Derivative Financial Instruments

3 Months Ended

Mar. 31, 2021

Derivative Financial Instruments

Derivative Financial Instruments

Note 10 – Derivative Financial Instruments

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash payments principally related to the Company’s borrowings.

The Company’s objectives in using interest rate derivative financial instruments are to add stability to interest expense and to manage the Company’s exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate caps as part of its interest rate risk management strategy. Interest rate caps involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.

The Company has not designated any of the interest rate derivatives as hedges. Although these derivative financial instruments were not designated or did not qualify for hedge accounting, the Company believes the derivative financial instruments are effective economic hedges against increases in interest rates. The Company does not use derivative financial instruments for trading or speculative purposes.

As of March 31, 2021, the Company had interest rate caps which effectively limit the Company’s exposure to interest rate risk by providing a ceiling on the underlying floating interest rate for $280.5 million of the Company’s floating rate mortgage debt.

The table below presents the classification and fair value of the Company’s derivative financial instruments on the consolidated balance sheets as of March 31, 2021 and December 31, 2020, and the classification and effect of the Company’s derivative financial instruments on the consolidated statements of operations for the three months ended March 31, 2021 and 2020 (amounts in thousands):

		Fair values of					The Effect of Derivative
Derivatives not designated as hedging	Balance Sheet	derivative				Location of Gain or (Loss)	Instruments on the Statement of
instruments under ASC 815‑20	Location	instruments				Recognized in Income	Operations
							Three Months Ended
		March 31,		December 31,			March 31,
		2021		2020			2021		2020
Interest rate caps	Accounts receivable, prepaids and other assets	$	81	$	14	Interest Expense	$	35	$	29