| 12. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reasonable estimates of their fair value. The aggregate fair value of the notes payable with fixed-rate payment terms was determined using Level 3 data in a discounted cash flow approach, which is based upon management’s estimate of borrowing rates and loan terms currently available to the Company for fixed rate financing, and assuming long term interest rates of approximately 4.0% and 4.30%, would be approximately $848.1 million and $889.2 million, as of December 31, 2012 and 2011, respectively, compared to the carrying value of $774.8 million and $808.8 million at December 31, 2012 and 2011, respectively. A change in any of the significant inputs may lead to a change in the Company’s fair value measurement of its debt.
Effective June 30, 2011, the Company determined that one of its interest-rate swap arrangements was a highly effective hedge of the cash flows under one of its variable-rate mortgage loans and designated the swap as a cash flow hedge of that mortgage. The swap is carried at fair value with changes in fair value recognized either in income or comprehensive income depending on the effectiveness of the swap. The following chart summarizes the changes in fair value of the Company’s swaps for the indicated periods.
| (Dollars in thousands) | Year ended December 31, | |||||||||||
| 2012 | 2011 | 2010 | ||||||||||
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Increase (decrease) in fair value: |
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Recognized in earnings |
$ | 36 | $ | (1,332 | ) | $ | — | |||||
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Recognized in other comprehensive income |
(932 | ) | (3,195 | ) | (543 | ) | ||||||
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Total |
$ | (896 | ) | $ | (4,527 | ) | $ | (543 | ) | |||
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The Company carries its interest rate swaps at fair value. The Company has determined the majority of the inputs used to value its derivative fall within Level 2 of the fair value hierarchy with the exception of the impact of counter-party risk, which was determined using Level 3 inputs and are not significant. Derivative instruments are classified within Level 2 of the fair value hierarchy because their values are determined using third-party pricing models which contain inputs that are derived from observable market data. Where possible, the values produced by the pricing models are verified by the market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measure of volatility, and correlations of such inputs. The swap agreements terminate on June 30, 2013 and July 1, 2020. As of December 31, 2012, the fair value of the interest-rate swaps was approximately $5.9 million and is included in “Accounts payable, accrued expenses and other liabilities” in the consolidated balance sheets. The decrease in value from inception of the swap designated as a cash flow hedge is reflected in “Other Comprehensive Income” in the Consolidated Statements of Comprehensive Income.