Derivatives

Our objectives in using derivatives are to add stability to interest expense and to manage our cash flow volatility and exposure to interest rate movements. To accomplish this objective, we primarily use interest rate protection agreements as part of our interest rate risk management strategy. Interest rate protection agreements designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

In connection with the origination of the seven-year, $200,000 unsecured loan (the "Unsecured Term Loan I") (see Note 4), during January 2014, we entered into four interest rate protection agreements, with an aggregate notional value of $200,000, to manage our exposure to changes in the one month LIBOR rate (the “Group I Swaps”). The Group I Swaps fix the LIBOR rate at a weighted average rate of 2.29% and mature on January 29, 2021. We designated the Group I Swaps as cash flow hedges.

In connection with origination of the Unsecured Term Loan II (see Note 4), during September 2015, we entered into six interest rate protection agreements, with an aggregate notional value of $260,000, to manage our exposure to changes in the one month LIBOR rate (the “Group II Swaps”). The Group II Swaps fix the LIBOR rate at a weighted average rate of 1.79% and mature on September 12, 2022. We designated the Group II Swaps as cash flow hedges.

In order to maintain our flexibility to pursue an offering of unsecured debt, during August 2014, we entered into three interest rate protection agreements, with an aggregate notional value of $220,000, to manage our exposure to changes in the three month LIBOR rate (the "Group III Swaps"). The Group III Swaps fixed the LIBOR rate at a weighted average rate of 2.5795% and were effective from December 1, 2014 through December 1, 2024. At origination, we designated the Group III Swaps as cash flow hedges but, during the first quarter of 2015, the Group III Swaps were de-designated and the fair market value loss of $12,990 was reclassified to earnings from other comprehensive income since we determined the forecasted offering of unsecured debt was no longer probable to occur within the time period stated in the respective designation memos. During the nine months ended September 30, 2015, we settled the Group III Swaps for a payment of $11,546 made to our derivative counterparties. For the nine months ended September 30, 2015, $11,546 is recognized as mark-to-market and settlement loss on interest rate protection agreements.

Our agreements with our derivative counterparties contain provisions where if we default on any of our indebtedness, then we could also be declared in default on our derivative obligations subject to certain thresholds. As of September 30, 2015, we had not posted any collateral related to these agreements and were not in breach of any of the agreement provisions. If we had breached these provisions, we could have been required to settle our obligations under the agreements at their termination value.

The following table sets forth our financial liabilities related to the Group I and Group II Swaps, which are included in Accounts Payable, Accrued Expenses and Other Liabilities on the accompanying consolidated balance sheet and are accounted for at fair value on a recurring basis as of September 30, 2015:



				Fair Value Measurements at Reporting Date Using:
Description	Fair Value			Quoted Prices in Active Markets for Identical Assets(Level 1)	Significant Other Observable Inputs (Level 2)			Unobservable Inputs (Level 3)
Liabilities:
Derivatives designated as a hedging instrument:
Group I Swaps	$	(10,148	)	—	$	(10,148	)	—
Group II Swaps	$	(4,322	)	—	$	(4,322	)	—

There was no ineffectiveness recorded on the Group I Swaps and Group II swaps during the three and nine months ended September 30, 2015. See Note 6 for more information.

The estimated fair value of the Group I Swaps and Group II Swaps was determined using the market standard methodology of netting the discounted fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of interest rates (forward curves) derived from observable market interest rate curves. In addition, credit valuation adjustments are incorporated in the fair value to account for potential non-performance risk, including our own non-performance risk and the respective counterparty’s non-performance risk. We determined that the significant inputs used to value the Group I Swaps and Group II Swaps fell within Level 2 of the fair value hierarchy.