Derivative Instruments

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Interest Rate Derivatives—We are exposed to risks arising from our business operations, economic conditions and financial markets. To manage these risks, we primarily use interest rate derivatives to hedge our debt and our cash flows. The interest rate derivatives include interest rate caps and interest rate floors, which are subject to master netting settlement arrangements. All derivatives are recorded at fair value.

The following table summarizes the interest rate derivatives we entered into over the applicable periods:



	Nine Months Ended September 30,
Interest rate caps:	2020			2019
Notional amount (in thousands)	$	602,500		$	348,500
Strike rate low end of range	3.00		%	3.00		%
Strike rate high end of range	4.00		%	7.80		%
Effective date range	March 2020 - June 2020			January 2019 - September 2019
Termination date range	April 2021 - June 2021			March 2020 - October 2021
Total cost of interest rate caps (in thousands)	$	92		$	89

Interest rate floors:
Notional amount (in thousands)	$	—		$	2,000,000
Strike rate				1.63		%
Effective date				January 2019
Termination date				March 2020
Total cost of interest rate floors (in thousands)	$	—		$	75

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No instruments were designated as cash flow hedges for during the nine months ended September 30, 2020 and 2019.

Interest rate derivatives consisted of the following:



Interest rate caps:⁽¹⁾	September 30, 2020			December 31, 2019
Notional amount (in thousands)	$	779,000		$	968,000
Strike rate low end of range	3.00		%	3.00		%
Strike rate high end of range	4.00		%	7.80		%
Termination date range	February 2021 - October 2021			January 2020 - October 2021
Aggregate principal balance on corresponding mortgage loans (in thousands)	$	779,000		$	870,000

Interest rate floors: ^{(1) (2)}
Notional amount (in thousands)	$	—		$	5,000,000
Strike rate low end of range				(0.25		)%
Strike rate high end of range				1.63		%
Termination date range				March 2020 - July 2020

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⁽¹⁾	No instruments were designated as cash flow hedges.


⁽²⁾	Cash collateral is posted by us as well as our counterparties. We offset the fair value of the derivative and the obligation/right to return/reclaim cash collateral.

Credit Default Swap Derivatives—We use credit default swaps, tied to the CMBX index, to hedge financial and capital market risk. A credit default swap is a derivative contract that functions like an insurance policy against the credit risk of an entity or obligation. The seller of protection assumes the credit risk of the reference obligation from the buyer (us) of protection in exchange for annual premium payments. If a default or a loss, as defined in the credit default swap agreements, occurs on the underlying bonds, then the buyer of protection is protected against those losses. The only liability for us, the buyer, is the annual premium and any change in value of the underlying CMBX index (if the trade is terminated prior to maturity). For all CMBX trades completed to date, we were the buyer of protection. Credit default swaps are subject to master-netting settlement arrangements and credit support annexes. As of September 30, 2020, we held a credit default swap with a notional amount of $50.0 million, an effective date of August 2017 and an expected maturity date of October 2026. Assuming the underlying bonds pay off at par over their remaining average life, our estimated total exposure for these trades was approximately $1.2 million as of September 30, 2020. Cash collateral is posted by us as well as our counterparties. We offset the fair value of the derivative and the obligation/right to return/reclaim cash collateral. The change in market value of credit default swaps is settled net through posting cash collateral or reclaiming cash collateral between us and our counterparties when such change in market value is over $250,000.