Capital and Financing Transactions

Notes Payable to Banks

At March 31, 2015 and December 31, 2014, the Company had $593.0 million and $481.5 million outstanding, respectively, under the following credit facilities (in thousands):



Credit Facilities	Interest Rate	Initial Maturity	Outstanding Balance at March 31, 2015		Outstanding Balance at December 31, 2014
$10.0 Million Working Capital Revolving Credit Facility	1.7%	03/30/2018	$	—	$	—
$450.0 Million Revolving Credit Facility	1.5%	03/30/2018	243,000		131,500
$250.0 Million Five-Year Term Loan	2.6%	03/29/2019	250,000		250,000
$100.0 Million Seven-Year Term Loan	4.4%	03/31/2021	100,000		100,000
			$	593,000	$	481,500

On January 27, 2015, the Company exercised the accordion feature under its senior unsecured revolving credit facility to increase the facility by $200.0 million to $450.0 million. All other terms and covenants associated with the senior unsecured revolving credit facility remained unchanged as a result of the increase.

The senior unsecured revolving credit facility and unsecured term loans bear interest at LIBOR plus an applicable margin. As a result of the investment grade credit ratings the Company received in January 2015 from S&P and Moody's, the Company has changed to a different pricing grid under its existing credit agreement that is based on the Company's most recent credit rating. The new applicable margin for the senior unsecured revolving credit facility is currently 1.30% resulting in an all-in rate of 1.47%. The new applicable margin for the $250.0 million five-year unsecured term loan is currently 1.40% resulting in a weighted average all-in rate of 2.56%, after giving effect to the floating-to-fixed-rate interest rate swaps. The new applicable margin for the $100.0 million seven-year unsecured term loan is currently 1.85%, resulting in an all-in rate of 4.41%, after accounting for the floating-to-fixed-rate interest rate swap.

Mortgage Notes Payable

Mortgage notes payable at March 31, 2015 totaled $1.3 billion, including unamortized net premiums on debt acquired of $24.8 million, with an effective interest rate of 4.37%.

On March 5, 2015, the Company extinguished the mortgage note payable associated with Westshore Corporate Center. The balance at the date of payoff was approximately $14.0 million. The Company recognized a gain on extinguishment of debt of approximately $79,000.

On March 23, 2015, Fund II drew approximately $2.1 million on its construction loan secured by the Hayden Ferry Lakeside III development in the Tempe submarket of Phoenix, Arizona. As of March 31, 2015, the balance of the construction loan payable was approximately $2.6 million.

Interest Rate Swaps

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 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.

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 (Loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2015, such derivatives were used to hedge the variable cash flows associated with variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. See "Note 6 – Fair Values of Financial Instruments," for the fair value of the Company's derivative financial instruments as well as their classification on the Company's consolidated balance sheets as of March 31, 2015 and December 31, 2014.

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks 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.

Tabular Disclosure of the Effect of Derivative Instruments on the Statements of Operations and Comprehensive Income

The table below presents the effect of the Company's derivative financial instruments on the Company's consolidated statements of operations and comprehensive income for the three months ended March 31, 2015 and 2014 (in thousands):



Derivatives in Cash Flow Hedging Relationships (Interest Rate Swaps)	Three Months Ended March 31,
	2015			2014
Amount of loss recognized in other comprehensive income on derivatives	$	(5,105	)	$	(1,533	)
Net loss reclassified from accumulated other comprehensive loss into earnings	$	1,858		$	1,412
Amount of loss recognized in income on derivatives (ineffective portion, reclassifications of missed forecasted transactions and amounts excluded from effectiveness testing)	$	24		$	—

Credit Risk-Related Contingent Features

The Company has entered into agreements with each of its derivative counterparties that provide that if the Company defaults or is capable of being declared in default on any of its indebtedness, the Company could also be declared in default on its derivative obligations.

As of March 31, 2015, the fair value of derivatives in a liability position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $13.8 million. As of March 31, 2015, the Company has not posted any collateral related to these agreements and was not in default under any of its derivative obligations. If the Company had been in default under any of its derivative obligations, it could have been required to settle its obligations under the agreements with its derivative counterparties at their aggregate termination value of $13.4 million at March 31, 2015.