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 master netting arrangements and the Company has elected not to offset its derivative position for purposes of balance sheet presentation and disclosure. The Company had no derivative liabilities in the consolidated balance sheet at March 31, 2019 and December 31, 2018. The Company had derivative assets of $3.1 million and $10.6 million recorded in “Other assets” in the consolidated balance sheet at March 31, 2019 and December 31, 2018, respectively. The Company has not posted or received collateral with its derivative counterparties as of March 31, 2019 or December 31, 2018. See Note 11 for disclosures relating to the fair value of the derivative instruments as of March 31, 2019 and December 31, 2018.

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions including the effect of changes in foreign currency exchange rates on foreign currency transactions 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 these objectives, 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 or payment of variable-rate amounts from a counterparty which results in the Company recording net interest expense that is fixed over the life of the agreements without exchange of the underlying notional amount.

As of March 31, 2019, the Company had two interest rate swap agreements to fix the interest rate at 2.64% on $300.0 million of borrowings under its unsecured term loan facility from July 6, 2017 to April 5, 2019. Additionally, as of March 31, 2019, the Company had three 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 its unsecured term loan facility from April 6, 2019 to February 7, 2022. Subsequent to March 31, 2019, the Company entered into an interest rate swap agreement to fix the interest rate at 3.35% on the remaining $50.0 million of borrowings under its unsecured term loan facility from April 5, 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 three months ended March 31, 2019 and 2018, 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 March 31, 2019, the Company estimates that during the twelve months ending March 31, 2020, $1.2 million will be reclassified from AOCI to a reduction of interest expense.

Cash Flow Hedges of Foreign Exchange Risk

The Company is exposed to foreign currency exchange risk against its functional currency, USD, on CAD denominated cash flow from its four Canadian properties. The Company uses cross-currency swaps to mitigate its exposure to fluctuations in the USD-CAD exchange rate on cash inflows associated with these 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.

As of March 31, 2019, the Company had a USD-CAD cross-currency swap with a fixed original notional value of $100.0 million CAD and $79.5 million USD. The net effect of this swap is to lock in an exchange rate of $1.26 CAD per USD on approximately $13.5 million of annual CAD denominated cash flows 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 within the same income statement line item as the earnings effect of the hedged transaction. As of March 31, 2019, the Company estimates that during the twelve months ending March 31, 2020, $0.6 million of gains will be reclassified from AOCI to other income.

Net Investment Hedges

The Company is exposed to fluctuations in the USD-CAD exchange rate on its net investments in Canada. As such, the Company uses either currency forward agreements or cross-currency swaps to manage its exposure to changes in foreign exchange rates on certain of its foreign net investments.

As of March 31, 2019, the Company had two fixed-to-fixed cross-currency swaps with a total notional value of $200.0 million CAD. These instruments became effective on July 1, 2018, mature on July 1, 2023 and are designated as net investment hedges on its Canadian net investments. The net effect of this hedge is to lock in an exchange rate of $1.32 CAD per USD on $200.0 million CAD of the Company's foreign net investments. The cross-currency swaps also have a monthly settlement feature locked in at an exchange rate of $1.32 CAD per USD on $4.5 million of CAD annual cash flows, the net effect of which is an excluded component from the effectiveness testing of this hedge.

For qualifying 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. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with the Company's accounting policy election. The earnings recognition of excluded components are presented in other income.

Below is a summary of the effect of derivative instruments on the consolidated statements of changes in equity and income for the three months ended March 31, 2019 and 2018.

Effect of Derivative Instruments on the Consolidated Statements of Changes in Equity and Income for the Three Months Ended March 31, 2019 and 2018 (Dollars in thousands)

	Three Months Ended March 31,
Description	2019			2018
Cash Flow Hedges
Interest Rate Swaps
Amount of (Loss) Gain Recognized in AOCI on Derivative	$	(2,439	)	$	4,778
Amount of Income (Expense) Reclassified from AOCI into Earnings (1)	775			(13		)
Cross-Currency Swaps
Amount of (Loss) Gain Recognized in AOCI on Derivative	(311		)	615
Amount of Income Reclassified from AOCI into Earnings (2)	134			554

Net Investment Hedges
Cross-Currency Swaps
Amount of Loss Recognized in AOCI on Derivative	(3,839		)	—
Amount of Income Recognized in Earnings (2) (3)	138			—
Currency Forward Agreements
Amount of Gain Recognized in AOCI on Derivative	—			4,546
Amount of Expense Reclassified from AOCI into Earnings (2)	—			—

Total
Amount of (Loss) Gain Recognized in AOCI on Derivatives	$	(6,589	)	$	9,939
Amount of Income Reclassified from AOCI into Earnings	909			541
Amount of Income Recognized in Earnings	138			—

Interest expense, net in accompanying consolidated statements of income	33,826			34,337
Other income in accompanying consolidated statements of income	344			630


(1)	Included in "Interest expense, net" in the accompanying consolidated statements of income for the three months ended March 31, 2019 and 2018.


(2)	Included in "Other income" in the accompanying consolidated statements of income for the three months ended March 31, 2019 and 2018.


(3)	Amounts represent derivative gains excluded from the effectiveness testing.

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 March 31, 2019, the Company had no derivatives with a fair value in a liability position related to these agreements. If the Company breached any of the contractual provisions of these derivative contracts, it would be required to settle its obligations under the agreements at their termination value, after considering the right of offset. As of March 31, 2019, the Company had not posted any collateral related to these agreements and was not in breach of any provisions in these agreements.