Financial Instruments - Derivatives and Hedging

6 Months Ended

Jun. 30, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Instruments - Derivatives and Hedging

Financial Instruments – Derivatives and Hedging

The Company’s use of derivative instruments is intended to manage its exposure to interest rate movements and such instruments are not utilized for speculative purposes. In certain situations, the Company may enter into derivative financial instruments such as interest rate swap and interest rate cap agreements that result in the receipt and/or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.

Cash Flow Hedges of Interest Rate Risk

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 exchanging the underlying notional amount. The Company utilizes interest rate swaps to partially hedge the cash flows associated with variable LIBOR based debt. During the six months ended June 30, 2021 and year ended December 31, 2020, the Company did not enter into any new interest rate swap agreements. During the six months ended June 30, 2021, the Company paid $1.1 million to terminate interest rate swaps with a notional amount of $250.0 million.

Detail on the Company’s interest rate derivatives designated as cash flow hedges outstanding as of June 30, 2021 and December 31, 2020 is as follows:


	Number of Instruments		Notional Amount
	June 30, 2021	December 31, 2020	June 30, 2021		December 31, 2020
Interest Rate Swaps	5	7	$	550,000	$	800,000

The Company has elected to present its interest rate derivatives on its unaudited Condensed Consolidated Balance Sheets on a gross basis as interest rate swap assets and interest rate swap liabilities. Detail on the fair value of the Company’s interest rate derivatives on a gross and net basis as of June 30, 2021 and December 31, 2020 is as follows:


	Fair Value of Derivative Instruments
Interest rate swaps classified as:	June 30, 2021		December 31, 2020
Gross derivative assets	$	—	$	—
Gross derivative liabilities	(19,516)		(28,225)
Net derivative liabilities	$	(19,516)	$	(28,225)

The gross derivative assets are included in Other assets and the gross derivative liabilities are included in Accounts payable, accrued expenses and other liabilities on the Company’s unaudited Condensed Consolidated Balance Sheets. All of the Company’s outstanding interest rate swap agreements for the periods presented were designated as cash flow hedges of interest rate risk. The fair value of the Company’s interest rate derivatives is determined using market standard valuation techniques including discounted cash flow analysis on the expected cash flows of each

derivative. This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. These inputs are classified as Level 2 of the fair value hierarchy. The effective portion of changes in the fair value of derivatives designated as cash flow hedges is recognized in other comprehensive income (loss) and is reclassified into earnings as interest expense in the period that the hedged forecasted transaction affects earnings.

The effective portion of the Company’s interest rate swaps that was recognized on the Company’s unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2021 and 2020 is as follows:


Derivatives in Cash Flow Hedging Relationships (Interest Rate Swaps)	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Change in unrealized gain (loss) on interest rate swaps	$	(325)	$	(3,180)	$	2,274	$	(27,011)
Amortization of interest rate swaps to interest expense	3,157		2,345		6,224		2,298
Change in unrealized gain (loss) on interest rate swaps, net	$	2,832	$	(835)	$	8,498	$	(24,713)

The Company estimates that $7.9 million will be reclassified from accumulated other comprehensive loss as an increase to interest expense over the next twelve months. No gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on the Company’s cash flow hedges during the three and six months ended June 30, 2021 and 2020.

Non-Designated (Mark-to-Market) Hedges of Interest Rate Risk

The Company does not use derivatives for trading or speculative purposes. As of June 30, 2021 and December 31, 2020, the Company did not have any non-designated hedges.

Credit-risk-related Contingent Features

The Company has agreements with its derivative counterparties that contain provisions whereby if the Company defaults on certain of its indebtedness and the indebtedness has been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. If the Company were to breach any of the contractual provisions of the derivative contracts, it would be required to settle its obligations under such agreements at their termination value, including accrued interest.