Derivative Instruments

12 Months Ended

Dec. 31, 2017

Summary of Derivative Instruments [Abstract]

Derivative Instruments

Derivative Instruments

All derivatives are recognized at fair value in the consolidated balance sheets within the line items "Other assets" and "Accounts payable and accrued liabilities" as applicable. The Company's derivatives are subject to a master netting arrangement and the Company has elected not to offset its derivative position for purposes of balance sheet presentation and disclosure. The Company had derivative liabilities of $0.1 million and $2.5 million recorded in “Accounts payable and accrued liabilities” and derivative assets of $25.7 million and $35.9 million recorded in “Other assets” in the consolidated balance sheet at December 31, 2017 and 2016, respectively. The Company has not posted or received collateral with its derivative counterparties as of December 31, 2017 and 2016. See Note 10 for disclosures relating to the fair value of the derivative instruments as of December 31, 2017 and 2016.

Risk Management Objective of Using Derivatives

The Company is exposed to the effect of changes in foreign currency exchange rates and interest rates on its LIBOR based borrowings. The Company manages this risk by following established risk management policies and procedures including the use of derivatives. The Company’s objective in using derivatives is to add stability to reported earnings and to manage its exposure to foreign exchange and interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps, cross currency swaps and foreign currency forwards.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements on its LIBOR based borrowings. To accomplish this objective, the Company currently uses interest rate swaps as its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

As of December 31, 2017, the Company had two interest rate swap agreements to fix the interest rate at 2.64% on $300.0 million of borrowings under the unsecured term loan facility from from July 6, 2017 to April 5, 2019. Additionally, as of December 31, 2017, the Company had three additional interest rate swap agreements to fix the interest rate at 3.15% on an additional $50.0 million of borrowings under its unsecured term loan facility from November 6, 2017 to April 5, 2019 and on $350.0 million of borrowings under the unsecured term loan facility from April 6, 2019 to February 7, 2022.

The change in the fair value of interest rate derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (AOCI) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings within the same income statement line item as the earnings effect of the hedged transaction. During the years ended December 31, 2017, 2016 and 2015, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. As of December 31, 2017, the Company estimates that during the twelve months ending December 31, 2018, $0.5 million will be reclassified from AOCI to interest expense.

Cash Flow Hedges of Foreign Exchange Risk

The Company is exposed to foreign currency exchange risk against its functional currency, the U.S. Dollar (USD), on its four Canadian properties. The Company uses cross currency swaps and foreign currency forwards to mitigate its exposure to fluctuations in the Canadian Dollar (CAD) to USD exchange rate on its Canadian properties. These foreign currency derivatives should hedge a significant portion of the Company's expected CAD denominated cash flow of the Canadian properties as their impact on the Company's cash flow when settled should move in the opposite direction of the exchange rates utilized to translate revenues and expenses of these properties.

At December 31, 2017, the Company’s cross-currency swaps had a fixed original notional value of $100.0 million CAD and $98.1 million USD. The net effect of these swaps is to lock in an exchange rate of $1.05 CAD per USD on approximately $13.5 million of annual CAD denominated cash flows on the properties through June 2018. Additionally, on August 30, 2017, the Company entered into a cross-currency swap that will be effective July 1, 2018 with a fixed original notional value of $100.0 million CAD and $79.5 million USD. The net effect of these swaps is to lock in an exchange rate of 1.26 CAD per USD on approximately $13.5 million of annual CAD denominated cash flows on the properties through June 2020.

The change in the fair value of foreign currency derivatives designated and that qualify as cash flow hedges of foreign exchange risk is recorded in AOCI and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. As of December 31, 2017, the Company estimates that during the twelve months ending December 31, 2018, $1.0 million will be reclassified from AOCI to other income.

Net Investment Hedges

As discussed above, the Company is exposed to fluctuations in foreign exchange rates on its four Canadian properties. As such, the Company uses currency forward agreements to hedge its exposure to changes in foreign exchange rates. Currency forward agreements involve fixing the CAD to USD exchange rate for delivery of a specified amount of foreign currency on a specified date. The currency forward agreements are typically cash settled in USD for their fair value at or close to their settlement date. In order to hedge the net investment in four of the Canadian properties, the Company entered into a forward contract with a fixed notional value of $100.0 million CAD and $94.3 million USD with a July 2018 settlement date. The exchange rate of this forward contract is approximately $1.06 CAD per USD. Additionally, on February 28, 2014, the Company entered into a forward contract with a fixed notional value of $100.0 million CAD and $88.1 million USD with a July 2018 settlement date. The exchange rate of this forward contract is approximately $1.13 CAD per USD. These forward contracts should hedge a significant portion of the Company’s CAD denominated net investment in these four properties through July 2018 as the impact on AOCI from marking the derivative to market should move in the opposite direction of the translation adjustment on the net assets of these four Canadian properties.

For foreign currency derivatives designated as net investment hedges, the change in the fair value of the derivatives are reported in AOCI as part of the cumulative translation adjustment. Amounts are reclassified out of AOCI into earnings when the hedged net investment is either sold or substantially liquidated.

Below is a summary of the effect of derivative instruments on the consolidated statements of changes in equity and income for the years ended December 31, 2017, 2016 and 2015:

Effect of Derivative Instruments on the Consolidated Statements of Changes in Equity and Income for the Years Ended December 31, 2017, 2016 and 2015 (Dollars in thousands)
	Year Ended December 31,
Description	2017			2016			2015
Interest Rate Swaps
Amount of Gain (Loss) Recognized in AOCI on Derivative	$	2,479		$	(2,044	)	$	(2,581	)
Amount of Expense Reclassified from AOCI into Earnings (1)	(2,498		)	(5,235		)	(2,004		)
Cross Currency Swaps
Amount of (Loss) Gain Recognized in AOCI on Derivative	(793		)	(754		)	5,380
Amount of Income Reclassified from AOCI into Earnings (2)	2,457			2,663			2,396
Currency Forward Agreements
Amount of (Loss) Gain Recognized in AOCI on Derivative	(9,547		)	(2,804		)	24,359
Amount of Income Reclassified from AOCI into Earnings (2)	—			—			—
Total
Amount of (Loss) Gain Recognized in AOCI on Derivative	$	(7,861	)	$	(5,602	)	$	27,158
Amount of (Expense) Income Reclassified from AOCI into Earnings	(41		)	(2,572		)	392
Interest expense, net in accompanying consolidated statements of income	133,124			97,144			79,915
Other income in accompanying consolidated statements of income	3,095			9,039			3,629

(1) Included in “Interest expense, net” in accompanying consolidated statements of income.

(2) Included in “Other expense” or "Other income" in the accompanying consolidated statements of income.

Credit-risk-related Contingent Features

The Company has agreements with each of its interest rate derivative counterparties that contain a provision where if the Company defaults on any of its obligations for borrowed money or credit in an amount exceeding $25.0 million for two of the agreements and $50.0 million for three of the agreements and such default is not waived or cured within a specified period of time, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its interest rate derivative obligations.

As of December 31, 2017, the fair value of the Company’s derivatives in a liability position related to these agreements was $0.1 million. If the Company breached any of the contractual provisions of the derivative contracts, it would be required to settle its obligations under the agreements at their termination value. The balance of this obligation, after considering the right of offset, at December 31, 2017 was zero.