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Derivative Financial Instruments | 6 Months Ended
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Jun. 30, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments | Derivative Financial Instruments The Company uses interest rate derivative contracts to manage its exposure to changes in interest rates on its variable rate debt. These derivatives are considered cash flow hedges and are recorded on a gross basis at fair value. Assessments of hedge effectiveness are performed quarterly using either a qualitative or quantitative approach. The Company recognizes the entire change in the fair value in Accumulated Other Comprehensive Income (“AOCI”) and the change is reflected as cash flow hedge changes in fair value in the supplemental disclosures of non-cash investing and financing activities in the condensed consolidated statements of cash flows. Effective September 1, 2022, such derivatives were initiated to hedge the variable cash flows associated with the 2028 Term Loan. The interest rate for the variable rate 2028 Term Loan is based on the hedged fixed rate of 2.63% compared to the variable 2028 Term Loan one-month SOFR rate as of June 30, 2023 of 5.16%, plus a SOFR adjustment of 0.10% and applicable margin of 1.15%. The maturity dates of the interest rate swaps coincide with the maturity date of the 2028 Term Loan. In anticipation of the settlement of the 2024 Term Loan, the Company converted and extended the existing cash flow hedges with an aggregate notional amount of $150.0 million to cover the base rate associated with the new 2027 Term Loan of $175.0 million. The remaining $25.0 million remained hedged under the original cash flow hedge with a maturity date of December 23, 2024. Subsequent to June 30, 2023, the Company entered into a $25.0 million cash flow hedge through the extended maturity date of the 2027 Term Loan of January 15, 2027. Effective June 30, 2023, the Company had a hedged fixed rate of 0.12% compared to the variable 2027 Term Loan SOFR rate as of June 30, 2023 of 5.05%, plus a SOFR adjustment of 0.10% and applicable margin of 1.15%. This hedged fixed rate of 0.12% is effective through November 27, 2023, and then adjusts to 1.87%, plus a SOFR adjustment of 0.10% and applicable margin of 1.15% through December 23, 2024, and 2.40%, plus a SOFR adjustment of 0.10% and applicable margin of 1.15% thereafter through the fully extended maturity of the 2027 Term Loan of January 2027. Amounts will subsequently be reclassified to earnings when the hedged item affects earnings. The Company does not enter into derivative contracts for speculative or trading purposes and does not have derivative netting arrangements. The Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company evaluates counterparty credit risk through monitoring the creditworthiness of counterparties, which includes review of debt ratings and financial performance. To mitigate credit risk, the Company enters into agreements with counterparties it considers credit-worthy, such as large financial institutions with favorable credit ratings. 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
Interest Rate Derivatives |  | June 30, 2023 |  | December 31, 2022 |  | June 30, 2023 |  | December 31, 2022
Interest rate swaps |  | 10 |  |  | 7 |  |  | $ | 525,000 |  |  | $ | 375,000 |
The following table presents the fair value of the Company's derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022 (in thousands):
|  | Derivative Assets
|  |  |  | Fair Value at
Derivatives Designated as Hedging Instruments: |  | Balance Sheet Location |  | June 30, 2023 |  | December 31, 2022
Interest rate swaps |  | Other assets, net |  | $ | 24,476 |  |  | $ | 24,067 |
The following table presents the effect of the Company's interest rate swaps on the condensed consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2023 and 2022 (in thousands):
|  | Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion) |  | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |  | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships |  | 2023 |  | 2022 |  |  |  | 2023 |  | 2022
For the Three Months Ended June 30 |  |  |  |  |  |  |  |  |  |
Interest Rate Products |  | $ | 9,714 |  |  | $ | 1,591 |  |  | Interest expense, net |  | $ | 3,326 |  |  | $ | 253 |
For the Six Months Ended June 30 |  |  |  |  |  |  |  |  |  |
Interest Rate Products |  | $ | 6,572 |  |  | $ | 7,779 |  |  | Interest expense, net |  | $ | 6,163 |  |  | $ | 230 |
The Company did not exclude any amounts from the assessment of hedge effectiveness for the three and six months ended June 30, 2023 and 2022. During the next twelve months, the Company estimates that an additional $18.4 million will be reclassified as a decrease to interest expense. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2023, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. The table below presents the Company’s derivative assets measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):
|  | Fair Value Hierarchy Level |  |
Description |  | Level 1 |  | Level 2 |  | Level 3 |  | Total Fair Value
June 30, 2023 |  |  |  |  |  |  |  |
Derivative assets |  | $ | — |  |  | $ | 24,476 |  |  | $ | — |  |  | $ | 24,476 |
December 31, 2022 |  |  |  |  |  |  |  |
Derivative assets |  | $ | — |  |  | $ | 24,067 |  |  | $ | — |  |  | $ | 24,067 |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent + Details
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