Derivative and Hedging Activities

6 Months Ended

Jun. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company does not enter into derivative financial instruments for speculative or trading purposes. 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 uses interest rate swaps as part of its 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.

These derivatives are designated and qualify as cash flow hedges and are recorded on a gross basis at fair value. Subsequent to the adoption of ASU 2017-12, assessments of hedge effectiveness are performed quarterly using either a qualitative or quantitative approach. The Company recognizes the entire change in the fair value in accumulated other comprehensive income (loss) and the change in fair value is reflected as unrealized gain/loss on cash flow hedges in the supplemental disclosures of non-cash financing activities in the consolidated statement of cash flows. The amounts recorded in accumulated other comprehensive income (loss) will subsequently be reclassified to interest expense as interest payments are made on the Company’s borrowings under its variable-rate term loan facilities. During the next twelve months, the Company estimates that $9.7 million will be reclassified from other comprehensive income as an increase to interest expense. The Company does not have netting arrangements related to its derivatives.

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 the counterparties will fail to meet their obligations. As of June 30, 2020, there were no events of default related to the interest rate swaps.

The following table summarizes the notional amount at inception and fair value of these instruments on the Company's balance sheet as of June 30, 2020 and December 31, 2019 (dollar amounts in thousands):


Derivatives Designated as Hedging Instruments	Fixed Rate Paid by Company	Variable Rate Paid by Bank	Effective Date	Maturity Date	Notional Value ⁽¹⁾		Fair Value of Asset/(Liability) as of June 30, 2020⁽²⁾		Fair Value of Asset/(Liability) as of December 31, 2019⁽²⁾
Interest Rate Swap	2.06%	1 month LIBOR	2019-05-14	2024-04-12	$	100,000	$	(7,177)	$	(1,996)
Interest Rate Swap	2.06%	1 month LIBOR	2019-05-14	2024-04-12	50,000		(3,589)		(999)
Interest Rate Swap	2.07%	1 month LIBOR	2019-05-14	2024-04-12	50,000		(3,595)		(1,005)
Interest Rate Swap ⁽³⁾	1.61%	1 month LIBOR	2019-12-09	2026-11-26	175,000		(14,001)		758
Interest Rate Swap ⁽³⁾	1.61%	1 month LIBOR	2019-12-09	2026-11-26	50,000		(4,014)		210
Interest Rate Swap ⁽³⁾	1.60%	1 month LIBOR	2019-12-09	2026-11-26	25,000		(1,982)		127
Interest Rate Swap ⁽⁴⁾	1.36%	1 month LIBOR	2020-07-09	2026-11-26	100,000		(6,446)		—
Interest Rate Swap ⁽⁴⁾	1.36%	1 month LIBOR	2020-07-09	2026-11-26	80,000		(5,167)		—
					$	630,000	$	(45,971)	$	(2,905)

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(1)Notional value indicates the extent of the Company’s involvement in these instruments, but does not represent exposure to credit, interest rate or market risks.

(2)Derivatives in a liability position are included within accrued liabilities, derivatives and other payables in the Company’s consolidated balance sheets totaling to $46.0 million and $4.0 million at June 30, 2020 and December 31, 2019, respectively.

(3)Derivatives in a net asset position are included within rent receivables, prepaid expenses and other assets in the Company’s consolidated balance sheets totaling to $1.1 million at December 31, 2019.

(4)The Company entered into two forward swap contracts during the six months ended June 30, 2020 with an effective date of July 9, 2020 and total notional value of $180.0 million.

The Company has agreements 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.

During the three months ended June 30, 2020 and June 30, 2019, the Company recorded $5.0 million and $3.9 million of accumulated other comprehensive loss. During the six months ended June 30, 2020 and June 30, 2019, the Company recorded $43.1 million and $3.9 million of accumulated other comprehensive loss.

As of June 30, 2020, 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 $47.3 million. 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 $4.1 million. As of June 30, 2020, there were no derivatives in a net asset position. As of December 31, 2019, the fair value of derivatives in a net asset position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $1.0 million.

As of June 30, 2020 and December 31, 2019, the Company had not posted any collateral related to these agreements and was not in breach of any provisions of such agreements. 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 $47.7 million and $3.1 million as of June 30, 2020 and December 31, 2019, respectively.