DERIVATIVES INSTRUMENTS

3 Months Ended

Mar. 31, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVES INSTRUMENTS

DERIVATIVE INSTRUMENTS

The Company enters into derivative instruments for risk management purposes to hedge its exposure to cash flow variability caused by changing interest rates. The primary goal of the Company’s risk management practices related to interest rate risk is to prevent changes in interest rates from adversely impacting the Company’s ability to achieve its investment return objectives. The Company does not enter into the derivatives for speculative purposes.

The Company enters into interest rate swaps as a fixed rate payer to mitigate its exposure to rising interest rates on its variable rate notes payable. The value of interest rate swaps is primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of the fixed rate payer position and decrease the value of the variable rate payer position. As the remaining life of the interest rate swap decreases, the value of both positions will generally move towards zero. All of the Company’s interest rate swaps are designated as cash flow hedges.

The following table summarizes the notional and fair value of the Company’s interest rate swaps designated as cash flow hedges as of March 31, 2014 and December 31, 2013. The notional value is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks (dollars in thousands):

						Fair Value of Asset (Liability)			Fair Value of Asset (Liability)
Derivative Instruments	Effective Date	Maturity Date	Notional Value		Reference Rate	March 31, 2014			December 31, 2013
Interest Rate Swap	02/01/2013	02/01/2017	$	68,730	One-month LIBOR/ Fixed at 0.79%	$	(2	)	$	25
Interest Rate Swap	04/02/2013	03/27/2018	56,600		One-month LIBOR/ Fixed at 1.07%	552			631
Interest Rate Swap	05/01/2013	03/27/2018	18,400		One-month LIBOR/ Fixed at 0.86%	334			369
Interest Rate Swap (1)	07/01/2013	06/01/2018	148,000		One-month LIBOR/ Fixed at 1.41%	(776		)	(721		)
Interest Rate Swap	03/03/2014	12/16/2018	215,000		One-month LIBOR/ Fixed at 1.51%	840			1,875
Total derivatives designated  as hedging instruments			$	506,730		$	948		$	2,179

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⁽¹⁾ The Company entered into an interest rate swap agreement with Bank of America, N.A., which effectively fixes the interest rate on a $148.0 million portion of the National Office Portfolio Mortgage Loan at 2.91% from July 1, 2013 through May 31, 2017, and which will effectively fix the interest rate on $100.0 million at 2.91% from June 1, 2017 through May 31, 2018.

Asset derivatives are recorded as deferred financing costs, prepaid expenses and other assets on the accompanying consolidated balance sheets, and liability derivatives are recorded as other liabilities on the accompanying consolidated balance sheets. The change in fair value of the effective portion of a derivative instrument that is designated as a cash flow hedge is recorded as other comprehensive income (loss) on the accompanying consolidated statements of comprehensive income (loss) and accompanying consolidated statements of stockholders’ equity. The Company recorded unrealized losses of $1.2 million and $1.3 million on derivative instruments designated as cash flow hedges in accumulated other comprehensive income (loss) during the three months ended March 31, 2014 and 2013, respectively. Amounts in other comprehensive income (loss) will be reclassified into earnings in the periods in which earnings are affected by the hedged cash flows. As a result of utilizing derivative instruments designated as cash flow hedges to hedge its variable rate notes payable, the Company recognized an additional $1.0 million and $0.1 million of interest expense related to the effective portion of cash flow hedges during the three months ended March 31, 2014 and 2013, respectively. The change in fair value of the ineffective portion is recognized directly in earnings. During the three months ended March 31, 2014 and 2013, there was no ineffective portion related to the change in fair value of the cash flow hedges. During the next 12 months, the Company expects to recognize additional interest expense related to derivative instruments designated as cash flow hedges. The present value of the additional interest expense expected to be recognized over the next 12 months totaled $5.7 million as of March 31, 2014 and was included in accumulated other comprehensive income.