Derivative Instruments

6 Months Ended

Jun. 30, 2020

Summary of Derivative Instruments [Abstract]

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 has elected not to offset its derivative position for purposes of balance sheet presentation and disclosure. The Company had derivative assets of $8.0 million and $1.1 million at June 30, 2020 and December 31, 2019, respectively, and derivative liabilities of $13.9 million and $4.5 million derivative liabilities at June 30, 2020 and December 31, 2019, respectively. The Company has not posted or received collateral with its derivative counterparties as of June 30, 2020 or December 31, 2019. See Note 11 for disclosures relating to the fair value of the derivative instruments.

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 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 June 30, 2020, the Company had four interest rate swap agreements designated as cash flow hedges of interest rate risk related to its variable rate unsecured term loan facility totaling $400.0 million. Additionally, at June 30, 2020, the Company had an interest rate swap agreement designated as a cash flow hedge of interest rate risk related to its variable rate secured bonds totaling $25.0 million. Interest rate swap agreements outstanding as of June 30, 2020 are summarized below:



Fixed rate		Notional Amount (in millions)		Index	Maturity
3.7950%	(1)	$	116.7	USD LIBOR	February 7, 2022
3.8075%	(1)	116.7		USD LIBOR	February 7, 2022
3.8080%	(1)	116.6		USD LIBOR	February 7, 2022
3.9950%	(1)	50.0		USD LIBOR	February 7, 2022
Total		$	400.0

1.3925%		25.0		USD LIBOR	September 30, 2024
Total		$	25.0

(1) As discussed in Note 8, on June 29, 2020 the Company amended its Consolidated Credit Agreement. The above fixed rates increased by 0.65% during the covenant relief period. The rates are scheduled to return to previous levels at the end of this period, subject to certain conditions.

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.

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 June 30, 2020, the Company estimates that during the twelve months ending June 30, 2021, $8.1 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, 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 which should hedge a significant portion of the Company's expected CAD denominated cash flows.

During the six months ended June 30, 2020, the Company entered into USD-CAD cross-currency swaps that was effective July 1, 2020 with a fixed original notional value of $100.0 million CAD and $76.6 million USD. The net effect of this swap is to lock in an exchange rate of $1.31 CAD per USD on approximately $7.2 million annual CAD denominated cash flows through June 2022.

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 June 30, 2020, the Company estimates that during the twelve months ending June 30, 2021, $0.2 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 June 30, 2020, the Company had the following cross-currency swaps designated as net investment hedges:



Fixed rate	Notional Amount (in millions, CAD)		Maturity
$1.32 CAD per USD	$	100.0	July 1, 2023
$1.32 CAD per USD	100.0		July 1, 2023
Total	$	200.0

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 and six months ended June 30, 2020 and 2019.

Effect of Derivative Instruments on the Consolidated Statements of Changes in Equity and Comprehensive (Loss) Income for the Three and Six Months Ended June 30, 2020 and 2019 (Dollars in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
Description	2020			2019			2020			2019
Cash Flow Hedges
Interest Rate Swaps
Amount of Loss Recognized in AOCI on Derivative	$	(1,031	)	$	(5,413	)	$	(11,673	)	$	(7,852	)
Amount of (Expense) Income Reclassified from AOCI into Earnings (1)	(1,601		)	403			(2,066		)	1,178
Cross-Currency Swaps
Amount of (Loss) Gain Recognized in AOCI on Derivative	(472		)	(165		)	667			(476		)
Amount of Income Reclassified from AOCI into Earnings (2)	236			157			442			291

Net Investment Hedges
Cross-Currency Swaps
Amount of (Loss) Gain Recognized in AOCI on Derivative	(6,188		)	(1,057		)	6,987			(4,896		)
Amount of Income Recognized in Earnings (2) (3)	172			146			334			284

Total
Amount of Loss Recognized in AOCI on Derivatives	$	(7,691	)	$	(6,635	)	$	(4,019	)	$	(13,224	)
Amount of (Expense) Income Reclassified from AOCI into Earnings	(1,365		)	560			(1,624		)	1,469
Amount of Income Recognized in Earnings	172			146			334			284

Interest expense, net in accompanying consolidated statements of (loss) income and comprehensive (loss) income	$	38,340		$	36,458		$	73,093		$	70,421
Other income in accompanying consolidated statements of (loss) income and comprehensive (loss) income	$	416		$	5,726		$	7,989		$	6,070

(1) Included in "Interest expense, net" in the accompanying consolidated statements of (loss) income and comprehensive (loss) income for the three and six months ended June 30, 2020 and 2019.

(2) Included in "Other income" in the accompanying consolidated statements of (loss) income and comprehensive (loss) income for the three and six months ended June 30, 2020 and 2019.

(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 $50.0 million 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 June 30, 2020, the fair value of the Company's derivatives in a liability position related to these agreements was $13.9 million. 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 of $12.6 million. As of June 30, 2020, the Company had not posted any collateral related to these agreements and was not in breach of any provisions in these agreements.