DERIVATIVE INSTRUMENTS, HEDGING ACTIVITIES AND OTHER COMPREHENSIVE INCOME

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE INSTRUMENTS, HEDGING ACTIVITIES AND OTHER COMPREHENSIVE INCOME

DERIVATIVE INSTRUMENTS, HEDGING ACTIVITIES AND OTHER COMPREHENSIVE INCOMEIn order to manage potential future variable interest rate risk, we enter into interest rate derivative agreements from time to time. We do not use interest rate derivative agreements for trading or speculative purposes. The agreements with each of our derivative counterparties provide that in the event of default on any of our indebtedness, we could also be declared in default on our derivative obligations.

The following table summarizes the terms and fair values of the Company’s derivative financial instruments that were designated and qualified as part of a hedging relationship as of September 30, 2023 and December 31, 2022 (dollars in thousands):


									Fair Value Assets (Liabilities)(1)
Type of Hedge	Number of Instruments	Aggregate Notional		Reference Rate	Interest Rate		Effective Date	Maturity Date	September 30, 2023		December 31, 2022
Cash Flow	Four	$	250,000	SOFR	2.99	%	12/1/2022	10/24/2025	$	9,158	$	7,134
Cash Flow	Two	100,000		SOFR	2.66	%	8/1/2022	8/1/2025	4,012		3,616
Cash Flow	Two	200,000		SOFR	2.72	%	8/3/2022	11/22/2023	750		3,663
Cash Flow	Three	120,000		SOFR	1.58	%	8/15/2022	7/17/2024	3,557		5,461
Cash Flow	Three	150,000		SOFR	1.68	%	8/15/2022	7/17/2026	11,491		10,896
		$	820,000						$	28,968	$	30,770

Fair Value(2)	Two	$	155,000	SOFR	SOFR + 3.70%		4/23/2021	9/10/2025	$	(12,791)	$	(14,177)

Forward-Starting Cash Flow	Two	$	200,000	SOFR	2.37	%	11/22/2023	8/1/2025	$	8,187	$	4,370

(1)Derivatives in an asset position are included within “Prepaid and other assets” and derivatives in a liability position are included within “Accounts payable and accrued expenses” in the accompanying consolidated balance sheets.

(2)On July 1, 2023, the fallback rate in the derivative agreements went into effect. The derivative agreements swap a blended fixed rate of 4.52% for a blended floating rate of three-month SOFR plus 3.70% as of September 30, 2023 and three-month LIBOR plus 3.70% as of December 31, 2022.

In October 2022, we terminated two forward-starting interest rate swaps with notional amounts totaling $150.0 million and a maturity date of June 1, 2032 and received $30.9 million upon termination. This settlement is included as a component of “Accumulated other comprehensive income” in the accompanying consolidated balance sheets and is being reclassified to earnings over time as the hedged items are recognized in earnings. During the nine months ended September 30, 2023, we accelerated the reclassification of $3.1 million in accumulated other comprehensive income as a reduction to interest expense as a result of a portion of the hedged forecasted transaction becoming probable not to occur. We currently expect that the debt issuance will occur during 2023.

These interest rate derivative agreements are the only assets or liabilities that we record at fair value on a recurring basis. The valuation of these assets and liabilities is determined using widely accepted techniques including discounted cash flow analysis. These techniques consider the contractual terms of the derivatives (including the period to maturity) and use observable market-based inputs such as interest rate curves and implied volatilities. We also incorporate credit valuation adjustments into the fair value measurements to reflect nonperformance risk on both our part and that of the respective counterparties.

We determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, although the credit valuation adjustments associated with our derivatives use Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. As of September 30, 2023 and December 31, 2022, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined the credit valuation adjustments were not significant to the overall valuation of our derivatives. As a result, we determined our derivative valuations were classified within Level 2 of the fair value hierarchy.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to earnings over time as the hedged items are recognized in earnings. Approximately $5.5 million and $13.2 million was reclassified as an increase to earnings during the three and nine months ended September 30, 2023, respectively. Approximately $1.2 million and $8.6 million was reclassified as a decrease to earnings during the three and nine months ended September 30, 2022, respectively. As interest payments on our derivatives are made over the next 12 months, we estimate the decrease to interest expense to be approximately $28.4 million, assuming the current SOFR curve.

Unrealized gains and losses on our interest rate derivative agreements are the only components of the change in accumulated other comprehensive income.