Derivative Instruments

9 Months Ended

Sep. 30, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Interest rate swaps [Text Block]

Derivative Instruments

We borrow funds at a combination of fixed and variable rates. Borrowings under our revolving credit facility and certain bank mortgage loans bear interest at variable rates. Our long-term debt typically bears interest at fixed rates. Our interest rate risk management objectives are to limit generally the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we enter into interest rate hedge contracts such as collars, swaps, caps and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We generally do not hold or issue these derivative contracts for trading or speculative purposes. The interest rate on all of our variable rate debt is generally adjusted at one or three month intervals, subject to settlements under interest rate hedge contracts.

Interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for 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 (for the Trust) and general partner's equity and limited partners' equity - common units (for the Operating Partnership) and is subsequently reclassified into interest expense in the period that the hedged forecasted transaction affects earnings.

The Company determines the fair value of its interest rate swaps by using the standard methodology of netting discounted future fixed cash payments with the discounted expected variable cash receipts. These variable cash receipts of interest rate swaps are based on expectations of future LIBOR interest rates (forward curves) estimated by observing market LIBOR interest rate curves. This is a Level 2 fair value calculation. Also, credit valuation adjustments are factored into the fair value calculations to account for potential nonperformance risk. These credit valuation adjustments were concluded to be not significant inputs for the fair value calculations for the periods presented.

In connection with the Cabot Acquisition, the Company assumed the seller’s interest in three interest rate swap contracts (“Swaps”) that eliminate the impact of changes in interest rates on the payments required under variable rate mortgages that were also assumed. The Swaps had aggregate notional amounts of $104.1 million and $105.2 million at September 30, 2014 and December 31, 2013, respectively, and expire at various dates between 2018 and 2020.

For the three months ended September 30, 2014, the effective portion of the change in the fair value of the swaps was an increase in the amount of $666,000 which was recorded as an increase in other comprehensive income. For the nine months ended September 30, 2014, the effective portion of the change in the fair value of the swaps was a decrease in the amount of $990,000, which was recorded as a reduction of other comprehensive income. These amounts reported in accumulated other comprehensive income will be reclassified to interest expense as interest payments are made on the variable rate mortgages. The amount of loss reclassified from accumulated other comprehensive income was $367,000 and $1.1 million for the three and nine months ended September 30, 2014, respectively. The ineffective portion of the change in the fair value of the Swaps for the three months ended September 30, 2014 in the amount of $13,000 was recorded as a decrease to interest expense in the accompanying consolidated statements of comprehensive income. The ineffective portion of the change in the fair value of the Swaps for the nine months ended September 30, 2014 in the amount of $42,000 was recorded as an increase to interest expense in the accompanying consolidated statements of comprehensive income.

The fair value of the Swaps in the amount of $8.0 million and $8.4 million as of September 30, 2014 and December 31, 2013, respectively, is included in other liabilities in the accompanying consolidated balance sheets. The Company estimates that $1.3 million will be reclassified from accumulated other comprehensive income as an increase to interest expense over the next 12 months.

The Company has agreements with its derivative counterparties that contain a provision whereby if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. If the Company were to breach any of the contractual provisions of the derivative contracts, it would be required to settle its obligations under the agreements at their termination value including accrued interest for approximately $8.3 million.