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Derivative Instruments | 3 Months Ended
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Mar. 31, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments | Derivative Instruments We are exposed to, among other risks, the impact of changes in foreign currency exchange rates as a result of our non-U.S. investments and interest rate risk related to our capital structure. Our risk management program is designed to manage the exposure and volatility arising from these risks, and utilizes foreign currency forward contracts, cross currency swap contracts, interest rate swaps, interest rate locks and debt issued in foreign currencies to offset a portion of these risks. Foreign Currency Forward Contracts Designated as Cash Flow Hedges For instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is deferred as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same period or periods, during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in earnings. Cash Flow Hedges and Fair Value Hedges of Interest Rate Risk We enter into interest rate swaps in order to maintain a capital structure containing targeted amounts of fixed and floating-rate debt and manage interest rate risk. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our fixed-rate payments. These interest rate swap agreements are used to hedge the variable cash flows associated with variable-rate debt. Interest rate swaps designated as fair value hedges involve the receipt of fixed amounts from a counterparty in exchange for our variable-rate payments. These interest rate swap agreements hedge the exposure to changes in the fair value of fixed-rate debt attributable to changes in the designated benchmark interest rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in earnings. We record the gain or loss on the hedged items in interest expense, the same line item as the offsetting loss or gain on the related interest rate swaps. During the quarter ended March 31, 2022, we entered into a $550,000,000 fixed to floating swap in connection with our March senior note issuance. The carrying amount of the notes, exclusive of the hedge, is $545,082,000. The fair value of the swap as of March 31, 2022 was $1,413,000 and was recorded as a derivative asset with an offset to senior unsecured notes on our Consolidated Balance Sheet. Periodically, we enter into and designate interest rate locks to partially hedge the risk of changes in interest payments attributable to increases in the benchmark interest rate during the period leading up to the probable issuance of fixed-rate debt. We designate our interest rate locks as cash flow hedges. Gains and losses when we settle our interest rate locks are amortized into earnings over the life of the related debt, except where a material amount is deemed to be ineffective, which would be immediately recognized in the Consolidated Statements of Comprehensive Income. Approximately $2,562,000 of losses, which are included in OCI, are expected to be reclassified into earnings in the next 12 months. Foreign Currency Forward Contracts and Cross Currency Swap Contracts Designated as Net Investment Hedges We use foreign currency forward and cross currency forward swap contracts to hedge a portion of the net investment in foreign subsidiaries against fluctuations in foreign exchange rates. For instruments that are designated and qualify as net investment hedges, the variability in the foreign currency to U.S. Dollar of the instrument is recorded as a cumulative translation adjustment component of OCI. During the three months ended March 31, 2022, we settled certain net investment hedges generating cash proceeds of $10,169,000. The balance of the cumulative translation adjustment will be reclassified to earnings if the hedged investment is sold or substantially liquidated. Derivative Contracts Undesignated We use foreign currency exchange contracts to manage existing exposures to foreign currency exchange risk. Gains and losses resulting from the changes in fair value of these instruments are recorded in interest expense on the Consolidated Statements of Comprehensive Income and are substantially offset by net revaluation impacts on foreign currency denominated balance sheet exposures. In addition, we have several interest rate cap contracts related to variable rate secured debt agreements. Gains and losses resulting from the changes in fair values of these instruments are also recorded in interest expense. Equity Warrants We received equity warrants through our lending activities, which were accounted for as loan origination fees. The warrants provide us the right to participate in the capital appreciation of the underlying HC-One Group real estate portfolio above a designated price upon liquidation and contain net settlement terms qualifying as derivatives under ASC Topic 815. The warrants are classified within receivables and other assets on our Consolidated Balance Sheets. These warrants are measured at fair value with changes in fair value being recognized within gain (loss) on derivatives and financial instruments in our Consolidated Statements of Comprehensive Income. The following presents the notional amount of derivatives and other financial instruments as of the dates indicated (in thousands):
|  | March 31, 2022 |  | December 31, 2021
Derivatives designated as net investment hedges: |  |  |  |
Denominated in Canadian Dollars |  | $ | 1,075,000 |  |  | $ | 675,000 |
Denominated in Pound Sterling |  | £ | 1,890,708 |  |  | £ | 1,904,708 |
Financial instruments designated as net investment hedges: |  |  |  |
Denominated in Canadian Dollars |  | $ | 250,000 |  |  | $ | 250,000 |
Denominated in Pound Sterling |  | £ | 1,050,000 |  |  | £ | 1,050,000 |
Interest rate swaps designated as cash flow hedges: |  |  |  |
Denominated in U.S Dollars (1) |  | $ | 25,000 |  |  | $ | 25,000 |
Interest rate swaps designated as fair value hedges: |  |  |  |
Denominated in U.S Dollars |  | $ | 550,000 |  |  | $ | — |
Derivative instruments not designated: |  |  |  |
Interest rate caps denominated in U.S. Dollars |  | $ | 26,137 |  |  | $ | 26,137 |
Forward sales contracts denominated in Canadian Dollars |  | $ | 80,000 |  |  | $ | 80,000 |
(1) At March 31, 2022 the maximum maturity date was November 1, 2023. The following presents the impact of derivative instruments on the Consolidated Statements of Comprehensive Income for the periods presented (in thousands):
|  |  |  | Three Months Ended March 31, |  |
Description |  | Location |  | 2022 |  | 2021 |  |  |  |
Gain (loss) on derivative instruments designated as hedges recognized in income |  | Interest expense |  | $ | 5,984 |  |  | $ | 6,024 |  |  |  |  |
Gain (loss) on derivative instruments not designated as hedges recognized in income |  | Interest expense |  | $ | (693) |  |  | $ | (719) |  |  |  |  |
Gain (loss) on equity warrants recognized in income |  | Gain (loss) on derivatives and financial instruments |  | $ | (2,423) |  |  | $ | — |  |  |  |  |
Gain (loss) on derivative and financial instruments designated as hedges recognized in OCI |  | OCI |  | $ | 51,940 |  |  | $ | (20,037) |  |  |  |  |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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