Financial Instruments and Fair Values

6 Months Ended

Jun. 30, 2016

Derivative Financial Instruments

We use derivative financial instruments primarily to manage interest rate risk and such derivatives are not considered speculative. These derivative instruments are typically in the form of interest rate swap and forward agreements and the primary objective is to minimize interest rate risks associated with investing and financing activities. The counterparties of these arrangements are major financial institutions with which we may also have other financial relationships. We are exposed to credit risk in the event of non-performance by these counterparties; however, we currently do not anticipate that any of the counterparties will fail to meet their obligations.

We have agreements with our derivative counterparties that contain a provision where if we either default or are capable of being declared in default on any of our indebtedness, then we could also be declared in default on our derivative obligations. As of June 30, 2016, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $33.1 million. If we had breached any of these provisions at June 30, 2016, we could have been required to settle our obligations under the agreements at their termination value of $33.1 million.

As of June 30, 2016, we had three interest rate LIBOR swaps with an aggregate notional value of $465.0 million. The notional value does not represent exposure to credit, interest rate or market risks. The fair value of these derivative instruments, which is included in accounts payable and accrued expenses on the condensed consolidated balance sheet, amounted to $32.2 million at June 30, 2016. These interest rate swaps have been designated as cash flow hedges and hedge the future cash outflows on our mortgage debt and also on our term loan facility that is subject to a floating interest rate. As of June 30, 2016, these cash flow hedges are deemed effective and an unrealized loss of $10.9 million and $30.2 million is reflected in the condensed consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2016, respectively. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the debt. We estimate that no amount of the current balance held in accumulated other comprehensive income (loss) will be reclassified into interest expense within the next 12 months as each swap agreement is a forward hedge relating to future interest expense.

The table below summarizes the terms of agreements and the fair values of our derivative financial instruments as of June 30, 2016 and December 31, 2015 (dollar amounts in thousands):



	As of June 30, 2016						June 30, 2016					December 31, 2015
Derivative	Notional Amount		Receive Rate	Pay Rate	Effective Date	Expiration Date	Asset		Liability			Asset		Liability
Interest rate swap	$	265,000	1 Month LIBOR	2.1485%	August 31, 2017	August 24, 2022	$	—	$	(13,478	)	$	—	$	(1,620	)
Interest rate swap	100,000		3 Month LIBOR	2.5050%	July 5, 2017	July 5, 2027	—		(9,339		)	—		(148		)
Interest rate swap	100,000		3 Month LIBOR	2.5050%	July 5, 2017	July 5, 2027	—		(9,340		)	—		(154		)
							$	—	$	(32,157	)	$	—	$	(1,922	)

The table below shows the effect of our derivative financial instruments designated as cash flow hedges for the three and six months ended June 30, 2016 and 2015 (amounts in thousands):



Effects of Cash Flow Hedges	Three Months Ended June 30, 2016			Three Months Ended June 30, 2015		Six Months Ended June 30, 2016			Six Months Ended June 30, 2015
Amount of gain (loss) recognized in other comprehensive income (loss) - effective portion	$	(10,864	)	$	—	$	(30,235	)	$	—
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense - effective portion	—			—		—			—
Amount of gain (loss) recognized in other income/expense - ineffective portion	—			—		—			—

Fair Valuation

The estimated fair values at June 30, 2016 and December 31, 2015 were determined by management, using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The fair value of derivative instruments, which is classified as Level 2, and measured on a recurring basis, is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

The fair value of borrowings, which is classified as Level 3, is estimated by discounting the contractual cash flows of each debt to their present value using adjusted market interest rates, which is provided by a third-party specialist.

The following tables summarize the carrying and estimated fair values of our financial instruments as of June 30, 2016 and December 31, 2015 (amounts in thousands):



	June 30, 2016
			Estimated Fair Value
	Carrying Value		Total		Level 1		Level 2		Level 3
Interest rate swaps included in accounts payable and accrued expenses	$	32,157	$	32,157	$	—	$	32,157	$	—
Mortgage notes payable	767,717		778,349		—		—		778,349
Senior unsecured notes - Exchangeable	239,841		252,794		—		—		252,794
Senior unsecured notes - Series A, B, and C	348,862		368,165		—		—		368,165
Unsecured term loan facility	262,735		265,000		—		—		265,000
Unsecured revolving credit facility	40,000		40,000		—		—		40,000



	December 31, 2015
			Estimated Fair Value
	Carrying Value		Total		Level 1		Level 2		Level 3
Interest rate swaps included in accounts payable and accrued expenses	$	1,922	$	1,922	$	—	$	1,922	$	—
Mortgage notes payable	747,661		752,350		—		—		752,350
Senior unsecured notes - Exchangeable	238,208		251,391		—		—		251,391
Senior unsecured notes - Series A, B, and C	348,810		344,501		—		—		344,501
Unsecured term loan facility	262,545		265,000		—		—		265,000
Unsecured revolving credit facility	35,192		40,000		—		—		40,000

Disclosure about fair value of financial instruments is based on pertinent information available to us as of June 30, 2016 and December 31, 2015. Although we are not aware of any factors that would significantly affect the reasonableness of these fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.

- 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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