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Risk Management and Derivatives

12 Months Ended

Dec. 31, 2023

Note 11—Risk Management and Derivatives

In the normal course of its ongoing business operations, the Company encounters credit risk. Credit risk is the risk of default on the Company’s leases that result from a tenant’s inability or unwillingness to make contractually required payments.

Risk concentrations—Concentrations of credit risks arise when the Company has multiple leases with a particular tenant or credit party, or a number of the Company’s tenants are engaged in similar business activities, or activities in the

same geographic region, or have similar economic features, such that their ability to meet contractual obligations, including those to the Company, could be similarly affected by changes in economic conditions.

Although the Company’s Ground Leases are geographically diverse and the tenants operate in a variety of industries and property types, to the extent the Company has a significant concentration of interest income from sales-type leases or operating lease income from any tenant, the inability of that tenant to make its payment could have a material adverse effect on the Company. The Company did not have a significant concentration of interest income from sales-type leases or operating lease income from any tenant for the periods presented.

Derivative instruments and hedging activity—The Company’s use of derivative financial instruments has been associated with debt issuances and primarily limited to the utilization of interest rate swaps, interest rate caps and treasury locks to manage interest rate risk exposure. The Company does not enter into derivatives for trading purposes.

The Company recognizes derivatives, if any, as either assets or liabilities on the Company’s consolidated balance sheets at fair value. Interest rate hedge assets are recorded in "Deferred expenses and other assets, net" and interest rate hedge liabilities are recorded in "Accounts payable, accrued expenses and other liabilities" on the Company’s consolidated balance sheets. If certain conditions are met, a derivative may be specifically designated as a hedge of the exposure to changes in the fair value of a recognized asset or liability, a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability.

For the Company’s derivatives designated and qualifying as cash flow hedges, changes in the fair value of the derivatives are reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into interest expense in the same periods during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s debt. If an interest rate hedge is terminated prior to maturity it could result in a net derivative instrument gain or loss that continues to be reported in accumulated other comprehensive (loss) and is reclassified into earnings over the period of the original forecasted hedged transaction. However, if it is probable that the original forecasted hedged transaction will not occur by the end of the original specified time period, the derivative instrument gain or loss reported in accumulated other comprehensive income (loss) will be reclassified into earnings immediately. If a derivative includes an other-than-insignificant financing element at inception, when the Company is deemed to be the lender all cash inflows and outflows of the derivative are considered cash flows from investing activities in the Company’s consolidated statements of cash flows and when the Company is deemed to be the borrower all cash inflows and outflows of the derivative are considered cash flows from financing activities in the Company’s consolidated statements of cash flows.

For the Company’s derivatives not designated as hedges, the changes in the fair value of the derivatives are reported in "Interest expense" in the Company’s consolidated statements of operations. Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements.

The table below presents the Company’s derivatives as well as their classification on the consolidated balance sheets as of December 31, 2023 and 2022 ($ in thousands):^(1)(2)(3)


	December 31, 2023		December 31, 2022
	Fair		Fair		Balance Sheet
Derivative Type	Value		Value		Location
Assets
Interest rate swaps	$	34,864	$	29,346	Deferred expenses and other assets, net
Total	$	34,864	$	29,346
Liabilities
Interest rate swaps	$	2,546	$	—	Accounts payable, accrued expenses and other liabilities
Total	$	2,546	$	—

(1)

As of December 31, 2023, the Company has two interest rate swap derivatives outstanding that mature in April 2028 and have an aggregate $500.0 million notional amount, which hedge in-place floating-rate debt. The Company also has three designated derivatives outstanding that protect the Company against interest rate volatility with respect to long-term debt to be placed in the future, which have an aggregate $400.0 million notional amount, one of which matures in December 2024 and two that mature in December 2025. These designated hedges protect the Company against interest rate volatility with respect to future debt with a tenor of approximately 30 years. During the years ended December 31, 2023, 2022 and 2021, the Company recorded $13.6 million, $40.4 million and $13.3 million, respectively, of unrealized gains in accumulated other comprehensive income (loss).

(2)

The fair value of the Company’s derivatives is estimated using valuation techniques utilized by a third-party specialist using observable inputs such as interest rates and contractual cash flow and are classified as Level 2 within the fair value hierarchy. Over the next 12 months, the Company expects that $2.6 million related to cash flow hedges will be reclassified from "Accumulated other comprehensive income (loss)" as a decrease to interest expense.

(3)	During the years ended December 31, 2023 and 2022, the Company received $11.4 million and $11.0 million, respectively, in settlement of certain interest rate hedges. During the year ended December 31, 2021, the Company paid $19.9 million to terminate certain interest rate hedges.

Credit Risk-Related Contingent Features—The Company reports derivative instruments, if any, on a gross basis in its consolidated financial statements. The Company has agreements with each of its derivative counterparties that contain a provision whereby if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.

The table below presents the effect of the Company’s derivative financial instruments in the consolidated statements of operations and the consolidated statements of comprehensive income for the years ended December 31, 2023, 2022 and 2021 ($ in thousands):


		Amount of Gain		Amount of Gain
		(Loss) Recognized in		(Loss) Reclassified
	Location of Gain (Loss)	Accumulated Other		from Accumulated
	When Recognized	Comprehensive		Other Comprehensive
Derivatives Designated in Hedging Relationships	in Income	Income		Income into Earnings
For the Year Ended December 31, 2023
Interest rate swaps	Interest expense	$	13,621	$	3,048
Interest rate swaps⁽¹⁾	Other income		—		15,191

For the Year Ended December 31, 2022
Interest rate swaps	Interest expense	$	40,373	$	(3,888)

For the Year Ended December 31, 2021
Interest rate swaps	Interest expense	$	13,290	$	(3,191)

(1)	For the year ended December 31, 2023, $15.2 million was reclassified to “Other income” in the Company’s consolidated statements of operations due to a hedge forecasted for permanent debt that did not occur.