Derivative Instruments

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Interest Rate Swaps / Caps

The Company enters into derivative agreements to manage interest rate risk exposure. Interest rate swap agreements are utilized to limit the Company's exposure to interest rate risk by converting a portion of its floating-rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense. Interest rate swaps involve the receipt of floating-rate amounts in exchange for fixed rate interest payments over the lives of the agreements without an exchange of the underlying principal amounts. The Company also utilizes interest rate cap agreements to manage interest rate risk exposure. Interest rate cap agreements place a ceiling on the Company's exposure to rising interest rates.

The counterparties to these agreements are highly rated financial institutions. In the unlikely event that the counterparties fail to meet the terms of these agreements, the Company's exposure is limited to the interest rate differential on the notional amount at each monthly settlement period over the life of the agreements. The Company does not anticipate any non-performance by the counterparties. Substantially all of the assets of certain indirect, wholly-owned subsidiaries of the Company have been pledged as collateral for the underlying indebtedness and the amounts payable under the agreements for each of these entities. In addition, certain assets of the Company's subsidiaries are pledged as collateral for various credit facilities and the amounts payable under certain agreements.

During the nine months ended September 30, 2020, the Company entered into an interest rate swap contract with an effective date of April 20, 2020 and a scheduled maturity date of April 20, 2024. This contract is indexed to 1 month LIBOR, has a fixed leg interest rate of 0.35%, and has a notional amount of $125.0 million.

As of September 30, 2020, the Company had interest rate swap and cap agreements in place to fix or limit the floating interest rates on a portion of the borrowings under its debt facilities summarized below:

Derivatives

Notional Amount

Weighted Average
Fixed Leg (Pay) Interest Rate

Cap Rate

Weighted Average
Remaining Term

Interest Rate Swap⁽¹⁾

$1,805.6 Million

2.00%

n/a

5.1 years

Interest Rate Cap

$200.0 Million

n/a

5.5%

1.3 years

(1) The impact of forward starting swaps with total notional amount of $350.0 million will increase the weighted average remaining term to 6.1 years.

Over the next twelve months, we expect to reclassify unrealized losses of $30.5 million to income of pre-tax amounts from accumulated other comprehensive income (loss) related to interest rate swap and cap agreements.

The following table summarizes the impact of derivative instruments on the consolidated statements of operations and the consolidated statements of comprehensive income on a pretax basis (in thousands):


		Three Months Ended September 30,						Nine Months Ended September 30,
Derivative Instrument	Financial statement caption	2020		2019		2020		2019
Non-designated derivative instruments	Realized (gain) loss on derivative instruments, net	$	—	$	(539)	$	(224)	$	(1,912)

Non-designated derivative instruments	Unrealized (gain) loss on derivative instruments, net	$	—	$	504	$	286	$	2,757
Designated derivative instruments	Interest and debt (income) expense	$	7,834	$	(1,530)	$	15,282	$	(6,192)
Designated derivative instruments	Comprehensive (income) loss	$	(852)	$	22,930	$	146,386	$	74,727

Fair Value of Derivative Instruments

The Company has elected to use the income approach to value its interest rate swap and cap agreements, using Level 2 market expectations at the measurement date and standard valuation techniques to convert future values to a single discounted present value. The Level 2 inputs for the interest rate swap and cap valuations are inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR and swap rates and credit risk at commonly quoted intervals). In response to the expected phase out of LIBOR, the Company continues to work with its counterparties to identify an alternative reference rate. Substantially all of the Company's debt agreements already include transition language, and the Company also adopted various practical expedients which will facilitate the transition.

The Company presents the fair value of derivative financial instruments on a gross basis on the consolidated balance sheet. At December 31, 2019, the Company had $0.3 million of interest rate contracts under derivative assets, which were not designated as hedging instruments. The Company has no non-designated hedging instruments as of September 30, 2020. Any amounts of cash collateral received or posted related to derivative instruments are included in Other Assets on the consolidated balance sheet and are presented in operating activities of the consolidated statements of cash flows. As of September 30, 2020, there was cash collateral of $38.9 million related to interest rate swap contracts.