Derivatives and Hedging Activities

9 Months Ended

Sep. 30, 2011

Derivatives and Hedging Activities [Abstract]

Derivatives and Hedging Activities

6. Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the period, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and nine months ended September 30, 2011 and 2010, the Company did not record any amount in earnings related to derivatives due to hedge ineffectiveness.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During 2011, the Company estimates that $0.1 million will be reclassified as an increase to interest expense.

As of September 30, 2011, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

Cash Flow Hedge Derivative Summary

	Number of
	Instruments		Notional
Derivative type
Interest rate swap		1	$	60,000,000
Interest rate cap		1		25,000,000
Total		2	$	85,000,000

Non-designated Hedges

Additionally, the Company does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements but due to immateriality, are not designated for hedge accounting purposes. The Company’s derivatives detailed in the table below are not designated as hedging instruments for accounting purposes and do not have material economic value as of September 30, 2011. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. As of September 30, 2011, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships:

Non-Designated Derivative Summary

	Number of
	Instruments		Notional
Derivative type
Interest rate caps		2	$	40,000,000
Total		2	$	40,000,000

Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet as of September 30, 2011 and December 31, 2010.

	Fair Values of Derivative Instruments
	Derivative Assets				Derivative Liabilities
	As of September 30,		As of December 31,		As of September 30,		As of December
	2011		2010		2011		31, 2010
	(In thousands)
Derivatives designated as hedging instruments
Balance sheet location	Other Assets		Other Assets		Other Liabilities		Other Liabilities
Interest rate caps	$	1	$	31	$	—	$	—
Interest rate swaps		—		117		77		—
Total	$	1	$	148	$	77	$	—
Derivatives not designated as hedging instruments
Balance sheet location	Other Assets		Other Assets		Other Liabilities		Other Liabilities
Interest rate caps	$	—	$	—	$	—	$	—
Total	$	—	$	—	$	—	$	—

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

The table below presents the effect of the Company’s derivative financial instruments on the statement of operations for the three and nine months ended September 30, 2011 and 2010 (in thousands).

	Income Statement Impact of Derivatives in Cash Flow Hedging Relationships
						Amount of Gain or (Loss) Reclassified from				Location of Gain or (Loss)	Amount of Gain or (Loss) Recognized in
	Amount of Gain or (Loss) Recognized in				Location of Gain or (Loss)	Accumulated OCI into Income (Effective				Recognized in Income on	Income on Derivative (Ineffective Portion and
	OCI on Derivative (Effective Portion) for				Reclassified from Accumulated	Portion) for the Three Months Ended				Derivative (Ineffective Portion	Amount Excluded from Effectiveness Testing)
	the Three Months Ended September 30,				OCI into Income (Effective	September 30,				and Amount Excluded from	for the Three Months Ended September 30,
	2011		2010		Portion)	2011		2010		Effectiveness Testing)	2011		2010
Interest rate derivatives
Interest rate caps	$	3	$	—	Interest income / (expense)	$	1	$	—	Other income / (expense)	$	—	$	—
Interest rate swap		21		—	Interest income / (expense)		47		—	Other income / (expense)		—		—
Total	$	24	$	—		$	48	$	—		$	—	$	—

						Amount of Gain or (Loss) Reclassified from				Location of Gain or (Loss)	Amount of Gain or (Loss) Recognized in
	Amount of Gain or (Loss) Recognized in				Location of Gain or (Loss)	Accumulated OCI into Income (Effective				Recognized in Income on	Income on Derivative (Ineffective Portion and
	OCI on Derivative (Effective Portion) for				Reclassified from Accumulated	Portion) for the Nine Months Ended				Derivative (Ineffective Portion	Amount Excluded from Effectiveness Testing)
	the Nine Months Ended September 30,				OCI into Income (Effective	September 30,				and Amount Excluded from	for the Nine Months Ended September 30,
	2011		2010		Portion)	2011		2010		Effectiveness Testing)	2011		2010
Interest rate derivatives
Interest rate caps	$	30	$	—	Interest income / (expense)	$	2	$	—	Other income / (expense)	$	—	$	—
Interest rate swap		323		—	Interest income / (expense)		129		—	Other income / (expense)		—		—
Total	$	353	$	—		$	131	$	—		$	—	$	—

Credit-Risk-Related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision under which if the Company defaults on any of its indebtedness, including default when repayment of the indebtedness has not been accelerated by the lender, the Company could also be declared in default on its derivative obligations. Such a default may require the Company to settle any outstanding derivatives at their then current fair value. As of September 30, 2011, the derivative instruments with fair values in a net liability position were not material and the Company has not posted any cash collateral related to these agreements.