Derivative Instruments and Hedging Activities

Risk Management Objective of Using Derivatives

The Company maintains an interest rate risk management strategy using derivative instruments to minimize significant unplanned impact on earnings and cash flows that may be caused by interest rate volatility. The strategy includes the use of interest rate swaps and option contracts having indices related to the pricing of specific liabilities. The Company enters into interest rate swaps to convert floating-rate debt to fixed-rate long-term debt, and vice-versa, depending on market conditions, or forward starting swaps to hedge the changes in benchmark interest rates on forecasted financings. Interest rate swap agreements are generally for periods of one to ten years. Option products used are primarily interest rate caps for periods of one to three years. The use of option products is consistent with the Company’s risk management objective to reduce or eliminate exposure to variability in future cash flows primarily attributable to changes in benchmark rates relating to forecasted financings, and the variability in cash flows attributable to increases relating to interest payments on its floating-rate debt.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. The Company primarily uses interest rate caps and swaps as part of its interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an upfront premium. 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.

The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated OCI and is subsequently reclassified into earnings during the period the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value is recognized directly in earnings. Ineffectiveness was insignificant during the three months ended September 30, 2014. During the nine months ended September 30, 2014, the Company recorded $3,667,000 as an increase to interest expense primarily related to ineffectiveness from a missed forecasted transaction arising from the early reclassification of OCI related to debt associated with an entity that was disposed of during the nine months ended September 30, 2014. During the three and nine months ended September 30, 2013, the Company recorded $2,963,000 as an increase to interest expense related to ineffectiveness arising primarily from the early reclassification of OCI related to debt associated with entities that were included in the partial disposition of real estate. The hedged debt for these entities was deconsolidated and is now accounted for under the equity method of accounting. As of September 30, 2014, the Company expects it will reclassify amounts recorded in accumulated OCI into earnings as an increase in interest expense of approximately $24,576,000, net of tax, within the next twelve months. However, the actual amount reclassified could vary due to future changes in fair value of these derivatives.

Fair Value Hedges of Interest Rate Risk

The Company enters into total rate of return swaps (“TRS”) on various tax-exempt fixed-rate borrowings. The TRS convert borrowings from a fixed rate to a variable rate. In exchange for a fixed rate, the TRS requires the payment of a variable interest rate, generally equivalent to the Securities Industry and Financial Markets Association (“SIFMA”) rate (0.04% at September 30, 2014) plus a spread. Additionally, the Company has guaranteed the fair value of the underlying borrowings. Fluctuation in the value of the TRS is offset by the fluctuation in the value of the underlying borrowings, resulting in minimal financial impact. At September 30, 2014, the aggregate notional amount of TRS that are designated as fair value hedging instruments is $358,755,000. The underlying TRS borrowings are subject to a fair value adjustment.

Nondesignated Hedges of Interest Rate Risk

The Company uses derivative contracts to hedge certain interest rate risk, even though the contracts do not qualify for, or the Company has elected not to apply, hedge accounting. In these situations, the derivative is recorded at its fair value with changes reflected in earnings.

In instances where the Company enters into separate derivative instruments effectively hedging the same debt for consecutive annual periods, the duplicate amount of notional is excluded from the following disclosure to provide information that enables the financial statement user to understand the Company’s volume of derivative activity. The following table presents the fair values and location in the Consolidated Balance Sheets of all derivative instruments:



	Fair Value of Derivative Instruments
	September 30, 2014
	Asset Derivatives (included in Other Assets)				Liability Derivatives (included in Accounts Payable, Accrued Expenses and Other Liabilities)
	Current Notional		Fair Value		Current Notional		Fair Value
	(in thousands)
Derivatives Designated as Hedging Instruments
Interest rate caps	$	330,000	$	208	$	—	$	—
Interest rate swaps	—		—		870,995		79,406
TRS	130,970		5,226		227,785		11,816
Total	$	460,970	$	5,434	$	1,098,780	$	91,222
Derivatives Not Designated as Hedging Instruments
Interest rate caps	$	266,925	$	50	$	—	$	—
TRS	76,482		623		38,987		15,467
Total	$	343,407	$	673	$	38,987	$	15,467

	December 31, 2013
Derivatives Designated as Hedging Instruments
Interest rate swaps	$	—	$	—	$	961,359	$	97,858
TRS	18,970		903		339,785		9,772
Total	$	18,970	$	903	$	1,301,144	$	107,630
Derivatives Not Designated as Hedging Instruments
Interest rate caps	$	447,532	$	155	$	—	$	—
TRS	—		—		39,052		15,477
Total	$	447,532	$	155	$	39,052	$	15,477

The following table presents the impact of gains and losses related to derivative instruments designated as cash flow hedges included in the accumulated OCI section of the Consolidated Balance Sheets and in equity in earnings and interest expense in the Consolidated Statements of Operations:



			Gain (Loss) Reclassified from Accumulated OCI
Derivatives Designated as Cash Flow Hedging Instruments	Gain (Loss) Recognized in OCI (Effective Portion)		Location on Consolidated Statements of Operations	Effective Amount			Ineffective Amount
	(in thousands)
Three Months Ended September 30, 2014
Interest rate caps and interest rate swaps	$	11,243	Interest expense	$	(594	)	$	(1	)
Interest rate swaps	—		Equity in earnings	(14		)	—
Total	$	11,243		$	(608	)	$	(1	)
Nine Months Ended September 30, 2014
Interest rate caps and interest rate swaps	$	19,253	Interest expense	$	(1,955	)	$	(1	)
Interest rate swap	—		Discontinued operations	—			(3,666		)
Interest rate swaps	—		Equity in earnings	(44		)	—
Total	$	19,253		$	(1,999	)	$	(3,667	)
Three Months Ended September 30, 2013
Interest rate swaps	$	2,817	Interest expense	$	(902	)	$	(2,963	)
Interest rate caps, interest rate swaps and Treasury options	—		Equity in earnings	(15		)	—
Total	$	2,817		$	(917	)	$	(2,963	)
Nine Months Ended September 30, 2013
Interest rate swaps	$	34,506	Interest expense	$	(2,825	)	$	(2,963	)
Interest rate caps, interest rate swaps and Treasury options	—		Equity in earnings	(93		)	5
Total	$	34,506		$	(2,918	)	$	(2,958	)

The following table presents the impact of gains and losses related to derivatives instruments not designated as cash flow hedges in the Consolidated Statements of Operations:



	Net Gain (Loss) Recognized
	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
	(in thousands)
Derivatives Designated as Fair Value Hedging Instruments
TRS ⁽¹⁾	$	68		$	2,996		$	2,279		$	3,100
Derivatives Not Designated as Hedging Instruments
Interest rate caps and interest rate swaps	$	62		$	—		$	(41	)	$	(239	)
TRS	(42		)	(1,807		)	633			(3,532		)
Total	$	20		$	(1,807	)	$	592		$	(3,771	)


(1)	The net gain (loss) recognized in interest expense from the change in fair value of the underlying TRS borrowings was $(68) and $(2,279) for the three and nine months ended September 30, 2014, respectively, and $(2,996) and $(3,100) for the three and nine months ended September 30, 2013, respectively, offsetting the gain (loss) recognized on the TRS.

Credit-risk-related Contingent Features

The principal credit risk of the Company’s interest rate risk management strategy is the potential inability of a counterparty to cover its obligations. If a counterparty fails to fulfill its obligation, the risk of loss approximates the fair value of the derivative. To mitigate this exposure, the Company generally purchases derivative financial instruments from the financial institution that issues the related debt, from financial institutions with which the Company has other lending relationships, or from financial institutions with a minimum credit rating of AA at the time of the transaction.

Agreements with derivative counterparties contain provisions under which the counterparty could terminate the derivative obligations if the Company defaults on its obligations under the Credit Facility and designated conditions are fulfilled. In instances where the Company’s subsidiaries have derivative obligations secured by a mortgage, the derivative obligations could be terminated if the indebtedness between the two parties is terminated, either by loan payoff or default of the indebtedness. In addition, certain derivative contracts provide that if the Company’s credit rating falls below certain levels, it may trigger additional collateral to be posted with the counterparty up to the full amount of the liability position of the derivative contracts. The majority of derivative instruments are held at the property level and do not contain credit-risk related contingent features, such as a credit rating downgrade. Also, certain subsidiaries have agreements containing provisions whereby the subsidiaries must maintain certain minimum financial ratios.

The following table presents information about collateral posted for derivatives in liability positions as of September 30, 2014:



	Collateral Information
	Notional Amount		Fair Value Prior to Nonperformance Risk		Nonperformance Risk			Collateral Posted		Nature of Collateral	Credit Risk Contingent Feature
	(in thousands)
Property Specific Swaps	$	670,995	$	83,580	$	(4,340	)	$	—	Mortgage liens	None
TRS	266,772		27,206		77			52,015		Restricted cash, securities, notes receivable, letters of credit	None
Corporate Aggregate Swaps	200,000		166		—			170		Restricted cash	Credit rating
Totals	$	1,137,767	$	110,952	$	(4,263	)	$	52,185