Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2016

6. Fair Value of Financial Instruments

Except as described below, the carrying value of the Company’s financial instruments approximates fair value due to the short-term nature of these financial instruments.

Debt

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 a debt obligation with similar credit terms and credit characteristics, which are Level 3 inputs under the fair value hierarchy. Market rates take into consideration general market conditions and maturity. As of September 30, 2016, the carrying value and estimated fair value of the Company’s debt were approximately $1.3 billion and $1.4 billion, respectively. As of December 31, 2015, both the carrying value and estimated fair value of the Company’s debt were approximately $1.0 billion. Both the carrying value and estimated fair value of the Company’s debt (as discussed above) is net of unamortized debt issue costs related to term loans and mortgage debt for each specific year.

Derivative Instruments

Currently, the Company uses interest rate swaps to manage its interest rate risks on variable rate debt. Throughout the terms of these interest rate swaps, the Company pays a fixed rate of interest and receives a floating rate of interest equal to the one month LIBOR. The swaps are designed to effectively fix the interest payments on variable rate debt instruments. These instruments are recorded at fair value and are included in accounts payable and other liabilities in the Company’s consolidated balance sheets. The fair values 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 under the 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. The following table sets forth information for each of the Company’s interest rate swap agreements outstanding as of September 30, 2016 and December 31, 2015. All dollar amounts are in thousands.

									Fair Value (Liability)
Hedge Type	Notional Amount at September 30, 2016		Assumption or Origination Date	Maturity Date		Swap Fixed Interest Rate			September 30, 2016			December 31, 2015
Non-designated hedge	$	0	3/1/2014		(1)		1.10	%	$	0		$	(134	)
Cash flow hedge (2)		212,500	5/21/2015	5/18/2020			1.58	%		(5,319	)		(1,233	)
Cash flow hedge (2)		110,000	7/2/2015	5/18/2020			1.62	%		(2,910	)		(824	)
Cash flow hedge (2)		50,000	4/7/2016	3/31/2021			1.09	%		(298	)		0
Cash flow hedge (2)		100,000	4/7/2016	3/31/2023			1.33	%		(1,464	)		0
Cash flow hedge		0	5/9/2016		(3)		1.72	%		0			0
									$	(9,991	)	$	(2,191	)

(1) On June 15, 2016, the Company repaid the related mortgage note and terminated this swap agreement. As part of this termination, the Company paid the fair value of the swap, approximately $0.1 million, to satisfy the outstanding liability at the time of termination.

(2) In May 2015 and July 2015, the Company entered into interest rate swap agreements with a commercial bank for the same notional amounts as its $212.5 million term loan and its $110 million term loan. In April 2016, the Company entered into forward interest rate swap agreements with a commercial bank, which beginning on September 30, 2016 effectively fixes the interest rate on the $50 million term loan and $100 million term loan. See Note 5 for more information on the term loans. Each of these swaps has been designated as a cash flow hedge for accounting purposes.

(3) In May 2016, the Company entered into an interest rate swap agreement with a commercial bank for the same notional amount as a $24 million variable-rate mortgage loan. On August 10, 2016, the lender exercised its option to convert the loan to a fixed-rate mortgage loan at 4.37% (the same annual fixed-rate as the swapped mortgage loan prior to the conversion) and simultaneously assumed the swap at no cost or further liability to the Company. Prior to the conversion, the swap was designated as a cash flow hedge for accounting purposes and the change in fair value, which resulted in an unrealized loss totaling approximately $1.0 million during the three months ended June 30, 2016, was recorded to other comprehensive income (loss). As a result of the conversion, the outstanding liability as of June 30, 2016 totaling approximately $1.0 million was recorded to other comprehensive income (loss) as an unrealized gain during the three months ended September 30, 2016.

The Company assesses, both at inception and on an ongoing basis, the effectiveness of its qualifying cash flow hedges. For swaps designated as cash flow hedges, the changes in fair value on the effective portion are recorded to accumulated other comprehensive income (loss), a component of shareholders’ equity in the Company’s consolidated balance sheets. Changes in fair value on the ineffective portion of all designated hedges are recorded to interest and other expense, net in the Company’s consolidated statements of operations. For terminated or matured swaps that were not designated as cash flow hedges (including four swaps, of which two matured or terminated in the first quarter of 2015, one terminated in the second quarter of 2015 and one terminated in the second quarter of 2016), the changes in fair value were recorded to interest and other expense, net in the Company’s consolidated statements of operations. Other than the fair value changes associated with the terminated interest rate swap for which hedge accounting was discontinued during the first half of 2015 as discussed below, fair value changes for derivatives that were not in qualifying hedge relationships for the three and nine months ended September 30, 2016 and 2015 were not material.

To adjust qualifying cash flow hedges to their fair value and recognize the impact of hedge accounting, the Company recorded unrealized gains (losses) of approximately $4.3 million and $(6.0) million during the three months ended September 30, 2016 and 2015, and approximately $(7.9) million and $(6.4) million during the nine months ended September 30, 2016 and 2015, respectively, to other comprehensive income (loss). There was no ineffectiveness recorded on designated cash flow hedges during the three and nine months ended September 30, 2016 and 2015. Amounts reported in accumulated other comprehensive loss will be reclassified to interest and other expense, net as interest payments are made on the Company’s variable-rate derivatives. The Company reclassified unrealized losses of approximately $0.9 million and $0.8 million during the three months ended September 30, 2016 and 2015, and unrealized losses of approximately $2.9 million and $1.0 million during the nine months ended September 30, 2016 and 2015 from accumulated other comprehensive loss to interest and other expense, net. Approximately $3.9 million of the net unrealized losses included in accumulated other comprehensive loss at September 30, 2016 is expected to be reclassified into interest and other expense, net within the next 12 months. Also, during the nine months ended September 30, 2015, the Company reclassified $0.8 million of unrealized losses from accumulated other comprehensive loss to net income which was associated with the $100 million terminated swap agreement as discussed below. Amounts recorded to accumulated other comprehensive loss totaled approximately $10.0 million and $2.1 million as of September 30, 2016 and December 31, 2015, respectively.

2015 Terminated Interest Rate Swap

In May 2015, concurrent with the Listing, the Company amended and restated its credit facility, at which time it repaid its $100 million term loan and terminated its $100 million interest rate swap, which was scheduled to mature in March 2019. At inception, this swap was designated as a cash flow hedge for accounting purposes, and from inception of the swap through March 2, 2015, the swap was a fully effective hedge, and therefore the changes in the fair value through this date were recorded in accumulated other comprehensive loss, a component of shareholders’ equity in the Company’s consolidated balance sheets, which totaled $0.8 million as of March 2, 2015. In the first quarter of 2015, the Company announced its intent to pursue a listing of its common shares on a national securities exchange and to enter into a modified credit facility and, as a result of this decision, it was determined that the cash flows being hedged were no longer probable of occurring through the maturity date of the swap. Therefore, the Company discontinued hedge accounting, and subsequent changes in fair value were recorded to interest and other expense, net in the Company’s consolidated statements of operations. The termination of the swap in May 2015 resulted in a cash settlement totaling approximately $1.1 million, the fair value at the time of settlement. As a result, the Company realized a loss of approximately $1.1 million during the nine months ended September 30, 2015 related to the swap termination, of which approximately $0.8 million previously recorded to accumulated other comprehensive loss ($0.3 million was recorded during the first quarter of 2015) was reclassified as an increase to transaction costs with the remaining amount recorded to interest and other expense, net in the Company’s consolidated statements of operations.

- 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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