DERIVATIVE AND HEDGING INSTRUMENTS

The Company is exposed to various market risks, including the potential loss arising from adverse changes in interest rates and foreign exchange rates. 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 and foreign exchange rates. The Company’s derivative financial instruments are used to manage differences in the amount of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.

Certain of the Company’s foreign operations expose the Company to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value in the Company’s functional currency, the U.S. dollar, of the Company’s investment in foreign operations, the cash receipts and payments related to these foreign operations and payments of interest and principal under Canadian dollar denominated debt. The Company enters into derivative financial instruments to protect the value of its foreign investments and fix a portion of the interest payments for certain debt obligations. The Company does not enter into derivatives for speculative purposes.

Cash Flow Hedges

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. As of September 30, 2018, approximately $8.8 million of gains, which are included in accumulated other comprehensive income, are expected to be reclassified into earnings in the next 12 months.

Net Investment Hedges

The Company is exposed to fluctuations in foreign exchange rates on investments it holds in Canada. The Company uses cross currency interest rate swaps to hedge its exposure to changes in foreign exchange rates on these foreign investments.

The following presents the notional amount of derivative instruments as of the dates indicated (in thousands):



	September 30, 2018		December 31, 2017
Derivatives designated as cash flow hedges:
Denominated in U.S. Dollars	$	845,000	$	845,000
Denominated in Canadian Dollars	$	125,000	$	125,000

Derivatives designated as net investment hedges:
Denominated in Canadian Dollars	$	55,425	$	56,300

Financial instrument designated as net investment hedge:
Denominated in Canadian Dollars	$	125,000	$	125,000

Derivatives not designated as net investment hedges:
Denominated in Canadian Dollars	$	875	$	—

Derivative and Financial Instruments Designated as Hedging Instruments

The following is a summary of the derivative and financial instruments designated as hedging instruments held by the Company at September 30, 2018 and December 31, 2017 (dollars in thousands):



		Count as of September 30, 2018	Fair Value				Maturity Dates
Type	Designation	Count as of September 30, 2018	September 30, 2018		December 31, 2017		Maturity Dates	Balance Sheet Location
Assets:
Interest rate swaps	Cash flow	12	$	36,688	$	25,221	2020 - 2023	Accounts receivable, prepaid expenses and other assets, net
Cross currency interest rate swaps	Net investment	2	1,423		674		2025	Accounts receivable, prepaid expenses and other assets, net
			$	38,111	$	25,895

Liabilities:
CAD term loan	Net investment	1	96,888		99,588		2022	Term loans, net
			$	96,888	$	99,588

The following presents the effect of the Company’s derivative and financial instruments designated as hedging instruments on the condensed consolidated statements of income and the condensed consolidated statements of equity for the three and nine months ended September 30, 2018 and 2017 (in thousands):



	Gain (Loss) Recognized in Other Comprehensive Income
	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018		2017			Income Statement Location

Cash Flow Hedges:
Interest rate products	$	2,954		$	4,372		$	16,091	$	4,462		Interest expense
Net Investment Hedges:
Foreign currency products	(688		)	(1,080		)	817		(2,239		)	N/A
CAD term loan	(1,725		)	(3,938		)	2,700		(7,225		)	N/A

	$	541		$	(646	)	$	19,608	$	(5,002	)



	Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
	Three Months Ended September 30,					Nine Months Ended September 30,
	2018		2017			2018		2017			Income Statement Location

Cash Flow Hedges:
Interest rate products	$	1,001	$	(535	)	$	1,584	$	(1,404	)	Interest expense
Net Investment Hedges:
Foreign currency products	—		—			—		—			N/A
CAD term loan	—		—			—		—			N/A

	$	1,001	$	(535	)	$	1,584	$	(1,404	)

The gain (loss) in the table above related to interest rate products was reclassified from accumulated other comprehensive income into interest expense. Interest expense totaled $37.3 million and $109.9 million for the three and nine months ended September 30, 2018, respectively, and $24.6 million and $56.2 million for the three and nine months ended September 30, 2017, respectively.

During the three and nine months ended September 30, 2018, no cash flow hedges were determined to be ineffective. During the three and nine months ended September 30, 2017, the Company determined that a portion of a cash flow hedge was ineffective and recognized $30,000 and $0.1 million, respectively, of unrealized losses related to its interest rate swaps to other income in the condensed consolidated statements of income.

Derivatives Not Designated as Hedging Instruments

As of September 30, 2018, the Company had one outstanding cross currency interest rate swap not designated as a hedging instrument in an asset position with a fair value of $22,000 and included this amount in accounts receivable, prepaid expenses and other assets, net on the condensed consolidated balance sheets. During each of the three and nine months ended September 30, 2018, the Company recorded $11,000 of other expense related to this derivative not designated as a hedging instrument. During the three and nine months ended September 30, 2017, the Company recorded $0 and $8,000, respectively, of other expense related to a cross currency interest rate swap not designated as a hedging instrument.

Offsetting Derivatives

The Company enters into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of September 30, 2018 and December 31, 2017 (in thousands):



	As of September 30, 2018
	Gross Amounts of Recognized Assets / Liabilities		Gross Amounts Offset in the Balance Sheet		Net Amounts of Assets / Liabilities presented in the Balance Sheet		Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Assets / Liabilities		Gross Amounts Offset in the Balance Sheet				Financial Instruments		Cash Collateral Received		Net Amount
Offsetting Assets:
Derivatives	$	38,111	$	—	$	38,111	$	—	$	—	$	38,111
Offsetting Liabilities:
Derivatives	$	—	$	—	$	—	$	—	$	—	$	—



	As of December 31, 2017
	Gross Amounts of Recognized Assets / Liabilities		Gross Amounts Offset in the Balance Sheet		Net Amounts of Assets / Liabilities presented in the Balance Sheet		Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Assets / Liabilities		Gross Amounts Offset in the Balance Sheet				Financial Instruments		Cash Collateral Received		Net Amount
Offsetting Assets:
Derivatives	$	25,895	$	—	$	25,895	$	—	$	—	$	25,895
Offsetting Liabilities:
Derivatives	$	—	$	—	$	—	$	—	$	—	$	—

Credit-risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision pursuant to which the Company could be declared in default on the derivative obligation if the Company defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender.

As of September 30, 2018, the Company had no derivatives with a fair value in a net liability position.