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DERIVATIVES AND HEDGING ACTIVITY (UNITED DOMINION REALTY, L.P.) | 12 Months Ended
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Dec. 31, 2019
Entity information |
DERIVATIVES AND HEDGING ACTIVITY | 14. DERIVATIVES AND HEDGING ACTIVITY Risk Management Objective of Using Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its debt funding and through the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings. Cash Flow Hedges of Interest Rate Risk The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. The changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in Accumulated other comprehensive income/(loss), net on the Consolidated Balance Sheets and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the years ended December 31, 2019, 2018, and 2017, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. During the year ended December 31, 2017, the Company recognized a loss of $0.1 million, reclassified from Accumulated other comprehensive income/(loss), net to Interest expense due to the de-designation of a cash flow hedge. No amounts were de-designated during the years ended December 31, 2019 and 2018. Amounts reported in Accumulated other comprehensive income/(loss), net on the Consolidated Balance Sheets related to derivatives that will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. Through December 31, 2020, the Company estimates that an additional $1.7 million will be reclassified as a decrease to Interest expense. As of December 31, 2019, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollars in thousands):
​ | ​ | ​ | ​ | ​ | ​
​ |  | Number of |  | ​
Product | ​ | Instruments | ​ | Notional
Interest rate swaps (a) | ​ | 4 | ​ | $ | 315,000
(a) | In addition to the interest rate swaps summarized above, the Company entered into an additional interest rate swap with a notional value of $315.0 million that will become effective in January 2020 upon the maturity of the interest rate swaps summarized above. Additionally, the Company had previously entered into two additional interest rate swaps with a notional value totaling $75.0 million that were subsequently terminated and settled during the year ended December 31, 2019 in conjunction with the July 2019 issuance of $300.0 million of senior unsecured medium-term notes as disclosed in Note 7, Secured and Unsecured, Net.
​ Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of GAAP. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and resulted in no gain or loss for the years ended December 31, 2019 and 2018, and a loss of less than $0.1 million for the year ended December 31, 2017. As of December 31, 2019, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (dollars in thousands):
​ | ​ | ​ | ​ | ​ | ​
​ |  | Number of |  | ​ | ​
Product | ​ | Instruments | ​ | Notional
Interest rate caps | ​ | 1 | ​ | $ | 19,880
​ Tabular Disclosure of Fair Values of Derivative Instruments on the Consolidated Balance Sheet The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of December 31, 2019 and 2018 (dollars in thousands):
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Asset Derivatives | ​ | Liability Derivatives
​ | ​ | (included in Other assets) | ​ | (included in Other liabilities)
​ | ​ | Fair Value at: | ​ | Fair Value at:
​ | ​ | December 31, | ​ | December 31, | ​ | December 31, | ​ | December 31,
​ | ​ | 2019 | ​ | 2018 | ​ | 2019 | ​ | 2018
Derivatives designated as hedging instruments: |  | ​ |  |  | ​ |  |  | ​ |  |  | ​ |
Interest rate products | ​ | $ | 6 | ​ | $ | 4,757 | ​ | $ | 142 | ​ | $ | 356
​ Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statements of Operations The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the years ended December 31, 2019, 2018, and 2017 (dollars in thousands):
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Gain/(Loss) Recognized in
​ | ​ | ​ | ​ | Gain/(Loss) Reclassified | ​ | Interest expense
​ | ​ | Unrealized holding gain/(loss) | ​ | from Accumulated OCI into | ​ | (Amount Excluded from
​ | ​ | Recognized in OCI | ​ | Interest expense | ​ | Effectiveness Testing)
Derivatives in Cash Flow Hedging Relationships |  | 2019 |  | 2018 |  | 2017 |  | 2019 |  | 2018 |  | 2017 |  | 2019 |  | 2018 |  | 2017
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest rate products | ​ | $ | (8,437) | ​ | $ | 4,806 | ​ | $ | 1,802 | ​ | $ | 2,770 | ​ | $ | 1,948 | ​ | $ | (1,271) | ​ | $ | — | ​ | $ | — | ​ | $ | (136)
​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Year Ended
​ | ​ | December 31,
​ | ​ | 2019 | ​ | 2018 | ​ | 2017
Total amount of Interest expense presented on the Consolidated Statements of Operations | ​ | $ | 170,917 | ​ | $ | 134,168 | ​ | $ | 128,711
​ ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Gain/(Loss) Recognized in
​ | ​ | Interest income and other income/(expense), net
Derivatives Not Designated as Hedging Instruments |  | 2019 |  | 2018 |  | 2017
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Interest rate products | ​ | $ | — | ​ | $ | — |  | (1)
​ Credit-risk-related Contingent Features The Company has agreements with its derivative counterparties that contain a provision where 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. The Company has certain agreements with some of its derivative counterparties that contain a provision where, in the event of default by the Company or the counterparty, the right of setoff may be exercised. Any amount payable to one party by the other party may be reduced by its setoff against any amounts payable by the other party. Events that give rise to default by either party may include, but are not limited to, the failure to pay or deliver payment under the derivative agreement, the failure to comply with or perform under the derivative agreement, bankruptcy, a merger without assumption of the derivative agreement, or in a merger, a surviving entity’s creditworthiness is materially weaker than the original party to the derivative agreement. As of December 31, 2019, the fair value of derivatives was in a net asset position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, of less than $0.1 million. Tabular Disclosure of Offsetting Derivatives The Company has elected not to offset derivative positions on the consolidated financial statements. The tables below present the effect on its financial position had the Company made the election to offset its derivative positions as of December 31, 2019 and 2018 (dollars in thousands):
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | ​ | ​ |  | Gross |  | Net Amounts of |  | Gross Amounts Not Offset | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | Amounts | ​ | Assets | ​ | in the Consolidated | ​ | ​ | ​
​ | ​ | Gross | ​ | Offset in the | ​ | Presented in the | ​ | Balance Sheet | ​ | ​ | ​
​ | ​ | Amounts of | ​ | Consolidated | ​ | Consolidated | ​ | ​ | ​ | ​ | Cash | ​ | ​ | ​
​ | ​ | Recognized | ​ | Balance | ​ | Balance Sheets | ​ | Financial | ​ | Collateral | ​ | ​ | ​
Offsetting of Derivative Assets | ​ | Assets | ​ | Sheets | ​ | (a) | ​ | Instruments |  | Received |  | Net Amount
December 31, 2019 | ​ | $ | 6 | ​ | $ | — | ​ | $ | 6 | ​ | $ | (3) | ​ | $ | — | ​ | $ | 3
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
December 31, 2018 | ​ | $ | 4,757 | ​ | $ | — | ​ | $ | 4,757 | ​ | $ | — | ​ | $ | — | ​ | $ | 4,757
(a) | Amounts reconcile to the aggregate fair value of derivative assets in the “Tabular Disclosure of Fair Values of Derivative Instruments on the Consolidated Balance Sheets” located in this footnote.
​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | ​ | ​ |  | Gross |  | Net Amounts of |  | Gross Amounts Not Offset | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | Amounts | ​ | Liabilities | ​ | in the Consolidated | ​ | ​ | ​
​ | ​ | Gross | ​ | Offset in the | ​ | Presented in the | ​ | Balance Sheet | ​ | ​ | ​
​ | ​ | Amounts of | ​ | Consolidated | ​ | Consolidated | ​ | ​ | ​ | ​ | Cash | ​ | ​ | ​
​ | ​ | Recognized | ​ | Balance | ​ | Balance Sheets | ​ | Financial | ​ | Collateral | ​ | ​ | ​
Offsetting of Derivative Liabilities |  | Liabilities |  | Sheets |  | (a) |  | Instruments |  | Posted |  | Net Amount
December 31, 2019 | ​ | $ | 142 | ​ | $ | — | ​ | $ | 142 | ​ | $ | (3) | ​ | $ | — | ​ | $ | 139
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
December 31, 2018 | ​ | $ | 356 | ​ | $ | — | ​ | $ | 356 | ​ | $ | — | ​ | $ | — | ​ | $ | 356
| (a) | Amounts reconcile to the aggregate fair value of derivative liabilities in the “Tabular Disclosure of Fair Values of Derivative Instruments on the Consolidated Balance Sheets” located in this footnote.
United Dominion Realty L.P. |
Entity information |
DERIVATIVES AND HEDGING ACTIVITY | 9. DERIVATIVES AND HEDGING ACTIVITY Risk Management Objective of Using Derivatives The Operating Partnership is exposed to certain risks arising from both its business operations and economic conditions. The General Partner principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The General Partner manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and through the use of derivative financial instruments. Specifically, the General Partner enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The General Partner’s and the Operating Partnership’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the General Partner’s known or expected cash payments principally related to the General Partner’s borrowings. Cash Flow Hedges of Interest Rate Risk The General Partner’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the General Partner primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the General Partner making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. The changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated other comprehensive income/(loss), net on the Consolidated Balance Sheets and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the year ended December 31, 2017, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. As of and during the years ended December 31, 2019 and 2018, no derivatives designated as cash flow hedges were held by the Operating Partnership. During the year ended December 31, 2017, the Operating Partnership recognized a loss of $0.1 million reclassified from Accumulated other comprehensive income/(loss), net to Interest expense due to the de-designation of a cash flow hedge. No amounts were de-designated during the years ended December 31, 2019 and 2018. Amounts reported in Accumulated other comprehensive income/(loss), net related to derivatives will be reclassified to interest expense as interest payments are made on the General Partner’s variable-rate debt that is owed by the Operating Partnership. As of December 31, 2019, no derivatives designated as cash flow hedges were held by the Operating Partnership and, as a result, no amounts are anticipated to be reclassified as an increase to interest expense through December 31, 2020. Derivatives not designated as hedges are not speculative and are used to manage the Operating Partnership’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of GAAP. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and resulted in no gain or loss for the years ended December 31, 2019 and 2018 and a loss of less than $0.1 million for the year ended December 31, 2017. As of December 31, 2019, we had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (dollars in thousands):
​ | ​ | ​ | ​ | ​ | ​
​ |  | Number of |  | ​ | ​
Product | ​ | Instruments | ​ | Notional
Interest rate caps |  | 1 | ​ | $ | 19,880
​ Tabular Disclosure of Fair Values of Derivative Instruments on the Consolidated Balance Sheets As of December 31, 2019 and December 31, 2018, the fair value of the Operating Partnership’s derivative financial instruments was zero. Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statements of Operations The tables below present the effect of the derivative financial instruments on the Consolidated Statements of Operations for the years ended December 31, 2019, 2018, and 2017 (dollars in thousands):
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Gain/(Loss) Recognized in
​ | ​ | ​ | ​ | Gain/(Loss) Reclassified | ​ | Interest expense
​ | ​ | Unrealized holding gain/(loss) | ​ | from Accumulated OCI into | ​ | (Amount Excluded from
​ | ​ | Recognized in OCI | ​ | Interest expense | ​ | Effectiveness Testing)
Derivatives in Cash Flow Hedging Relationships |  | 2019 |  | 2018 | ​ | 2017 |  | 2019 |  | 2018 | ​ | 2017 |  | 2019 |  | 2018 | ​ | 2017
Interest rate products | ​ | $ | — | ​ | $ | — | ​ | $ | — | ​ | $ | — | ​ | $ | — | ​ | $ | — | ​ | $ | — | ​ | $ | — | ​ | $ | (106)
​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Year Ended
​ | ​ | December 31,
​ | ​ | 2019 | ​ | 2018 | ​ | 2017
Total amount of Interest expense presented on the Consolidated Statements of Operations (a) | ​ | $ | 1,639 | ​ | $ | 8,733 | ​ | ​ | 18,156
| (a) | Excludes Interest expense on notes payable due to the General Partner for the years ended December 31, 2019, 2018, and 2017.
​ ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Gain/(Loss) Recognized in
​ | ​ | Interest income and other
​ | ​ | income/(expense), net
Derivatives Not Designated as Hedging Instruments |  | 2019 |  | 2018 |  | 2017
Interest rate products | ​ | $ | — | ​ | $ | — | ​ | $ | (1)
​ Credit-risk-related Contingent Features The General Partner has agreements with its derivative counterparties that contain a provision where the General Partner could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the General Partner’s default on the indebtedness. The General Partner has certain agreements with some of its derivative counterparties that contain a provision where, in the event of default by the General Partner or the counterparty, the right of setoff may be exercised. Any amount payable to one party by the other party may be reduced by its setoff against any amounts payable by the other party. Events that give rise to default by either party may include, but are not limited to, the failure to pay or deliver payment under the derivative agreement, the failure to comply with or perform under the derivative agreement, bankruptcy, a merger without assumption of the derivative agreement, or in a merger, a surviving entity’s creditworthiness is materially weaker than the original party to the derivative agreement.

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