Fair Value

3 Months Ended

Mar. 31, 2013

Fair Value

Fair Value

11.  Fair Value

Financial Instruments Carried at Fair Value

Derivative Financial Instruments

Currently, the Company uses interest rate swap and interest rate cap agreements to manage its interest rate risk.   These instruments are carried at fair value in the Company’s financial statements.  In adjusting the fair value of its derivative contracts for the effect of counterparty nonperformance risk, the Company has considered the impact of its net position with a given counterparty, as well as any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. The Company minimizes its credit risk on these transactions by dealing with major, creditworthy financial institutions which have an A or better credit rating by the Standard & Poor’s Ratings Group. As part of its on-going control procedures, the Company monitors the credit ratings of counterparties and the exposure of the Company to any single entity, thus minimizing credit risk concentration. The Company believes the likelihood of realizing losses from counterparty non-performance is remote. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. As of March 31, 2013, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined it is not significant.  As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.

Hedge ineffectiveness from qualifying hedge relationships did not have a material impact on earnings of the Company for any prior period, and the Company does not anticipate that it will have a material effect in the future.

The following table summarizes the consolidated Hedging Derivatives at March 31, 2013, excluding derivatives executed to hedge debt on communities classified as held for sale (dollars in thousands):

	Non-
	designated			Cash Flow			Cash Flow
	Hedges			Hedges			Hedges
	Interest			Interest			Interest
	Rate Caps			Rate Caps			Rate Swaps
Notional balance	$	568,514		$	179,675		$	215,000
Weighted average interest rate (1)	1.5		%	2.4		%	4.6		%
Weighted average capped interest rate	5.8		%	5.3		%	N/A
Earliest maturity date	Aug-13			Jul-13			May-13
Latest maturity date	Sep-17			Jun-15			May-13

(1) For interest rate caps, this represents the weighted average interest rate on the debt.

Excluding derivatives executed to hedge debt on communities classified as held for sale, the Company had four derivatives designated as cash flow hedges and 14 derivatives not designated as hedges at March 31, 2013. In conjunction with the Archstone Acquisition, the Company became the holder of 10 derivative positions with a fair value of approximately $20,000 at March 31, 2013. Fair value changes for derivatives not in qualifying hedge relationships for the three months ended March 31, 2013, resulted in an unrecognized gain of approximately $1,414,000, included in Interest expense, net in the Condensed Consolidated Statements of Comprehensive Income. To adjust the Hedging Derivatives in qualifying cash flow hedges to their fair value and recognize the impact of hedge accounting, the Company recorded an increase in other comprehensive income of $11,008,000 during the three months ended March 31, 2012. The Company reclassified $1,391,000 from accumulated other comprehensive loss into earnings as a component of the interest expense, net for the three months ended March 31, 2013. The Company anticipates reclassifying approximately $5,493,000 of hedging losses from accumulated other comprehensive losses into earnings within the next 12 months to offset the variability of cash flows of the hedged item during this period. The Company did not have any derivatives designated as fair value hedges as of March 31, 2013 or 2012.

The Company is also party to a $215,000,000 forward interest rate protection agreement, which was entered into in 2011 to reduce the impact of variability in interest rates on a portion of our expected debt issuance activity in 2013.  In 2013, based on changes in the Company’s capital markets outlook for the year, and current liquidity position, it is now uncertain as to whether it will issue the anticipated debt for which this interest rate protection agreement was transacted.  The Company will cash settle this position at or prior to its maturity in May 2013 for the fair value at the time of settlement.  At the point that the Company deems the anticipated debt issuance probable of not occurring, it will record a charge for the reversal of the deferred loss recorded within accumulated other comprehensive income of $53,484,000 for the forward interest swap agreement.  If the Company does issue the debt as previously anticipated, then the amounts recorded within accumulated other comprehensive income will be recognized as interest expense over the term of the debt.

Redeemable Noncontrolling Interests

In conjunction with the consolidated joint ventures acquired as part of the Archstone Acquisition, the Company assumed guarantee obligations that Archstone had provided to certain joint venture partners in the form of redemption options (the “Puts”).  Two of the Puts allow the joint venture partners in the ventures to require the Company to purchase their interest in the investment at a guaranteed minimum amount beginning in June 2022, or earlier if the operating communities underlying the joint ventures are sold. The Puts are payable in cash and have a price determined by a guaranteed return on the joint venture partners’ net capital contributions over the term of the partnership. The Company determines the fair value of the Puts based on unobservable inputs considering the assumptions that market participants would make in pricing the obligation, applying the contractual guaranteed rate of return to the joint venture partners’ net capital contribution balance as of period end. The Company assumed an additional redemption option related to a development right, where the joint venture partner has the right to put its interest in the venture to the Company upon stabilization of the planned apartment community.  The value of the Company's obligation is based on the joint venture partner’s current interest in the venture, including any implied return thereon under the terms of the joint venture agreement. Given the significance of the unobservable inputs, the valuation of these puts are classified in Level 3 of the fair value hierarchy.

The Company provided a redemption option (the “Put”) that allows a joint venture partner of the Company to require the Company to purchase its interest in the investment at a guaranteed minimum amount. The Put is payable in cash. The Company determines the fair value of the Put based on unobservable inputs considering the assumptions that market participants would make in pricing the obligation, applying a guaranteed rate of return to the joint venture partner’s net capital contribution balance as of period end. Given the significance of the unobservable inputs, the valuation is classified in Level 3 of the fair value hierarchy.

The Company issued units of limited partnership interest in DownREITs which provide the DownREIT limited partners the ability to present all or some of their units for redemption for cash as determined by the partnership agreement.  Under the DownREIT agreement, for each limited partnership unit, the limited partner is entitled to receive cash in the amount equal to the fair value of the Company’s common stock on or about the date of redemption.  In lieu of cash redemption, the Company may elect to exchange such units for an equal number of shares in the Company’s common stock. The limited partnership units in the DownREIT are valued using the market price of the Company’s common stock, a Level 1 price under the fair value hierarchy.

Financial Instruments Not Carried at Fair Value

Cash and Cash Equivalents

Cash and cash equivalent balances are held with various financial institutions within principal protected accounts.  The Company monitors credit ratings of these financial institutions and the concentration of cash and cash equivalent balances with any one financial institution and believes the likelihood of realizing material losses related to cash and cash equivalent balances is remote.  Cash and cash equivalents are carried at their face amounts, which reasonably approximate their fair values.

Other Financial Instruments

Rents receivable, accounts and construction payable and accrued expenses and other liabilities are carried at their face amounts, which reasonably approximate their fair values.

The Company values its unsecured notes using quoted market prices, a Level 1 price within the fair value hierarchy. The Company values its notes payable and outstanding amounts under the Credit Facility using a discounted cash flow analysis on the expected cash flows of each instrument. This analysis reflects the contractual terms of the instrument, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The process also considers credit valuation adjustments to appropriately reflect the Company’s nonperformance risk. The Company has concluded that the value of its notes payable and amounts outstanding under its credit facility are Level 2 prices as the majority of the inputs used to value its positions fall within Level 2 of the fair value hierarchy.

Financial Instruments Measured/Disclosed at Fair Value on a Recurring Basis

The following table summarizes the classification between the three levels of the fair value hierarchy of the Company’s financial instruments measured/disclosed at fair value on a recurring basis (dollars in thousands):

				Quoted Prices			Significant
				in Active			Other			Significant
				Markets for			Observable			Unobservable
	Total Fair Value			Identical Assets			Inputs			Inputs
Description	3/31/2013			(Level 1)			(Level 2)			(Level 3)
Interest Rate Caps	$	29		$	—		$	29		$	—
Interest Rate Swaps	(52,069		)	—			(52,069		)	—
Puts	(19,819		)	—			—			(19,819		)
DownREIT units	(950		)	(950		)	—			—
Indebtedness	(6,115,233		)	(1,993,536		)	(4,121,697		)	—
Total	$	(6,188,042	)	$	(1,994,486	)	$	(4,173,737	)	$	(19,819	)