DERIVATIVE FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2016

Derivative Instruments And Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS

NOTE 6: DERIVATIVE FINANCIAL INSTRUMENTS

We may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with our borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with our operating and financial structure as well as to hedge specific anticipated transactions.  While these instruments may impact our periodic cash flows, they benefit us by minimizing the risks and/or costs previously described.  The counterparties to these contractual arrangements are major financial institutions with which we and our affiliates may also have other financial relationships. In the event of nonperformance by the counterparties, we are potentially exposed to credit loss. However, because of the high credit ratings of the counterparties, we do not anticipate that any of the counterparties will fail to meet their obligations.

Interest Rate Swaps and Caps

We have entered into various interest rate swap contracts to hedge interest rate exposure on floating rate indebtedness. IRT has also entered into an interest cap contract to hedge its interest rate exposure on floating rate indebtedness.  

We designate interest rate hedge agreements at inception and determine whether or not the interest rate hedge agreement is highly effective in offsetting interest rate fluctuations associated with the identified indebtedness. At designation, certain of these interest rate swaps had a fair value not equal to zero. However, we concluded, at designation, that these hedging arrangements were highly effective during their term using regression analysis and determined that the hypothetical derivative method would be used in measuring any ineffectiveness. At each reporting period, we update our regression analysis and, as of June 30, 2016, we concluded that these hedging arrangements were highly effective during their remaining term and used the hypothetical derivative method in measuring the ineffective portions of these hedging arrangements.

During the three months ended June 30, 2016, IRT entered into an interest rate swap contract with a notional value of $150 million, a strike rate of 1.145% and a maturity date of June 17, 2021.  IRT designated this interest rate swap as a cash flow hedge at inception and determined that the hedge is highly effective in offsetting interest rate fluctuations associated with the identified indebtedness. IRT concluded that this hedging relationship was and will continue to be highly effective, and using the hypothetical derivative method, did not recognize any ineffectiveness.  During the three months ended June 30, 2016, IRT de-designated its interest rate cap, which was highly effective through the de-designation date.  As of June 30, 2016, this interest rate cap is accounted for as a freestanding derivative.  The change in fair value of this interest cap was less than $1 during the three months ended June 30, 2016.

The following table summarizes the aggregate notional amount and estimated net fair value of our derivative instruments as of June 30, 2016 and December 31, 2015:

	As of June 30, 2016							As of December 31, 2015
	Notional		Fair Value of Assets		Fair Value of Liabilities			Notional		Fair Value of Assets		Fair Value of Liabilities
Cash flow hedges:
Interest rate swaps	$	247,900	$	—	$	(1,950	)	$	243,816	$	—	$	(4,672	)
Interest rate cap		—		—		—			200,000		24		—
Other interest rate swaps & caps		260,235		53		(2,022	)		37,325		182		(55	)
Net fair value	$	508,135	$	53	$	(3,972	)	$	481,141	$	206	$	(4,727	)

During the period July 1, 2016 through September 30, 2016, interest rate swap agreements relating to RAIT I and RAIT II with a notional amount of $97,900 and a weighted average strike rate of 4.7% as of June 30, 2016, will terminate in accordance with their terms.

Effective interest rate swaps and caps are reported in accumulated other comprehensive income and the fair value of these hedge agreements is included in other assets or derivative liabilities.

For interest rate swaps and caps that are considered effective hedges, we reclassified realized losses of $1,656 and $4,398, respectively, to earnings for the three months ended June 30, 2016 and 2015 and $4,059 and $9,365 for the six months ended June 30, 2016.

Changes in the fair value of our other interest rate swaps and caps are reported in change in fair value of financial instruments in the Consolidated Statements of Operations.