Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Risk Management Objective of Using Derivatives

The Company maintains an overall interest rate risk management strategy using derivative instruments to minimize significant unplanned impact on earnings and cash flows caused by interest rate volatility. The strategy uses 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 swaps are generally for periods of one to ten years. Option products 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 and nine months ended September 30, 2015, and 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 accumulated OCI related to debt associated with an entity that was disposed of during the nine months ended September 30, 2014. As of September 30, 2015, the Company expects it will reclassify amounts recorded in accumulated OCI into earnings as an increase in interest expense of approximately $24,512,000, net of tax, within the next twelve months. However, the actual amount reclassified could vary due to future changes in the fair value of these derivatives.

Fair Value Hedges of Interest Rate Risk

The Company enters into total rate of return swaps (“TROR”) on various tax-exempt fixed-rate borrowings. The TROR convert borrowings from a fixed rate to a variable rate. In exchange for a fixed rate, the TROR requires the payment of a variable interest rate, generally equivalent to the Securities Industry and Financial Markets Association (“SIFMA”) rate (0.02% at September 30, 2015) plus a spread. Additionally, the Company has guaranteed the fair value of the underlying borrowings. Fluctuation in the value of the TROR is offset by the fluctuation in the value of the underlying borrowings, resulting in minimal financial impact. At September 30, 2015, the aggregate notional amount of TROR designated as fair value hedging instruments is $471,985,000. The underlying TROR 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 in an effort to provide information that enables the financial statement user to understand the Company’s volume of derivative activity.

The following table summarizes the fair values and location in the Consolidated Balance Sheets of all derivative instruments:

	Fair Value of Derivative Instruments
	September 30, 2015
	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	$	—	$	—	$	—
Interest rate swaps	—		—		734,497		61,096
TROR	149,200		7,977		322,785		10,282
Total	$	479,200	$	7,977	$	1,057,282	$	71,378
Derivatives Not Designated as Hedging Instruments
Interest rate caps	$	316,396	$	—	$	—	$	—
TROR	101,190		5,435		38,356		14,200
Total	$	417,586	$	5,435	$	38,356	$	14,200
	December 31, 2014
Derivatives Designated as Hedging Instruments
Interest rate caps	$	330,000	$	114	$	—	$	—
Interest rate swaps	—		—		869,154		75,281
TROR	149,200		6,379		217,785		11,983
Total	$	479,200	$	6,493	$	1,086,939	$	87,264
Derivatives Not Designated as Hedging Instruments
Interest rate caps	$	205,522	$	12	$	—	$	—
TROR	101,410		1,857		38,425		15,098
Total	$	306,932	$	1,869	$	38,425	$	15,098

The following table summarizes 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 (loss) and interest expense in the Consolidated Statements of Operations:

				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, 2015
Interest rate caps and interest rate swaps	$	(7,854	)	Interest expense	$	(9,759	)	$	(16	)
				Net gain on change in control of interests	—			—
				Earnings (loss) from unconsolidated entities, gross of tax	(885		)	—
Total	$	(7,854	)		$	(10,644	)	$	(16	)
Nine Months Ended September 30, 2015
Interest rate caps and interest rate swaps	$	(15,557	)	Interest expense	$	(28,060	)	$	(27	)
				Net gain on change in control of interests	900			—
				Earnings (loss) from unconsolidated entities, gross of tax	(2,851		)	(1		)
Total	$	(15,557	)		$	(30,011	)	$	(28	)
Three Months Ended September 30, 2014
Interest rate caps and interest rate swaps	$	1,288		Interest expense	$	(9,561	)	$	(1	)
				Earnings (loss) from unconsolidated entities, gross of tax	(1,002		)	—
Total	$	1,288			$	(10,563	)	$	(1	)
Nine Months Ended September 30, 2014
Interest rate caps and interest rate swaps	$	(10,166	)	Interest expense	$	(28,412	)	$	(1	)
				Discontinued operations	—			(3,666		)
				Earnings (loss) from unconsolidated entities, gross of tax	(3,005		)	—
Total	$	(10,166	)		$	(31,417	)	$	(3,667	)

The following table summarizes the impact of gains and losses related to derivative 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,
	2015			2014			2015			2014
	(in thousands)
Derivatives Designated as Fair Value Hedging Instruments
TROR (1)	$	848		$	68		$	3,299		$	2,279
Derivatives Not Designated as Hedging Instruments
Interest rate caps and interest rate swap	$	(180	)	$	62		$	(195	)	$	(41	)
TROR	(1,143		)	(42		)	4,476			633
Total	$	(1,323	)	$	20		$	4,281		$	592

(1) The net gain (loss) recognized in interest expense from the change in fair value of the underlying TROR borrowings was $(848) and $(3,299) for the three and nine months ended September 30, 2015, respectively, and $(68) and $(2,279) for the three and nine months ended September 30, 2014, respectively, offsetting the gain (loss) recognized on the TROR.

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 subsidiaries have agreements containing provisions whereby the subsidiaries must maintain certain minimum financial ratios. As of September 30, 2015, the Company does not have any derivative contracts containing credit-risk related contingent features, such as a credit rating downgrade, that may trigger collateral to be posted with a counterparty.

The following table summarizes information about collateral posted for derivatives in liability positions as of September 30, 2015:

	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	$	734,497	$	63,553	$	(2,457	)	$	—	Mortgage liens	None
TROR	361,141		24,426		56			50,569		Restricted cash, notes receivable, letters of credit	None
Total	$	1,095,638	$	87,979	$	(2,401	)	$	50,569