Interest rate swap agreements

6 Months Ended

Jun. 30, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Interest rate swap agreements

Interest rate hedge agreements

We use interest rate derivatives to hedge the variable cash flows associated with certain of our existing LIBOR-based variable-rate debt, including our unsecured senior line of credit, unsecured senior bank term loans, and secured notes payable, and to manage our exposure to interest rate volatility. Our derivative instruments include interest rate swaps and interest rate caps.

On June 30, 2016, we executed two interest rate cap agreements for a notional amount based on scheduled increases over the term of the agreements, up to $150.0 million of the total loan commitment. We entered into these agreements to manage our exposure to interest rate movements on our variable-rate construction loan secured by our property located at 100 Binney Street, if one-month LIBOR exceeds 2.00% between July 29, 2016, the effective date, and April 20, 2019, the maturity date.

In our interest rate hedge agreements, the ineffective portion of the change in fair value is required to be recognized directly in earnings. During the six months ended June 30, 2016 and 2015, our interest rate hedge agreements were 100% effective; as a result, no hedge ineffectiveness was recognized in earnings. Changes in fair value, including accrued interest and adjustments for non-performance risk, on the effective portion of our interest rate hedge agreements that are designated and that qualify as cash flow hedges are classified in accumulated other comprehensive income. Amounts classified in accumulated other comprehensive income are subsequently reclassified into earnings in the period during which the hedged transactions affect earnings. During the next 12 months, we expect to reclassify approximately $6.9 million in accumulated other comprehensive income to earnings as an increase to interest expense. As of June 30, 2016, and December 31, 2015, the fair values of our interest rate swap and cap agreements aggregating an asset balance were classified in other assets, and the fair value of our interest rate swap agreements aggregating a liability balance were classified in accounts payable, accrued expenses, and tenant security deposits, based upon their respective fair values, without any offsetting pursuant to master netting agreements. Refer to Note 7 – “Fair Value Measurements” to these unaudited consolidated financial statements for further details. Under our interest rate hedge agreements, we have no collateral posting requirements.

The Company has agreements with certain of its derivative counterparties that contain a provision wherein (i) the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness; or (ii) 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 had breached any of these provisions as of June 30, 2016, it could have been required to settle its obligations under the agreements at their termination value of $12.4 million.

We had the following outstanding interest rate hedge agreements that were designated as cash flow hedges of interest rate risk as of June 30, 2016 (dollars in thousands):

Interest Rate Hedge Type			Number of Contracts	Weighted-Average Interest Pay/Cap Rate (1)	Fair Value as of 6/30/16				Notional Amount in Effect as of
	Effective Date	Maturity Date							6/30/16		12/31/16		12/31/17		12/31/18
Swap	September 1, 2015	March 31, 2017	2	0.57%	$	(72	)		$	100,000	$	100,000	$	—	$	—
Swap	March 31, 2016	March 31, 2017	11	1.15%	(5,058		)		1,000,000		1,000,000		—		—
Swap	March 31, 2017	March 31, 2018	15	1.31%	(6,484		)		—		—		900,000		—
Swap	March 29, 2018	March 31, 2019	4	1.06%	(718		)		—		—		—		250,000
Cap	July 29, 2016	April 20, 2019	2	2.00%	110				—		55,000		126,000		150,000
Total					$	(12,222	)	(2)	$	1,100,000	$	1,155,000	$	1,026,000	$	400,000

(1) In addition to the interest pay rate for each swap agreement, interest is payable at an applicable margin for borrowings outstanding as of June 30, 2016. Borrowings under our 2019 unsecured senior bank term loan include an applicable margin of 1.20%, and borrowings outstanding under our unsecured senior line of credit and our 2021 unsecured senior bank term loan include an applicable margin of 1.10%. The applicable margin for our unsecured senior line of credit was reduced from 1.10% to 1.00% as a result of the amendment executed on July 29, 2016. Refer to Note 15 – “Subsequent Events” for additional information.

(2) This total represents the net of the fair value of interest rate hedges in liability position of $12.3 million and fair value of interest rate hedges in asset position of $110 thousand. Refer to Note 7 – “Fair Value Measurements” to these unaudited consolidated financial statements for further information.

During July 2016, we executed two interest rate swap agreements that were designated as cash flow hedges of interest rate risk (dollars in thousands):

Interest Rate Hedge Type			Number of Contracts	Weighted-Average Interest Pay Rate	Fair Value as of 6/30/16	Notional Amount in Effect as of
	Effective Date	Maturity Date				6/30/16		12/31/16		12/31/17		12/31/18
Swap	March 29, 2018	March 31, 2019	2	0.95%	N/A	$	—	$	—	$	—	$	200,000