Derivatives and Hedging Activities

12 Months Ended

Dec. 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Hedging Activities

— Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

The Company may use derivative financial instruments, including interest rate swaps, caps, collars, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings.

The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions. Additionally, in using interest rate derivatives, the Company aims to add stability to interest expense and to manage its exposure to interest rate movements. The Company does not intend to utilize derivatives for speculative purposes or purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company, and its affiliates, may also have other financial relationships. The Company does not anticipate that any of its counterparties will fail to meet their obligations.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of December 31, 2019 and 2018:

		December 31,
(In thousands)	Balance Sheet Location	2019		2018
Derivatives designated as hedging instruments:
Interest rate “pay-fixed” swaps	Derivative assets, at fair value	$	377	$	4,582
Interest rate “pay-fixed” swaps	Derivative liabilities, at fair value	$	5,305	$	—
Derivatives not designated as hedging instruments:
Interest rate caps	Derivative assets, at fair value	$	15	$	51

Cash Flow Hedges of Interest Rate Risk

The Company currently has 9 interest rate swaps that are designated as cash flow hedges. The interest rate swaps are used as part of the Company’s interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During 2019 and 2018, such derivatives were used to hedge the variable cash flows associated with variable-rate debt.

The changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive (loss) income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.

In connection with the refinancing of the MOB Loan during the fourth quarter of 2019, the Company terminated two interest rate swaps with an aggregate notional amount of $250.0 million for a payment of approximately $2.2 million. Following these terminations, $2.2 million was recorded in AOCI and is being recorded as an adjustment to interest expense over the term of the two terminated swaps and the MOB Loan prior to its refinancing. Of the amount recorded in AOCI following these terminations, $0.1 million was recorded as an increase to interest expense for the three months ended December 31, 2019 and approximately $2.1 million remained in AOCI as of December 31, 2019.

Amounts reported in accumulated other comprehensive (loss) income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next 12 months, from January 1, 2020 through December 31, 2020, the Company estimates that $2.2 million will be reclassified from other comprehensive loss as an increase to interest expense.

As of December 31, 2019 and 2018, the Company had the following derivatives that were designated as cash flow hedges of interest rate risk:

	December 31, 2019			December 31, 2018
Interest Rate Derivative	Number of Instruments	Notional Amount		Number of Instruments	Notional Amount
		(In thousands)			(In thousands)
Interest rate “pay-fixed” swaps	9	$	578,500	2	$	250,000

The table below details the location in the financial statements of the loss recognized on interest rate derivatives designated as cash flow hedges for the periods ended December 31, 2019 and 2018:

	Year Ended December 31,
(In thousands)	2019			2018		2017
Amount of gain (loss) recognized in accumulated other comprehensive (loss) income on interest rate derivatives	$	(10,753	)	$	2,367	$	1,674
Amount of (loss) gain reclassified from accumulated other comprehensive income into income as interest expense (effective portion)	$	872		$	258	$	(799	)
Total amount of interest expense presented in the consolidated statements of operations and comprehensive loss	$	56,059		$	49,471	$	30,264

Non-Designated Derivatives

These derivatives are used to manage the Company’s exposure to interest rate movements, but do not meet the strict hedge accounting requirements to be classified as hedging instruments. Changes in the fair value of derivatives not designated as hedges under a qualifying hedging relationship are recorded directly to net income (loss) and were a loss of $0.1 million, a loss of $0.2 million and a loss of $0.2 million for the years ended December 31, 2019, 2018 and 2017, respectively.

The Company had the following outstanding interest rate derivatives that were not designated as a hedges in qualifying hedging relationships as of as of December 31, 2019 and 2018:

	December 31, 2019			December 31, 2018
Interest Rate Derivatives	Number of Instruments	Notional Amount		Number of Instruments	Notional Amount
		(In thousands)			(In thousands)
Interest rate caps	6	$	359,322	7	$	359,322

Offsetting Derivatives

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of December 31, 2019 and 2018. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure

of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheet.

									Gross Amounts Not Offset in the Consolidated Balance Sheet
(In thousands)	Gross Amounts of Recognized Assets		Gross Amounts of Recognized (Liabilities)		Gross Amounts Offset in the Consolidated Balance Sheet	Net Amounts of Assets presented in the Consolidated Balance Sheet			Financial Instruments	Cash Collateral Received	Net Amount
December 31, 2019	$	392	—		—	$	392		—	—	$	392
December 31, 2019	$	—	(5,305	)	—	$	(5,305	)	—	—	$	(5,305	)
December 31, 2018	$	4,633	—		—	$	4,633		—	—	$	4,633

Credit-risk-related Contingent Features

The Company has agreements in place with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.

As of December 31, 2019 the fair value of derivatives in a net liability position, including accrued interest but excluding any adjustment for nonperformance risk related to these agreements, was $5.3 million. As of December 31, 2019, the Company has not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value of $5.3 million at December 31, 2019.