30, 2013, the Company had three outstanding interest rate swap agreements that effectively fix the interest rate on two separate variable-rate mortgage loans. The notional amounts, effective dates, maturity dates, and fair values for these agreements are as follows (all dollars in thousands):

Related property/mortgage	Effective date	Notional amount at 9/30/13		Maturity date	Fair value
Westford Residence Inn	10/1/2010	$	6,593	10/1/2015	$	(186	)
Oceanside Residence Inn/Burbank Residence Inn	1/13/2012		39,480	1/13/2015		(357	)
Oceanside Residence Inn/Burbank Residence Inn	1/13/2015		38,440	1/13/2017		61
Total					$	(482	)

At September 30, 2013 and December 31, 2012, the Company’s outstanding interest rate swap agreements were recorded at a fair value of $0.5 million (liability) and $0.8 million (liability), respectively and were included in accounts payable and accrued expenses. The fair value of the Company’s interest rate swap agreements are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts, which is considered a Level 2 measurement within the Accounting Standards Codification’s fair value hierarchy. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. These derivatives are not designated by the Company as hedges for accounting purposes, and the changes in the fair value are recorded to interest expense, net in the consolidated statements of operations. For each of the three-month periods ended September 30, 2013 and 2012, the change in fair value resulted in a net increase of $0.1 million to interest expense, net. For the nine months ended September 30, 2013 and 2012, the change in fair value resulted in a net decrease of approximately $0.3 million and a net increase of $0.1 million, respectively, to interest expense, net.

The carrying value of the Company’s other financial instruments approximates fair value due to the short-term nature of these financial instruments.

- 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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