DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING

12 Months Ended

Dec. 31, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING

We are exposed to interest rate risk through our variable-rate debt. We manage this risk primarily by managing the amount, sources, and duration of our debt funding and through the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage our exposure to known or expected cash payments related to our variable-rate debt. The maximum length of time over which we have hedged our exposure to variable interest rates with our existing derivative financial instruments is approximately six years.

Our objectives in using derivative financial instruments are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. Our interest rate swaps are designated as cash flow hedges and involve the receipt of variable-rate payments from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

On October 2, 2017, we entered into two separate $100 million interest rate swap agreements with an effective date of January 29, 2018, to partially fix the interest rate on a portion of our variable interest rate unsecured indebtedness.  The swaps convert LIBOR from a floating rate to an average annual fixed rate of 1.98% through January 31, 2023.

Our interest rate swap agreement with a notional amount of $75.0 million expires on October 1, 2018.

Our agreements with our derivative counterparties contain provisions such that if we default, or can be declared in default, on any of our indebtedness, then we could also be declared in default on our derivative financial instruments.

Information about our derivative financial instruments at December 31, 2017 and 2016 are as follows (dollar amounts in thousands):

	December 31, 2017						December 31, 2016
	Number of Instruments	Notional Amount		Fair Value			Number of Instruments	Notional Amount		Fair Value
Interest rate swaps (asset)	2	$	200,000	$	1,509		—	$	—	$	—
Interest rate swap (liability)	1	75,000		(190		)	1	75,000		(1,118		)
	3	$	275,000	$	1,319		1	$	75,000	$	(1,118	)

Our interest rate swaps have been designated as cash flow hedges and are valued using a market approach, which is a Level 2 valuation technique. At December 31, 2017, two of our interest rate swaps were in an asset position and one was in a liability position. At December 31, 2016, our interest rate swap was in a liability position. We are not required to post any collateral related to these agreements and we are not in breach of any financial provisions of the agreements.

During 2017, we elected to early adopt ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. As a result of this election, beginning in 2017, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness will be recorded in other comprehensive income. Amounts deferred in other comprehensive income will be reclassified to interest expense as interest payments are made on the hedged variable-rate debt. In 2018, we estimate that an additional $0.6 million will be reclassified from other comprehensive income as an increase to interest expense.

The table below details the location in the financial statements of the gain or loss recognized on derivative financial instruments designated as cash flow hedges (in thousands):

	2017			2016			2015
Gain (loss) recognized in accumulated other comprehensive income on derivative financial instruments	$	1,703		$	(497	)	$	(1,846	)
Loss reclassified from accumulated other comprehensive income to interest expense	$	(734	)	$	(1,190	)	$	(1,927	)
Loss recognized in other expense	$	—		$	—		$	(1	)
Total interest expense and other finance expense presented in the Consolidated Statement of Operations in which the effects of cash flow hedges are recorded	$	(29,687	)	$	(28,091	)	$	(30,414	)