Derivatives and Hedging Activities

3 Months Ended

Mar. 31, 2013

Derivatives and Hedging Activities

11. Derivatives and Hedging Activities

In December 2010, the Company executed two pay-fixed interest rate swaps with a notional value of $55.8 million (weighted average interest rate of 1.41%) to hedge the variable cash flows associated with one of the Company’s mortgage payables. As a result of the interest rate swaps, the Company either (1) receives the difference between a fixed interest rate (the “Strike Rate”) and one-month LIBOR if the Strike Rate is less than LIBOR or (2) pays such difference if the Strike Rate is greater than LIBOR. No initial investment was made to enter into either of the interest rate swap agreements. The Company had no derivative financial instruments prior to the execution of the two swaps.

During the three months ended March 31, 2013 and 2012, the Company recorded no amounts in earnings attributable to hedge ineffectiveness. During the next twelve months, the Company estimates that an additional $459,000 will be reclassified from other comprehensive income as an increase to interest expense.

As of March 31, 2013, the Company had the following outstanding interest rate swaps and other derivatives instruments (in thousands):

	Fair Value(1)				Current Notional Amount		Strike Rate		Expiration Date
Type of Derivative Instrument	March 31, 2013		December 31, 2012
Interest rate swaps(2)	$	459	$	620	$	55,800		1.34% to 1.48%	December 2013
Other derivative instrument(3)		—		274					March 2013
Total derivative instruments	$	459	$	894

⁽¹⁾  Fair value of derivative instruments does not include any related accrued interest payable to the counterparty.

⁽²⁾ The interest rate swaps are classified within accounts payable and other liabilities on the accompanying condensed consolidated balance sheets.

⁽³⁾ The Company’s purchase agreement executed in connection with the acquisition of the Edwards Theatres property in March 2011 contained a provision determined to be an embedded derivative instrument. The embedded derivative provided a guaranteed fair value for the OP units provided to the sellers of the property if redeemed for shares of the Company’s common stock or cash, at the Company’s election, prior to its expiration in March 2013. The fair value of the embedded derivative at each period was calculated through the use of a Monte Carlo valuation model based on the historical volatility and closing price of the Company’s common stock and a risk-free interest rate (see Note 17 for discussion of changes in the fair value of this derivative). The embedded derivative was classified within accounts payable and other liabilities in the accompanying condensed consolidated balance sheets.

Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement

The tables below present the effect of the Company’s derivative financial instruments on the condensed consolidated statements of operations for the three months ended March 31, 2013 and 2012 (in thousands):

	Three Months Ended
	March 31, 2013			March 31, 2012
Amount of unrealized gain (loss) recognized in OCI (effective portion):
Interest rate swaps	$	(1	)	$	(173	)
Other derivatives		—			—
Total	$	(1	)	$	(173	)
Amount of gain (loss) reclassified from accumulated OCI into income (effective portion):
Interest rate swaps (interest expense)	$	(162	)	$	(157	)
Other derivatives		—			—
Total	$	(162	)	$	(157	)
Amount of gain (loss) recognized in income (ineffective portion and amount excluded from effectiveness testing):
Interest rate swaps (other income/expense)	$	—		$	—
Other derivatives (changes in fair value of financial instruments and gain on OP unit redemption)		230			462
Total	$	230		$	462

Credit-risk-related Contingent Features

Under the terms of the two interest rate swaps detailed above, the Company could be declared in default on its obligations under the swap agreements in the event that it defaults on any of its indebtedness, even if repayment of the indebtedness has not been accelerated by the lender. Additionally, because the Company’s derivative counterparty is also the lender for the hedged floating rate credit agreement, the swap agreements incorporate the loan covenant provisions of the Company’s indebtedness. Failure to comply with the loan covenant provisions would result in the Company being in default on any derivative instrument obligations covered by the agreement.

If the Company had breached any of these provisions at March 31, 2013, it could have been required to settle its obligations under the agreements at their termination value. As of March 31, 2013, the termination value defined as the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, was a liability of approximately $515,000. As of March 31, 2013, the Company has not posted any collateral related to these agreements.

Although the Company’s derivative contracts are subject to a master netting arrangement, the Company does not net its derivative fair values or any existing rights or obligations to cash collateral on the consolidated balance sheets.