DERIVATIVE INSTRUMENTS

9 Months Ended

Sep. 30, 2022

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

8 – DERIVATIVE INSTRUMENTS

The Company is exposed to interest rate risk on its floating rate debt. As of September 30, 2022, the Company had three interest rate cap agreements outstanding to manage interest costs and the risk associated with variable interest rates. The three interest rate cap agreements were initially designated and qualified as cash flow hedges. The premium paid is recognized in income on a rational basis, and all changes in the value of the caps are deferred in Accumulated other comprehensive income (“AOCI”) and are subsequently reclassified into Interest expense in the period when the hedged interest affects earnings.

During the second quarter of 2022, based on the total outstanding debt under the $450 Million Credit Facility being below the total notional amount of the interest rate cap agreements, a portion of one of the interest rate cap agreements was dedesignated as a hedge. Subsequent gains and losses resulting from valuation adjustments on the dedesignated portion of the cap are recorded within interest expense. As the forecasted interest payments hedged are not remote of occurring, the amounts in AOCI as of the date of dedesignation will be recognized over the remaining original hedge period. During the three and nine months ended September 30, 2022, the Company recorded a gain of $88 and $77, respectively, in interest expense for the portion of the interest rate caps not designated as a hedging instrument.

The following table summarizes the interest rate cap agreements in place as of September 30, 2022.

Interest Rate Cap Detail						Notional Amount Outstanding
						September 30,
Trade date	Cap Rate		Start Date	End Date		2022
March 25, 2021	0.75	%	April 29, 2021	March 28, 2024	$	50,000
July 29, 2020	0.75	%	July 31, 2020	December 29, 2023		100,000
March 6, 2020	1.50	%	March 10, 2020	March 10, 2023		50,000
					$	200,000

The Company records the fair value of the interest rate caps as Fair value of derivative instruments in the current and non-current asset section on its Condensed Consolidated Balance Sheets. The Company has elected to use the income approach to value the interest rate derivatives using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present amount (discounted) reflecting current market expectations about those future amounts. Level 2 inputs for derivative valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap rates, implied volatility, basis swap adjustments, and credit risk at commonly quoted intervals). Mid-market pricing is used as a practical expedient for most fair value measurements.

The Company recorded a $6,280 unrealized gain for the nine months ended September 30, 2022 in AOCI. The estimated income that is currently recorded in AOCI as of September 30, 2022 that is expected to be reclassified into earnings within the next twelve months is $5,534.

The Effect of Fair Value and Cash Flow Hedge Accounting on the Statements of Operations
	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
	Interest Expense		Interest Expense		Interest Expense		Interest Expense
Total amounts of income and expense line items presented in the statements of operations in which the effects of fair value or cash flow hedges are recorded	$	2,276	$	3,943	$	6,923	$	12,955
The effects of fair value and cash flow hedging
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20:
Interest contracts:
Amount of gain or (loss) reclassified from AOCI to income	$	(626)	$	—	$	(676)	$	—
Premium excluded and recognized on an amortized basis		41		43		139		153
Amount of gain or (loss) reclassified from AOCI to income as a result that a forecasted transaction is no longer probable of occurring		—		—		—		—

The following table shows the interest rate cap assets as of September 30, 2022:

			September 30,		December 31,
	Balance Sheet Location		2022		2021
Derivatives designated as hedging instruments
Interest rate caps	Fair value of derivative instruments – current	$	5,551	$	—
Interest rate caps	Fair value of derivative instruments – noncurrent	$	1,577	$	1,166
Derivatives not designated as hedging instruments
Interest rate caps	Fair value of derivative instruments – current	$	173	$	—
Interest rate caps	Fair value of derivative instruments – noncurrent	$	82	$	—

The components of AOCI included in the accompanying Condensed Consolidated Balance Sheet consists of net unrealized gains on cash flow hedges as of September 30, 2022.

AOCI — January 1, 2022	$	825
Amount recognized in OCI on derivative, intrinsic		6,921
Amount recognized in OCI on derivative, excluded		(641)
Amount reclassified from OCI into income		—
AOCI — September 30, 2022	$	7,105