Risk Management and Use of Derivative Financial Instruments

3 Months Ended

Mar. 31, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Risk Management and Use of Derivative Financial Instruments

Risk Management

In the normal course of our ongoing business operations, we encounter economic risk. There are four main components of economic risk that impact us: interest rate risk, credit risk, market risk, and foreign currency risk. We are primarily subject to interest rate risk on our interest-bearing liabilities, including our unhedged variable-rate non-recourse mortgage loans. Credit risk is the risk of default on our operations and our tenants’ inability or unwillingness to make contractually required payments. Market risk includes changes in the value of our properties and related loans, due to changes in interest rates or other market factors. We own investments in the United States and Europe and are subject to risks associated with fluctuating foreign currency exchange rates.

Derivative Financial Instruments

There have been no significant changes in our derivative financial instrument policies from what was disclosed in the 2023 Annual Report. At both March 31, 2024 and December 31, 2023, no cash collateral had been posted nor received for any of our derivative positions.

The following table sets forth certain information regarding our derivative instruments (in thousands):


		Asset Derivatives Fair Value at
Derivatives Designated as Hedging Instruments	Balance Sheet Location	March 31, 2024		December 31, 2023
Interest rate cap	Other assets, net	$	428	$	433
		428		433
Total derivatives		$	428	$	433

The following tables present the impact of our derivative instruments in the consolidated financial statements (in thousands):


	Amount of Gain (Loss) Recognized on Derivatives in Other Comprehensive (Loss) Income
	Three Months Ended March 31,
Derivatives in Cash Flow Hedging Relationships	2024		2023
Interest rate cap	$	212	$	—
Total	$	212	$	—


		Amount of Gain (Loss) on Derivatives Reclassified from Other Comprehensive (Loss) Income
	Location of Gain (Loss) Recognized in Income	Three Months Ended March 31,
Derivatives in Cash Flow Hedging Relationships		2024		2023
Interest rate cap	Interest expense	$	(215)	$	—
Total		$	(215)	$	—

Amounts reported in Other comprehensive (loss) income related to interest rate derivative contracts will be reclassified to Interest expense as interest is incurred on our variable-rate debt. As of March 31, 2024, we estimate that an additional $0.9 million will be reclassified as Interest expense during the next 12 months.

The following table presents the impact of our derivative instruments in the consolidated financial statements (in thousands):


		Amount of Gain (Loss) on Derivatives Recognized in Income
	Location of Gain (Loss) Recognized in Income	Three Months Ended March 31,
Derivatives in Cash Flow Hedging Relationships		2024		2023
Interest rate cap	Interest expense	$	(2)	$	—
Total		$	(2)	$	—

See below for information on our purposes for entering into derivative instruments.

Interest Rate Caps

We are exposed to the impact of interest rate changes primarily through our borrowing activities. We have obtained, and may in the future obtain, variable-rate debt (our NLOP Financing Arrangements), and, as a result, we have entered into, and may continue to enter into, interest rate cap agreements with counterparties. Interest rate caps limit the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements.

The interest rate caps that our consolidated subsidiaries had outstanding at March 31, 2024 are summarized as follows (currency in thousands):


Interest Rate Derivatives	Number of Instruments	Notional Amount		Fair Value at March 31, 2024
Designated as Cash Flow Hedging Instruments
Interest rate cap	1	335,000	USD	$	428
				$	428

Credit Risk-Related Contingent Features

We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of any collateral received. No collateral was received as of March 31, 2024. At March 31, 2024, both our total credit exposure and the maximum exposure to any single counterparty was $0.4 million.