Derivative Instruments and Hedging Activities

6 Months Ended

Jul. 31, 2011

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

G. Derivative Instruments and Hedging Activities

Risk Management Objective of Using Derivatives

The Company maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned decreases in earnings and cash flows that may be caused by interest rate volatility. Derivative instruments that are used as part of the Company’s strategy include interest rate swaps and option contracts that have indices related to the pricing of specific balance sheet liabilities. The Company enters into interest rate swaps to convert certain 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. The Company enters into interest rate swap agreements for hedging purposes for periods that are generally one to ten years. Option products utilized include interest rate caps, floors and Treasury options. The use of these 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. The caps and floors have typical durations ranging from one to three years while the Treasury options are for periods of five to ten years. The Company does not have any Treasury options outstanding at July 31, 2011.

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 its exposure to interest rate movements. To accomplish these objectives, 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 in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company incurred insignificant charges related to ineffectiveness. There are no amounts in the total ineffectiveness charged to earnings related to derivative losses reclassified from accumulated OCI as a result of forecasted transactions that did not occur by the end of the originally specified time period or within an additional two-month period of time thereafter (missed forecasted transaction). As of July 31, 2011, the Company expects that within the next twelve months it will reclassify amounts recorded in accumulated OCI into earnings as an increase in interest expense of approximately $28,659,000, net of tax. However, the actual amount reclassified could vary due to future changes in fair value of these derivatives.

Fair Value Hedges of Interest Rate Risk

From time to time, the Company and/or certain of its joint ventures (the “Joint Ventures”) enter into TRS on various tax-exempt fixed-rate borrowings generally held by the Company and/or within the Joint Ventures. The TRS convert these borrowings from a fixed rate to a variable rate and provide an efficient financing product to lower the cost of capital. In exchange for a fixed rate, the TRS require the Company and/or the Joint Ventures pay a variable rate, generally equivalent to the SIFMA rate plus a spread. At July 31, 2011, the SIFMA rate was 0.08%. Additionally, the Company and/or the Joint Ventures have guaranteed the fair value of the underlying borrowing. Any fluctuation in the value of the TRS would be offset by the fluctuation in the value of the underlying borrowing, resulting in minimal financial impact to the Company and/or the Joint Ventures. At July 31, 2011, the aggregate notional amount of TRS that are designated as fair value hedging instruments is $260,982,000. The underlying TRS borrowings are subject to a fair value adjustment (refer to Note H — Fair Value Measurements).

Nondesignated Hedges of Interest Rate Risk

The Company entered into derivative contracts that are intended to economically hedge certain interest rate risk, even though the contracts do not qualify for hedge accounting or the Company has elected not to apply hedge accounting. In situations in which hedge accounting is discontinued, or not elected, and the derivative remains outstanding, the Company records the derivative at its fair value and recognizes changes in the fair value in the Consolidated Statements of Operations.

The Company periodically enters into forward swaps to protect itself against fluctuations in the swap rate at terms ranging between five to ten years associated with forecasted fixed rate borrowings. At the time the Company secures and locks an interest rate on an anticipated financing, it intends to simultaneously terminate the forward swap associated with that financing. At July 31, 2011, the Company had no forward swaps outstanding. The Company terminated forward swaps with notional amounts of $62,800,000 and $107,000,000 on February 1, 2011 and May 3, 2010, respectively. These forward swaps were not designated as cash flow hedges under the accounting guidance on derivatives and hedging activities. As such, the change in fair value of these swaps was marked to market through earnings on a quarterly basis. Related to these forward swaps, the Company recorded $229,000 for the six months ended July 31, 2011 as a reduction to interest expense and $4,417,000 and $4,725,000 for the three and six months ended July 31, 2010, respectively, as an increase of interest expense.

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

			Fair Value of Derivative Instruments
	July 31, 2011
					Liability Derivatives
	Asset Derivatives				(included in Accounts Payable
	(included in Other Assets)				and Accrued Expenses)
	Current Notional		Fair Value		Current Notional		Fair Value
			(in thousands)
Derivatives Designated as Hedging Instruments
Interest rate caps	$	105,882	$	1	$	-	$	-
Interest rate swap agreements		-		-		1,196,149		128,547
TRS		9,130		15		251,852		13,586
Total derivatives designated as hedging instruments	$	115,012	$	16	$	1,448,001	$	142,133
Derivatives Not Designated as Hedging Instruments
Interest rate caps	$	1,311,593	$	39	$	-	$	-
Interest rate swap agreements		20,117		1,523		-		-
TRS		140,800		3,824		30,600		10,466
Total derivatives not designated as hedging instruments	$	1,472,510	$	5,386	$	30,600	$	10,466
	January 31, 2011
			(in thousands)
Derivatives Designated as Hedging Instruments
Interest rate caps	$	476,100	$	184	$	-	$	-
Interest rate swap agreements		300,000		716		1,285,000		110,398
TRS		-		-		280,885		21,938
Total derivatives designated as hedging instruments	$	776,100	$	900	$	1,565,885	$	132,336
Derivatives Not Designated as Hedging Instruments
Interest rate caps and floors	$	1,943,202	$	11	$	-	$	-
Interest rate swap agreements		20,117		1,801		60,900		14,011
TRS		140,800		2,144		30,600		10,240
Total derivatives not designated as hedging instruments	$	2,104,119	$	3,956	$	91,500	$	24,251

The following tables present 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 loss of unconsolidated entities and interest expense in the Consolidated Statements of Operations:

				Gain (Loss) Reclassified from
				Accumulated OCI
				(Effective Portion)
	Gain (Loss)							Ineffectiveness
	Recognized			Location on				Recognized in
	in OCI			Consolidated				Interest
Derivatives Designated as	(Effective			Statements of				Expense
Cash Flow Hedging Instruments	Portion)			Operations	Amount			on Derivatives
				(in thousands)
Three Months Ended July 31, 2011
Interest rate caps, interest rate swaps and Treasury options	$	(20,850	)	Interest expense	$	(944	)	$	-
Interest rate caps and treasury options		-		Equity in loss of unconsolidated entities		(94	)		(555	)
Total	$	(20,850	)		$	(1,038	)	$	(555	)
Six Months Ended July 31, 2011
Interest rate caps, interest rate swaps and Treasury options	$	(22,889	)	Interest expense	$	(1,635	)	$	-
Interest rate caps and treasury options		-		Equity in loss of unconsolidated entities		(182	)		(555	)
Total	$	(22,889	)		$	(1,817	)	$	(555	)

				Gain (Loss) Reclassified from
				Accumulated OCI
				(Effective Portion)
	Gain (Loss)							Ineffectiveness
	Recognized			Location on				Recognized in
	in OCI			Consolidated				Interest
Derivatives Designated as	(Effective			Statements of				Expense
Cash Flow Hedging Instruments	Portion)			Operations	Amount			on Derivatives
				(in thousands)
Three Months Ended July 31, 2010
Interest rate caps, interest rate swaps and Treasury options	$	(40,966	)	Interest expense	$	(697	)	$	3
Treasury options		-		Equity in loss of unconsolidated entities		(20	)		-
Total	$	(40,966	)		$	(717	)	$	3
Six Months Ended July 31, 2010
Interest rate caps, interest rate swaps and Treasury options	$	(40,114	)	Interest expense	$	(1,448	)	$	1
Treasury options		-		Equity in loss of unconsolidated entities		(38	)		(2	)
Total	$	(40,114	)		$	(1,486	)	$	(1	)

The following table presents the impact of gains and losses in the Consolidated Statements of Operations related to derivative instruments:

	Net Gain (Loss) Recognized (1)
	Three Months Ended July 31,						Six Months Ended July 31,
	2011			2010			2011			2010
				(in thousands)
Derivatives Designated as Fair Value Hedging Instruments
TRS	$	5,982		$	3,573		$	7,464		$	5,872
Derivatives Not Designated as Hedging Instruments
Interest rate caps, interest rate swaps and floors	$	(201	)	$	(4,526	)	$	(397	)	$	(5,302	)
TRS		414			(3,939	)		1,454			(3,778	)
Total	$	213		$	(8,465	)	$	1,057		$	(9,080	)

(1) The net loss recognized in interest expense from the change in fair value of the underlying TRS borrowings was $5,982 and $7,464 for the three and six months ended July 31, 2011, respectively, and $3,573 and $5,872 for the three and six months ended July 31, 2010, respectively, offsetting the gain recognized on the TRS (see Note H — Fair Value Measurements).

Credit-risk-related Contingent Features

The principal credit risk to the Company through its interest rate risk management strategy is the potential inability of the financial institution from which the derivative financial instruments were purchased to cover all of its obligations. If a counterparty fails to fulfill its performance obligations under a derivative contract, the Company’s risk of loss approximates the fair value of the derivative. To mitigate this exposure, the Company generally purchases its 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 the Company enters into the transaction.

The Company has agreements with its derivative counterparties that contain a provision under which the derivative counterparty could terminate the derivative obligations if the Company defaults on its obligations under its bank revolving credit facility and designated conditions have passed. In instances where subsidiaries of the Company have derivative obligations that are 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, the Company has certain derivative contracts which provide that if the Company’s credit rating were to fall 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. Also, certain subsidiaries of the Company have agreements with certain of its derivative counterparties that contain provisions whereby the subsidiaries of the Company must maintain certain minimum financial ratios.

As of July 31, 2011, the aggregate fair value of all derivative instruments in a liability position, prior to the adjustment for nonperformance risk of $14,850,000, is $167,449,000. The Company had posted collateral consisting primarily of cash and notes receivable of $71,500,000 related to all derivative instruments. If all credit risk contingent features underlying these agreements had been triggered on July 31, 2011, the Company would have been required to post collateral of the full amount of the liability position.