Derivatives and Hedging

We are subject to interest rate risk in connection with borrowings under our debt agreements which are subject to variable interest rates. In December 2018 we entered into an interest rate cap, which is a derivative instrument, to manage our interest rate risk on a portion of our variable-rate debt. We do not use derivatives for speculative purposes. The interest rate cap is designated as a cash flow hedge. In exchange for our up-front premium, we would receive variable amounts from a counterparty if interest rates rise above the strike rate on the contract. The interest rate cap agreement is for a notional amount of $300 million and a maturity date of January 2021.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the changes in the fair value of the derivative are recorded in Accumulated Other Comprehensive Income, or AOCI, and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. 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 our accounting policy election. The earnings recognition of excluded components is presented in interest expense. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. We estimate that $1.0 million will be reclassified as an increase to interest expense over the next 12 months.

The table below presents the fair value of our derivative financial instruments as well as their classification on the Balance Sheet as of March 31, 2019 and December 31, 2018 (in thousands):



Derivative Type	Classification	March 31, 2019		December 31, 2018
Assets:
Interest rate cap agreement	Other Assets	$	369	$	1,253

The table below presents the effect of cash flow hedge accounting on AOCI as of March 31, 2019 and December 31, 2018 (in thousands):

The table below presents the effect of our derivative financial instruments on the Income Statement as of three months ended March 31, 2019 and 2018 (in thousands):



	Location and Amount of Gain or (Loss) Recognized in Income on Cash Flow Hedging Relationships
	Three Months Ended March 31,
	2019			2018
Interest expense	$	(135	)	$	—

March 31, 2019

December 31, 2018

Amount Recognized in OCI on Derivative:

Interest rate cap agreement