Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2013

17. Fair Value of Financial Instruments

The Company is required to disclose fair value information relating to financial instruments that are remeasured on a recurring basis and those that are only initially recognized at fair value (not required to be subsequently remeasured). The Company’s disclosures of estimated fair value of financial instruments were determined using available market information and appropriate valuation methods. The use of different assumptions or methods of estimation may have a material effect on the estimated fair value of financial instruments.

The following table reflects the fair values of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis (in thousands):


	Balance at March 31, 2013			Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Fair value measurements on a recurring basis:
Assets:
Other assets related to business combinations⁽¹⁾	$	830		$	—	$	—		$	830
Liabilities:
Interest rate swaps (see Note 11)	$	(459	)	$	—	$	(459	)	$	—
Contingent consideration related to business combinations⁽²⁾		(1,787	)	$	—		—			(1,787	)

Total	$	(2,246	)	$	—	$	(459	)	$	(1,787	)


	Balance at December 31, 2012			Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Fair value measurements on a recurring basis:
Assets:
Other assets related to business combinations⁽¹⁾	$	992		$	—	$	—		$	992
Liabilities:
Interest rate swaps (see Note 11)	$	(620	)	$	—	$	(620	)	$	—
Contingent consideration related to business combinations⁽²⁾		(1,787	)	$	—		—			(1,787	)
Derivative instrument related to business combinations (see Note 11)⁽³⁾		(274	)		—		—			(274	)

Total	$	(2,681	)	$	—	$	(620	)	$	(2,061	)

⁽¹⁾

Amount reflects the fair value of funds expected to be received pursuant to master lease agreements executed in connection with the Promenade Corporate Center acquisition. The Company has estimated the fair value of the asset based on its expectations of the probability of leasing or releasing spaces within the term of the master lease agreements and corresponding estimates for time required to lease, lease rates and funds required for tenant improvements and lease commissions. This amount has been included in other assets in the accompanying condensed consolidated balance sheets, with subsequent changes in the fair value of the asset recorded as a gain (loss) in earnings in the period in which the change occurs.

⁽²⁾

Additional consideration may be due to the prior owners of two properties purchased in 2012 contingent upon their ability to lease-up vacant space at those properties during 2013. The balance of $1.8 million at December 31, 2012 and March 31, 2013 represents the Company’s best estimate of the fair value of funds expected to be paid to the former owners (the maximum amount of contingent consideration that may be contractually earned by the prior owners is $8.0 million).

⁽³⁾

Amount reflects the fair value of a provision within a purchase agreement that provides a guaranteed redemption value for OP units provided to the sellers of a property acquired in March 2011. The Company has estimated the fair value of the embedded derivative instrument using 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. This amount is included in accounts payable and other liabilities in the accompanying condensed consolidated balance sheets, with changes in the fair value of the embedded derivative recorded as gain (loss) on changes in fair value of financial instruments and gain on OP unit redemption in the condensed consolidated statements of operations. This embedded derivative instrument expired on March 11, 2013.

During the period from March 2012 to March 2013, 591,474 OP units were tendered to the Company for redemption, resulting in the issuance of 531,768 shares of common stock and cash payments totaling approximately $1.9 million. The Company has recognized the acquisition of non-controlling interests based on the fair value of shares issuable in connection with the one-for-one redemption right available to all holders of OP units. The Company recognized a loss of approximately $16,000 and a gain of approximately $174,000 in the three months ended March 31, 2013 and 2012, respectively, as a result of the deficit or excess of the fair value of the guarantee over the fair value of the consideration required to settle. In total, the Company recognized increases in additional paid-in capital and common stock, par value, of approximately $279,000 and $1.4 million for the three months ended March 31, 2013 and 2012, respectively. The Company also recognized additional gains of $246,000 and $288,000 in the three months ended March 31, 2013 and 2012, respectively, as a result of revaluations of the redemption obligation.

The following table reconciles the beginning and ending balances of financial instruments that are remeasured on a recurring basis using significant unobservable inputs (Level 3) as of March 31, 2013 (in thousands):


	Other Assets Related to Business Combinations⁽¹⁾			Contingent Consideration Related to Business Combinations⁽²⁾			Derivative Instruments Related to Business Combinations⁽³⁾
Beginning balance, January 1, 2013	$	992		$	(1,787	)	$	(274	)
Total gains:
Included in earnings		—			—			246
Purchases, issuances, or settlements		(162	)		—			28

Ending balance, March 31, 2013	$	830		$	(1,787	)	$	—

⁽¹⁾

The change of $162,000 for other assets related to business combinations during the three months ended March 31, 2013 is comprised of payments received on the master lease assets.

⁽²⁾

There was no change in the contingent consideration related to business combinations during the three months ended March 31, 2013, with the earn-out periods related to the two applicable acquisitions ending on June 30, 2013 and September 30, 2013, respectively.

⁽³⁾

The change of $274,000 for derivative instruments related to business combinations during the three months ended March 31, 2013 is related to changes to the redemption provision for OP units issued in connection with the 2011 Edwards Theatres acquisition as a result of (a) a decrease of $246,000 due to recognition of a gain included in earnings related to changes in the fair value of the redemption obligation and (b) a decrease of $28,000 due to the redemption of corresponding OP units.


	Other Assets Related to Business Combinations⁽¹⁾		Contingent Consideration Related to Business Combinations⁽²⁾			Derivative Instruments Related to Business Combinations⁽³⁾
Beginning balance, January 1, 2012	$	—	$	(1,613	)	$	(3,050	)
Total gains:
Included in earnings		—		—			462
Purchases, issuances, or settlements		772		1,613			266

Ending balance, March 31, 2012	$	772	$	—		$	(2,322	)

⁽¹⁾

The change of $772,000 for other assets related to business combinations during the three months ended March 31, 2012 is comprised of the recognition of a master lease asset of $772,000 related to the acquisition of the Promenade Corporate Center property (see Note 3).

⁽²⁾

The change of $1.6 million for contingent consideration related to business combinations during the three months ended March 31, 2012 is comprised of a decrease in the obligation due to the payment of approximately $1.6 million in earn-outs in January 2012.

⁽³⁾

The change of $728,000 for derivative instruments related to business combinations during the three months ended March 31, 2012 is related to changes to the redemption provision for OP units issued in connection with the 2011 Edwards Theatres acquisition as a result of (a) a decrease of $462,000 due to recognition of a gain included in earnings related to changes in the fair value of the redemption obligation and (b) a decrease of $266,000 due to the redemption of corresponding OP units.

There were no additional gains or losses, purchases, sales, issuances, settlements, or transfers in or out related to any of the three levels of the fair value hierarchy during the three months ended March 31, 2013 and 2012.

The following table provides quantitative disclosure about significant unobservable inputs related to financial assets and liabilities measured on a recurring basis (Level 3 of the fair value hierarchy) as of March 31, 2013:


	Fair Value at March 31, 2013			Valuation Technique(s)		Unobservable Input		Range (Weighted Average)
Other assets related to business combinations⁽¹⁾	$	830			Cash flow		Tenant improvement allowance Lease commission TI construction period	$ $	12.00/sf - 35.00/sf 6.0 2-5 months	%
Contingent consideration related to business combinations⁽²⁾	$	(1,787	)		Cash flow		Tenant improvement allowance Lease commission TI construction period	$ $	12.00/sf - 33.00/sf 6.0 2 months	%

⁽¹⁾

The significant unobservable inputs used in the fair value measurement of the master lease agreement asset are any estimated tenant improvement allowances, leasing commissions and the construction periods associated with projected new leasing. Significant increases (decreases) in any of these inputs in isolation would result in a significantly higher (lower) fair value measurement. Generally, a change in the assumption used for market lease rates is accompanied by a directionally similar change in the assumption used for tenant improvement allowances and/or leasing commissions.

⁽²⁾

The significant unobservable inputs used in the fair value measurement of the contingent consideration are any estimated tenant improvement allowances, construction periods, leasing commissions and lease rates. Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for market lease rates is accompanied by a directionally similar change in the assumption used for tenant improvement allowances and/or leasing commissions.

The Company has not elected the fair value measurement option for any of its other financial assets or liabilities. The Company has estimated the fair value of its financial assets using a discounted cash flow analysis based on an appropriate market rate for a similar type of instrument. The Company has estimated the fair value of its financial liabilities by using either (1) a discounted cash flow analysis using an appropriate market discount rate for similar types of instruments, or (2) a present value model and an interest rate that includes a credit value adjustment based on the estimated value of the property that serves as collateral for the underlying debt. The fair values of financial instruments not included in this table are estimated to be equal to their carrying amounts.

The fair values of certain additional financial assets and liabilities at March 31, 2013 and December 31, 2012 (fair value measurements categorized as Level 3 of the fair value hierarchy) are as follows (in thousands):


	March 31, 2013				December 31, 2012
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Note receivable (Other Assets)	$	750	$	750	$	750	$	750
Financial liabilities:
Mortgage notes payable		332,732		340,158		333,935		341,288
Notes payable		88,000		88,047		75,000		74,862

- 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.

+ References

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