Use of Derivative Financial Instruments

9 Months Ended

Sep. 30, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Use of Derivative Financial Instruments

Use of Derivative Financial Instruments

Risk Management Objective of Using Derivatives

The Company’s use of derivative instruments is limited to the utilization of interest rate swaps to manage interest rate risk exposure on existing and future liabilities and not for speculative purposes. The principal objective of such arrangements is to minimize the risks and related costs associated with the Company’s operating and financial structure.

The following table details the Company’s outstanding interest rate swaps as of September 30, 2017. All of the Company's interest rate swaps are designated as qualifying cash flow hedges.

Interest Rate Derivative Counterparty	Trade Date	Effective Date	Notional Amount (in thousands)		Fair Value (in thousands)			Pay Fixed Interest Rate		Receive Variable Interest Rate	Maturity Date
Regions Bank	Mar-01-2013	Mar-01-2013	$	25,000	$	194		1.3300	%	One-month L	Feb-14-2020
Capital One, N.A.	Jun-13-2013	Jul-01-2013	$	50,000	$	(25	)	1.6810	%	One-month L	Feb-14-2020
Capital One, N.A.	Jun-13-2013	Aug-01-2013	$	25,000	$	(26	)	1.7030	%	One-month L	Feb-14-2020
Regions Bank	Sep-30-2013	Feb-03-2014	$	25,000	$	(196	)	1.9925	%	One-month L	Feb-14-2020
The Toronto-Dominion Bank	Oct-14-2015	Sep-29-2016	$	25,000	$	255		1.3830	%	One-month L	Sep-29-2020
PNC Bank, N.A.	Oct-14-2015	Sep-29-2016	$	50,000	$	497		1.3906	%	One-month L	Sep-29-2020
Regions Bank	Oct-14-2015	Sep-29-2016	$	35,000	$	354		1.3858	%	One-month L	Sep-29-2020
U.S. Bank, N.A.	Oct-14-2015	Sep-29-2016	$	25,000	$	247		1.3950	%	One-month L	Sep-29-2020
Capital One, N.A.	Oct-14-2015	Sep-29-2016	$	15,000	$	148		1.3950	%	One-month L	Sep-29-2020
Royal Bank of Canada	Jan-08-2015	Mar-20-2015	$	25,000	$	52		1.7090	%	One-month L	Mar-21-2021
The Toronto-Dominion Bank	Jan-08-2015	Mar-20-2015	$	25,000	$	50		1.7105	%	One-month L	Mar-21-2021
The Toronto-Dominion Bank	Jan-08-2015	Sep-10-2017	$	100,000	$	(1,550	)	2.2255	%	One-month L	Mar-21-2021
Wells Fargo, N.A.	Jan-08-2015	Mar-20-2015	$	25,000	$	19		1.8280	%	One-month L	Mar-31-2022
The Toronto-Dominion Bank	Jan-08-2015	Feb-14-2020	$	25,000	$	(196	)	2.4535	%	One-month L	Mar-31-2022
Regions Bank	Jan-08-2015	Feb-14-2020	$	50,000	$	(413	)	2.4750	%	One-month L	Mar-31-2022
Capital One, N.A.	Jan-08-2015	Feb-14-2020	$	50,000	$	(467	)	2.5300	%	One-month L	Mar-31-2022
The Toronto-Dominion Bank	Jul-20-2017	Oct-30-2017	$	25,000	$	75		1.8485	%	One-month L	Jan-04-2023
Royal Bank of Canada	Jul-20-2017	Oct-30-2017	$	25,000	$	76		1.8505	%	One-month L	Jan-04-2023
Wells Fargo, N.A.	Jul-20-2017	Oct-30-2017	$	25,000	$	76		1.8505	%	One-month L	Jan-04-2023
PNC Bank, N.A.	Jul-20-2017	Oct-30-2017	$	25,000	$	75		1.8485	%	One-month L	Jan-04-2023
PNC Bank, N.A.	Jul-20-2017	Oct-30-2017	$	50,000	$	152		1.8475	%	One-month L	Jan-04-2023

The fair value of the interest rate swaps outstanding as of September 30, 2017 and December 31, 2016 was as follows.

Balance Sheet Line Item (in thousands)	Notional Amount September 30, 2017		Fair Value September 30, 2017			Notional Amount December 31, 2016		Fair Value December 31, 2016
Interest rate swaps-Asset	$	400,000	$	2,270		$	300,000	$	1,471
Interest rate swaps-Liability	$	325,000	$	(2,873	)	$	375,000	$	(2,438	)

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate swaps are to add stability to interest expense and to manage its exposure to interest rate movements. 

The effective portion of changes in the fair value of derivatives designated as qualifying cash flow hedges is recorded in accumulated other comprehensive loss and will be reclassified to interest expense in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings into interest expense. During the three and nine months ended September 30, 2017 and September 30, 2016, the Company recorded a gain of approximately $0.1 million, $0.1 million, $0 and $0, respectively, of hedge ineffectiveness in earnings due to short-term, partial mismatches in notional amounts.

Amounts reported in accumulated other comprehensive loss related to derivatives designated as qualifying cash flow hedges will be reclassified to interest expense as interest payments are made on the Company's variable rate debt. The Company estimates that approximately $1.6 million will be reclassified from accumulated other comprehensive loss as an increase to interest expense over the next 12 months.

The table below details the location in the financial statements of the gain or loss recognized on interest rate swaps designated as qualifying cash flow hedges for the three and nine months ended September 30, 2017 and September 30, 2016 (in thousands).

	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017			2016
Amount of income (loss) recognized in accumulated other comprehensive loss on interest rate swaps (effective portion)	$	316	$	2,159	$	(1,126	)	$	(16,206	)
Amount of loss reclassified from accumulated other comprehensive loss into income (loss) as interest expense (effective portion)	$	282	$	704	$	1,426		$	2,178
Amount of gain recognized in interest expense (ineffective portion)	$	61	$	—	$	88		$	—

Credit-risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness.

As of September 30, 2017, derivatives that were in a net liability position and subject to credit-risk-related contingent features had a termination value of approximately $1.8 million, which includes accrued interest but excludes any adjustment for nonperformance risk. As of September 30, 2017, the Company had not breached the provisions of these agreements and has not posted any collateral related to these agreements. If the Company had breached any of its provisions at September 30, 2017, it could have been required to settle its obligations under the agreement of the interest rate swaps in a liability position plus accrued interest for approximately $1.8 million.

Fair Value of Interest Rate Swaps

The Company’s valuation of the interest rate swaps is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs including interest rate curves.

The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.  However, as of September 30, 2017 and December 31, 2016, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.  As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The following sets forth the Company’s financial instruments that are accounted for at fair value on a recurring basis as of September 30, 2017 and December 31, 2016. 

				Fair Value Measurements as of September 30, 2017 Using
Balance Sheet Line Item (in thousands)	Fair Value September 30, 2017			Level 1		Level 2			Level 3
Interest rate swaps-Asset	$	2,270		$	—	$	2,270		$	—
Interest rate swaps-Liability	$	(2,873	)	$	—	$	(2,873	)	$	—

				Fair Value Measurements as of December 31, 2016 Using
Balance Sheet Line Item (in thousands)	Fair Value December 31, 2016			Level 1		Level 2			Level 3
Interest rate swaps-Asset	$	1,471		$	—	$	1,471		$	—
Interest rate swaps-Liability	$	(2,438	)	$	—	$	(2,438	)	$	—