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Derivatives and Hedging Activities
 9 Months Ended
Sep. 30, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives and Hedging Activities Derivatives and Hedging Activities
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 interest rate caps as part of its interest rate risk management strategy. During 2022 and 2021, such derivatives have been used to hedge the variable cash flows associated with existing variable-rate debt.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income ("OCI") and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings, as documented at hedge inception in accordance with the Company’s accounting policy election. Amounts reported in accumulated OCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. Over the next 12 months, the Company estimates that an additional $25.2 million will be reclassified as a decrease to interest expense.
As of September 30, 2022, the Company had nine interest rate swaps with a total net hedged notional amount of $1.2 billion and two interest rate caps with a total hedged notional amount of $322.0 million. Of the nine interest rate swaps, three are pay-fixed, receive 1-Month LIBOR (subject to a minimum of 0.75%) interest rate swaps designated in cash flow hedging relationships with a total notional amount of $1.2 billion and a termination date of March 31, 2025. The remaining six interest rate swaps are undesignated and consist of three pay-fixed, receive 1-Month LIBOR (subject to a minimum of 1.00%) interest rate swaps and three pay 1-Month LIBOR (subject to a minimum of 1.00%), receive-fixed interest rate swaps with a termination date of November 30, 2023. The pay-floating, receive-fixed swaps are designed to economically offset the undesignated pay-fixed, receive-floating swaps. The interest rate caps each have a termination date of March 31, 2025.
The pay-fixed, receive floating interest rate swaps did not meet the requirements to be considered derivatives in their entirety as a result of the financing component. Accordingly, the swaps are considered hybrid instruments, consisting of a financing element treated as a debt instrument and an embedded at-market derivative that was designated as a cash flow hedge.
Within the Company’s condensed consolidated balance sheets, the financing elements treated as debt instruments described above are carried at amortized cost and the embedded at-market derivatives and the undesignated swaps are recorded at fair value. The cash flows related to the portion treated as debt are classified as financing activities in the condensed consolidated statements of cash flows while the portion treated as an at-market derivative are classified as operating activities. Cash settlements related to the undesignated swaps will offset and are classified as operating activities in the condensed consolidated cash flows. Within the Company’s condensed consolidated balance sheets, the interest rate caps are recorded at fair value. The cash flows related to the interest rate caps are classified as operating activities in the condensed consolidated statements of cash flows.
The key terms of interest rate swaps and interest rate caps outstanding are presented below:
September 30, 2022December 31, 2021
DescriptionEffective DateNotional Amount (in millions)StatusNotional Amount (in millions)StatusMaturity Date
Pay-fixed swapMay 7, 2021$435.0 Active$435.0 ActiveMarch 31, 2025
Pay-fixed swapMay 7, 2021330.0 Active330.0 ActiveMarch 31, 2025
Pay-fixed swapMay 7, 2021435.0 Active435.0 ActiveMarch 31, 2025
Interest rate capSeptember 30, 2021161.0 Active166.8 ActiveMarch 31, 2025
Interest rate capSeptember 30, 2021161.0 Active166.8 ActiveMarch 31, 2025
Pay-fixed swapNovember 30, 2018165.0 Active165.0 ActiveNovember 30, 2023
Pay-fixed swapNovember 30, 2018120.0 Active120.0 ActiveNovember 30, 2023
Pay-fixed swapJune 28, 2019150.0 Active150.0 ActiveNovember 30, 2023
Receive-fixed swapApril 30, 2021(165.0)Active(165.0)ActiveNovember 30, 2023
Receive-fixed swapApril 30, 2021(120.0)Active(120.0)ActiveNovember 30, 2023
Receive-fixed swapApril 30, 2021(150.0)Active(150.0)ActiveNovember 30, 2023
$1,522.0 $1,533.6 
Our interest rate swap agreements, excluding the portion treated as debt, are recognized at fair value in the condensed consolidated balance sheets and are valued using pricing models that rely on market observable inputs such as yield curve data, which are classified as Level 2 inputs within the fair value hierarchy. The fair value of the interest rate caps are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the caps are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. The interest rate caps are classified using Level 2 inputs within the fair value hierarchy.
The following table presents the fair values of our derivatives and their location on the condensed consolidated balance sheets (in millions):
September 30, 2022December 31, 2021
LocationAssetsLiabilitiesAssetsLiabilities
Derivatives not designated as hedging instruments
Interest rate swapsOther long-term assets$8.2 $— $12.5 $— 
Interest rate swapsOther long-term liabilities— 8.2 — 12.4 
Derivatives in cash flow hedging relationships
Interest rate capsOther long-term assets20.1 — 2.9 — 
Interest rate swapsOther long-term assets88.9 — 8.2 — 
Interest rate swaps
Other long-term liabilities (1)
— 35.3 — 45.8 
Total$117.2 $43.5 $23.6 $58.2 
(1)The balance as of September 30, 2022 and December 31, 2021 is related to the financing component of the pay-fixed, receive floating interest rate swaps.
The following table presents the pre-tax effect of the interest rate swaps and caps on the Company's accumulated OCI and condensed consolidated statement of operations (in millions):
Three Months Ended September 30,Nine Months Ended September 30,
Location2022202120222021
Derivatives not designated as hedging instruments
Loss recognized in incomeOther income, net$0.1 $— $0.2 $0.2 
Derivatives in cash flow hedging relationships
Gain (loss) recognized in OCI (effective portion)$37.0 $(0.1)$100.1 $(5.0)
Loss reclassified from accumulated OCI into income (effective portion) (1)
Interest expense, net$1.5 $6.6 $14.2 $18.1 
(1)Includes amortization of accumulated OCI related to de-designated and terminated interest rate swaps of $5.4 million for the three months ended September 30, 2022 and 2021. Includes amortization of accumulated OCI related to de-designated and terminated interest rate swaps of $16.0 million and $8.6 million for the nine months ended September 30, 2022 and 2021, respectively.