Derivative Financial Instruments

3 Months Ended

Mar. 31, 2016

Derivative Financial Instruments

Derivative Financial Instruments

6. Derivative Financial Instruments

The Company may enter into interest rate derivative contracts to manage exposure to interest rate risks. The Company does not use derivative financial instruments for trading or speculative purposes. Derivative financial instruments are recognized at fair value and presented within other assets and liabilities in the condensed consolidated balance sheets. Gains and losses resulting from changes in the fair value of derivatives that are neither designated nor qualify as hedging instruments are recognized within the change in fair value of interest rate derivatives in the condensed consolidated statements of comprehensive income. For derivatives that qualify as cash flow hedges, the effective portion of the gain or loss is reported as a component of other comprehensive loss and reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings.

On February 25, 2016, the Operating Partnership entered into a LIBOR interest rate cap agreement on a notional amount of $75.0 million at a strike rate of 1.50% for a premium of less than $0.1 million.  The interest rate cap agreement expires on March 1, 2018.

The Company’s derivatives were comprised of the following as of March 31, 2016 and December 31, 2015 (in thousands):

	March 31, 2016						December 31, 2015
	(Unaudited)
	Notional						Notional
	Amount		Fair Value				Amount		Fair Value
			Asset		Liability				Asset		Liability
Interest rate swaps	$	57,047	$	—	$	(2,250)	$	57,093	$	—	$	(1,082)
Interest rate caps		218,500		75		—		246,546		164		—
Total	$	275,547	$	75	$	(2,250)	$	303,639	$	164	$	(1,082)

The changes in the fair value of the Company’s derivatives during the three months ended March 31, 2016 and 2015 were comprised of the following (in thousands):

	Three Months Ended
	March 31,
	2016		2015
	(Unaudited)
Interest rate swaps	$	(2,244)	$	(787)
Interest rate caps		(145)		(146)
Total	$	(2,389)	$	(933)
Comprehensive income statement presentation:
Change in fair value of interest rate derivatives	$	(2,389)	$	(147)
Unrealized gain (loss) on cash flow hedge		—		(786)
Total	$	(2,389)	$	(933)

Effective March 31, 2016, the Company determined that the short-cut method of hedge accounting was not appropriate for two of its interest-rate swaps and, for accounting purposes, the hedge relationship was terminated. The swaps were entered into in February and July 2015. Accordingly, changes in fair value of the swap should have been recorded in income rather than other comprehensive income. The Company determined that the errors were immaterial to all previously issued financial statements. The Company recognized $0.7 million of accumulated other comprehensive income and $0.4 million, which was previously allocated to noncontrolling interest as of December 31, 2015, in earnings during the first quarter of 2016. Subsequent changes in the value of the interest rate swap for the period January 1, 2016 to March 31, 2016 were also recognized in earnings during the first quarter of 2016. Net income for the three months ended March 31, 2015 was overstated by $0.8 million. In reaching its conclusions, management considered the nature of the error, the effect of the error on operating results for 2015, and the effects of the error on important financial statement measures, including related trends.