Fair Value of Financial Instruments (Tables)

3 Months Ended

Mar. 31, 2013

Schedule of Financial Assets and Liabilities Measured at Fair Value on Recurring Basis

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.

Statement of Reconciliation of Financial Instruments Remeasured on Recurring Basis

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.

Quantitative Disclosure of Significant Unobservable Inputs Relating to Financial Assets and Liabilities Measured on Recurring Basis

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.

Fair Values of Certain Additional Financial Assets and Liabilities

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