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Financial Instruments and Fair Values | 9 Months Ended
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Sep. 30, 2020
Fair Value Disclosures [Abstract] |
Financial Instruments and Fair Values | Financial Instruments and Fair Values Derivative Financial Instruments We use derivative financial instruments primarily to manage interest rate risk and such derivatives are not considered speculative. These derivative instruments are typically in the form of interest rate swap and forward agreements and the primary objective is to minimize interest rate risks associated with investing and financing activities. The counterparties of these arrangements are major financial institutions with which we may also have other financial relationships. We are exposed to credit risk in the event of non-performance by these counterparties; however, we currently do not anticipate that any of the counterparties will fail to meet their obligations. We have agreements with our derivative counterparties that contain a provision where if we either default or are capable of being declared in default on any of our indebtedness, then we could also be declared in default on our derivative obligations. As of September 30, 2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $10.3 million. If we had breached any of these provisions at September 30, 2020, we could have been required to settle our obligations under the agreements at their termination value of $10.3 million. As of September 30, 2020 and December 31, 2019, we had interest rate LIBOR swaps with an aggregate notional value of $265.0 million and $390.0 million, respectively. The notional value does not represent exposure to credit, interest rate or market risks. As of September 30, 2020 and December 31, 2019, the fair value of our derivative instruments amounted to $(10.2) million and $(13.3) million, respectively, which is included in accounts payable and accrued expenses on the condensed consolidated balance sheets. These interest rate swaps have been designated as cash flow hedges and hedge the variability in future cash flows associated with our existing variable-rate term loan facilities. As of September 30, 2020 and 2019, our cash flow hedges are deemed highly effective and a net unrealized gain (loss) of $2.9 million and $(5.9) million for the three months ended September 30, 2020 and 2019, respectively, and a net unrealized gain (loss) of $(13.4) million and $(25.4) million for the nine months ended September 30, 2020 and 2019, respectively, relating to both active and terminated hedges of interest rate risk, are reflected in the condensed consolidated statements of comprehensive income. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the debt. We estimate that $(11.5) million net loss of the current balance held in accumulated other comprehensive income (loss) will be reclassified into interest expense within the next 12 months. The table below summarizes the terms of agreements and the fair values of our derivative financial instruments as of September 30, 2020 and December 31, 2019 (dollar amounts in thousands):
|  |  |  | September 30, 2020 |  | December 31, 2019
Derivative |  | Notional Amount | Receive Rate | Pay Rate | Effective Date | Expiration Date |  | Asset | Liability |  | Asset | Liability
Interest rate swap |  | $ | 265,000 |  | 1 Month LIBOR | 2.1485% | August 31, 2017 | August 24, 2022 |  | $ | — |  | $ | (10,222 | ) |  | $ | — |  | $ | (4,247 | )
Interest rate swap |  | 125,000 |  | 3 Month LIBOR | 2.9580% | July 1, 2019 | N/A |  | — |  | — |  |  | — |  | (9,083 | )
|  |  |  |  |  |  |  | $ | — |  | $ | (10,222 | ) |  | $ | — |  | $ | (13,330 | )
During the nine months ended September 30, 2020, we terminated the $125.0 million swap and paid a settlement fee of $20.3 million. The table below shows the effect of our derivative financial instruments designated as cash flow hedges on accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019 (amounts in thousands):
|  | Three Months Ended |  | Nine Months Ended
Effects of Cash Flow Hedges |  | September 30, 2020 |  | September 30, 2019 |  | September 30, 2020 |  | September 30, 2019
Amount of gain (loss) recognized in other comprehensive income (loss) |  | $ | 64 |  |  | $ | (6,256 | ) |  | $ | (19,340 | ) |  | $ | (25,992 | )
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense |  | (2,873 | ) |  | (319 | ) |  | (5,986 | ) |  | (637 | )
The table below shows the effect of our derivative financial instruments designated as cash flow hedges on the condensed consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019 (amounts in thousands):
|  | Three Months Ended |  | Nine Months Ended
Effects of Cash Flow Hedges |  | September 30, 2020 |  | September 30, 2019 |  | September 30, 2020 |  | September 30, 2019
Total interest (expense) presented in the condensed consolidated statements of operations in which the effects of cash flow hedges are recorded |  | $ | (23,360 | ) |  | $ | (19,426 | ) |  | $ | (66,906 | ) |  | $ | (60,712 | )
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense |  | (2,873 | ) |  | (319 | ) |  | (5,986 | ) |  | (637 | )
Fair Valuation The estimated fair values at September 30, 2020 and December 31, 2019 were determined by management, using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The fair value of derivative instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. Although the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by ourselves and our counterparties. The impact of such credit valuation adjustments, determined based on the fair value of each individual contract, was not significant to the overall valuation. As a result, all of our derivatives were classified as Level 2 of the fair value hierarchy. The fair value of our mortgage notes payable, senior unsecured notes - Series A, B, C, D, E, F, G and H, unsecured term loan facilities, unsecured revolving credit facility and ground lease liabilities which are determined using Level 3 inputs, are estimated by discounting the future cash flows using current interest rates at which similar borrowings could be made to us. The following tables summarize the carrying and estimated fair values of our financial instruments as of September 30, 2020 and December 31, 2019 (amounts in thousands):
| September 30, 2020
|  |  | Estimated Fair Value
| Carrying Value |  | Total |  | Level 1 |  | Level 2 |  | Level 3
Interest rate swaps included in accounts payable and accrued expenses | $ | 10,222 |  |  | $ | 10,222 |  |  | $ | — |  |  | $ | 10,222 |  |  | $ | — |
Mortgage notes payable | 603,178 |  |  | 636,032 |  |  | — |  |  | — |  |  | 636,032 |
Senior unsecured notes - Series A, B, C, D, E, F, G and H | 973,106 |  |  | 1,055,971 |  |  | — |  |  | — |  |  | 1,055,971 |
Unsecured term loan facilities | 387,309 |  |  | 390,000 |  |  | — |  |  | — |  |  | 390,000 |
| December 31, 2019
|  |  | Estimated Fair Value
| Carrying Value |  | Total |  | Level 1 |  | Level 2 |  | Level 3
Interest rate swaps included in accounts payable and accrued expenses | $ | 13,330 |  |  | $ | 13,330 |  |  | $ | — |  |  | $ | 13,330 |  |  | $ | — |
Mortgage notes payable | 605,542 |  |  | 629,609 |  |  | — |  |  | — |  |  | 629,609 |
Senior unsecured notes - Series A, B, C, D, E and F | 798,392 |  |  | 843,394 |  |  | — |  |  | — |  |  | 843,394 |
Unsecured term loan facility | 264,640 |  |  | 265,000 |  |  | — |  |  | — |  |  | 265,000 |
Disclosure about the fair value of financial instruments is based on pertinent information available to us as of September 30, 2020 and December 31, 2019. Although we are not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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