DERIVATIVE FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2012

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

9.  DERIVATIVE FINANCIAL INSTRUMENTS

The Company’s use of derivative instruments is limited to the utilization of interest rate agreements or other instruments to manage interest rate risk exposures and not for speculative purposes. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure, as well as to hedge specific transactions. The counterparties to these arrangements are major financial institutions with which the Company and its subsidiaries may also have other financial relationships. The Company is potentially exposed to credit loss in the event of non-performance by these counterparties. However, because of the high credit ratings of the counterparties, the Company does not anticipate that any of the counterparties will fail to meet these obligations as they come due. The Company does not hedge credit or property value market risks.

The Company has entered into interest rate swap agreements that qualify and are designated as cash flow hedges designed to reduce the impact of interest rate changes on its variable rate debt.   Therefore, the interest rate swaps are recorded in the consolidated balance sheet at fair value and the related gains or losses are deferred in shareholders’ equity as Accumulated Other Comprehensive Loss.  These deferred gains and losses are amortized into interest expense during the period or periods in which the related interest payments affect earnings.  However, to the extent that the interest rate swaps are not perfectly effective in offsetting the change in value of the interest payments being hedged, the ineffective portion of these contracts is recognized in earnings immediately.

The Company formally assesses, both at inception of a hedge and on an on-going basis, whether each derivative is highly-effective in offsetting changes in cash flows of the hedged item. If management determines that a derivative is highly-effective as a hedge, then the Company accounts for the derivative using hedge accounting, pursuant to which gains or losses inherent in the derivative do not impact the Company’s results of operations.  If management determines that a derivative is not highly-effective as a hedge or if a derivative ceases to be a highly-effective hedge, the Company will discontinue hedge accounting prospectively and will reflect in its statement of operations realized and unrealized gains and losses in respect of the derivative.

The following table summarizes the terms and fair values of the Company’s derivative financial instruments at June 30, 2012 and December 31, 2011, respectively (dollars in thousands):

									Fair Value
Hedge			Notional						June 30,			December 31,
Product	Hedge Type		Amount		Strike		Effective Date	Maturity	2012			2011
Cap	Cash flow		$	100,000	2.0000	%	2/1/2011	1/31/2012	$	—		$	—
Swap	Cash flow	(a)	$	40,000	1.8025	%	6/20/2011	6/20/2016	(1,862		)	(1,494		)
Swap	Cash flow	(a)	$	40,000	1.8025	%	6/20/2011	6/20/2016	(1,861		)	(1,502		)
Swap	Cash flow	(a)	$	20,000	1.8025	%	6/20/2011	6/20/2016	(928		)	(727		)
Swap	Cash flow	(a)	$	75,000	1.3360	%	12/30/2011	3/31/2017	(2,024		)	(907		)
Swap	Cash flow	(a)	$	50,000	1.3360	%	12/30/2011	3/31/2017	(1,319		)	(484		)
Swap	Cash flow	(a)	$	50,000	1.3360	%	12/30/2011	3/31/2017	(1,323		)	(485		)
Swap	Cash flow	(a)	$	25,000	1.3375	%	12/30/2011	3/31/2017	(673		)	(319		)
Swap	Cash flow	(a)	$	40,000	2.4590	%	6/20/2011	6/20/2018	(3,299		)	(2,553		)
Swap	Cash flow	(a)	$	40,000	2.4725	%	6/20/2011	6/20/2018	(3,348		)	(2,628		)
Swap	Cash flow	(a)	$	20,000	2.4750	%	6/20/2011	6/20/2018	(1,665		)	(1,295		)
									$	(18,302	)	$	(12,394	)

(a)Hedging unsecured variable rate debt by fixing 30-day LIBOR.

The Company measures its derivative instruments at fair value and records them in the balance sheet as either an asset or liability.  The effective portions of changes in the fair value of the derivatives are reported in accumulated other comprehensive income (loss).

During the three months ended June 30, 2012, the Company paid $0.2 million to settle a swap associated with the unsecured senior note offering.  The Company recorded this amount to accumulated other comprehensive loss and will amortize the amount over the life of the notes.