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Derivative Instruments and Hedging Activity

12 Months Ended

Dec. 31, 2019

Derivative Instruments and Hedging Activity

Derivative Instruments and Hedging Activity

Note 9 – Derivative Instruments and Hedging Activity

Background

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 risk, including interest rate, liquidity and credit risk primarily by managing the amount, sources and duration of its debt funding and, to a limited extent, the use of derivative instruments. For additional information regarding the leveling of our derivatives. Refer to “Note 10 – Fair Value Measurements.”

The Company’s objective in using interest rate derivatives is to manage its exposure to interest rate movements and add stability to interest expense. To accomplish this objective, the Company uses interest rate swaps 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 agreement without exchange of the underlying notional amount.

2019 Activity

In March 2019, the Company entered into forward-starting interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates from the trade date through the forecasted issuance date of $100.0 million of long-term debt. The Company hedged its exposure to the variability in future cash flows for a forecasted issuance of long-term debt over a maximum period of one year. In May, the Company terminated the swap agreements at the time of pricing the future debt issuance, receiving $0.8 million upon termination. See discussion of the 2031 Notes in “Note 5 – Debt” above.

In June 2019, the Company entered into forward-starting interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates from the trade date through the forecasted issuance date of $100.0 million of long-term debt. The Company is hedging its exposure to the variability in future cash flows for a forecasted issuance of long-term debt over a maximum period ending March 2021. As of December 31, 2019, these interest rate swaps were valued as a liability of $1.4 million.

In October 2019, the Company entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $65.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreements, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 1.4275%. This swap effectively converts $65.0 million of variable-rate borrowings to fixed-rate borrowings from July 12, 2021 to January 12, 2024. As of December 31, 2019, this interest rate swap was valued as an asset of approximately $0.2 million.

Also in October 2019, the Company entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $35.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 1.4265%. This swap effectively converts $35.0 million of variable-rate borrowings to fixed-rate borrowings from September 29, 2020 to January 12, 2024. As of December 31, 2019, this interest rate swap was valued as an asset of approximately $0.1 million.

Prior Derivative Transactions

In September 2013, the Company entered into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $35.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 2.20%. This swap effectively converts $35.0 million of variable-rate borrowings to fixed-rate borrowings from October 3, 2013 to September 29, 2020. As of December 31, 2019, this interest rate swap was valued as a liability of approximately $0.1 million.

In July 2014, the Company entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $65.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 2.09%. This swap effectively converts $65.0 million of variable-rate borrowings to fixed-rate borrowings from July 21, 2014 to July 21, 2021. As of December 31, 2019, this interest rate swap was valued as a liability of approximately $0.5 million.

In September 2016, the Company entered into an interest rate swap agreement to hedge against changes in future cash flows resulting from changes in interest rates on $40.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreement, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 1.40%. This swap effectively converts $40.0 million of variable-rate borrowings to fixed-rate borrowings from August 1, 2016 to July 1, 2023. As of December 31, 2019, this interest rate swap was valued as an asset of approximately $0.2 million.

In December 2018, the Company entered into interest rate swap agreements to hedge against changes in future cash flows resulting from changes in interest rates on $100.0 million in variable-rate borrowings. Under the terms of the interest rate swap agreements, the Company receives from the counterparty interest on the notional amount based on 1 month LIBOR and pays to the counterparty a fixed rate of 2.66%. This swap effectively converts $100.0 million of variable-rate borrowings to fixed-rate borrowings from December 27, 2018 to January 15, 2026. As of December 31, 2019, this interest rate swap was valued as a liability of approximately $5.9 million.

Recognition

Companies are required to recognize all derivative instruments as either assets or liabilities at fair value on the balance sheet. We recognize our derivatives within Other Assets, net and Accounts Payable, Accrued Expenses, and Other Liabilities on our Balance Sheet.

On January 1, 2019, the Company adopted ASU No. 2017-12, "Targeted Improvements to Accounting for Hedging Activities", which provided changes in hedge accounting recognition and presentation requirements. The Company now recognizes all changes in fair value for hedging instruments designated and qualifying for cash flow hedge accounting treatment as a component of Other Comprehensive Income (OCI), as opposed to previously recognizing the ineffective portion, if any, directly in earnings. Upon adoption, there were no adjustments to recognize relating to previously recorded derivatives transactions or amounts. Net realized gains or losses resulting from derivatives that were settled in conjunction with planned fixed rate financings or refinancings continue to be included in accumulated OCI during the term of the hedged debt transaction.

Amounts reported in accumulated OCI related to currently outstanding interest rate derivatives are recognized as an adjustment to income as interest payments are made on the Company’s variable-rate debt. Realized gains or losses on settled derivative instruments included in accumulated OCI are recognized as an adjustment over the term of the hedged debt transaction. During the next twelve months, the Company estimates that an additional $1.5 million will be reclassified as an increase to interest expense.

The Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (in thousands, except number of instruments):


	Number of Instruments		Notional
	December 31,	December 31,	December 31,		December 31,
Interest Rate Derivatives	2019	2018	2019		2018
Interest Rate Swap	15	10	$	240,000	$	258,543

The table below presents the estimated fair value of the Company’s derivative financial instruments as well as their classification in the consolidated balance sheets (in thousands).

The table below presents the effect of the Company’s derivative financial instruments in the consolidated statements of operations and other comprehensive loss for the years ended December 31, 2019 and 2018 (in thousands).


Year Ended December 31,		2019		2018			2019		2018

	Interest rate swaps	$	(8,657)	$	193	Interest Expense	$	(118)	$	(139)

The Company does not use derivative instruments for trading or other speculative purposes and did not have any other derivative instruments or hedging activities as of December 31, 2019.

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.

As of December 31, 2019, the fair value of derivatives in a net liability position related to these agreements, which includes accrued interest but excludes any adjustment for nonperformance risk, was $7.6 million.

Although the derivative contracts are subject to master netting arrangements, which serve as credit mitigants to both us and our counterparties under certain situations, we do not net our derivative fair values or any existing rights or obligations to cash collateral on the Consolidated Balance Sheets.

The table below presents a gross presentation of the effects of offsetting and a net presentation of the Company’s derivatives as of December 31, 2019 and December 31, 2018. The gross amounts of derivative assets or liabilities can be

reconciled to the Tabular Disclosure of Fair Values of Derivative Instruments above, which also provides the location that derivative assets and liabilities are presented on the Consolidated Balance Sheets (in thousands):

Offsetting of Derivative Assets

As of December 31, 2019

Gross Amounts

Net Amounts of

Offset in the

Assets presented

Gross Amounts Not Offset in the

Gross Amounts

Statement of

in the Statement

Statement of Financial Position

of Recognized

Financial

of Financial

Financial

Cash Collateral

Assets

Position

Instruments

Received

Net Amount

Derivatives

572

—

572

(572)

—

Offsetting of Derivative Liabilities

As of December 31, 2019

Net Amounts of

Gross Amounts

Liabilities

Offset in the

presented in the

Gross Amounts Not Offset in the

Gross Amounts

Statement of

Statement of Financial Position

of Recognized

Financial

Cash Collateral

Liabilities

Position

Instruments

Posted

Net Amount

Derivatives

7,943

—

7,943

(572)

—

7,372

Offsetting of Derivative Assets

As of December 31, 2018

Gross Amounts

Net Amounts of

Offset in the

Assets presented

Gross Amounts Not Offset in the

Gross Amounts

Statement of

in the Statement

Statement of Financial Position

of Recognized

Financial

of Financial

Financial

Cash Collateral

Assets

Position

Instruments

Received

Net Amount

Derivatives

2,539

—

2,539

(575)

—

1,964

Offsetting of Derivative Liabilities

As of December 31, 2018

Net Amounts of

Gross Amounts

Liabilities

Offset in the

presented in the

Gross Amounts Not Offset in the

Gross Amounts

Statement of

Statement of Financial Position

of Recognized

Financial

Cash Collateral

Liabilities

Position

Instruments

Posted

Net Amount

Derivatives

1,135

—

1,135

(575)

—

560

Asset Derivatives

December 31, 2019

December 31, 2018

Fair Value

Fair Value

Derivatives designated as cash flow hedges:

Interest Rate Swaps