Derivative Instruments

3 Months Ended

Mar. 31, 2022

Summary of Derivative Instruments [Abstract]

Derivative Instruments

Derivative InstrumentsAll derivatives are recognized at fair value in the consolidated balance sheets within the line items "Other assets" and "Accounts payable and accrued liabilities" as applicable. The Company has elected not to offset its derivative

position for purposes of balance sheet presentation and disclosure. The Company had derivative assets of $0.6 million at March 31, 2022 and no derivative assets at December 31, 2021. The Company had derivative liabilities of $7.6 million and $4.9 million at March 31, 2022 and December 31, 2021, respectively. The Company has not posted or received collateral with its derivative counterparties as of March 31, 2022 or December 31, 2021. See Note 11 for disclosures relating to the fair value of the derivative instruments.

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions including the effect of changes in foreign currency exchange rates on foreign currency transactions and interest rates on its LIBOR-based borrowings. The Company manages this risk by following established risk management policies and procedures including the use of derivatives. The Company’s objective in using derivatives is to add stability to reported earnings and to manage its exposure to foreign exchange and interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps, cross-currency swaps and foreign currency forwards.

Cash Flow Hedges of Interest Rate Risk

The Company uses interest rate swaps as its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt or payment of variable-rate amounts from a counterparty which results in the Company recording net interest expense that is fixed over the life of the agreements without exchange of the underlying notional amount.

At March 31, 2022, the Company had one interest rate swap agreement designated as a cash flow hedge of interest rate risk related to its variable rate secured bonds totaling $25.0 million. The interest rate swap agreement outstanding as of March 31, 2022 is summarized below:

Fixed rate	Notional Amount (in millions)		Index	Maturity
1.3925%	$	25.0	USD LIBOR	September 30, 2024

The change in the fair value of interest rate derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (AOCI) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings within the same income statement line item as the earnings effect of the hedged transaction.

Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. As of March 31, 2022, the Company estimates that during the twelve months ending March 31, 2023, $0.1 million of gains will be reclassified from AOCI to other income.

Cash Flow Hedges of Foreign Exchange Risk

The Company is exposed to foreign currency exchange risk against its functional currency, USD, on CAD denominated cash flow from its four Canadian properties. The Company uses cross-currency swaps to mitigate its exposure to fluctuations in the USD-CAD exchange rate on cash inflows associated with these properties which should hedge a significant portion of the Company's expected CAD denominated cash flows.

The Company entered into three USD-CAD cross-currency swaps that were effective July 1, 2020 with a fixed original notional value of $100.0 million CAD and $76.6 million USD. The net effect of these swaps is to lock in an exchange rate of $1.31 CAD per USD on approximately $7.2 million annual CAD denominated cash flows through June 2022.

On April 12, 2022, the Company entered into three USD-CAD cross-currency swaps that will be effective July 1, 2022 with a total fixed original notional value of $150.0 million CAD and $118.7 million USD. The net effect of these swaps is to lock in an exchange rate of $1.27 CAD per USD on approximately $10.8 million annual CAD denominated cash flows through September 2024.

Additionally, on April 29, 2022, the Company entered into two additional cross-currency swaps effective May 1, 2022 with a total fixed notional value of $200.0 million CAD and $156.0 million USD. The net effect of these swaps is to lock in exchange rate of $1.29 CAD per USD on approximately $4.5 million of additional annual CAD denominated cash flows through October 1, 2024.

The change in the fair value of foreign currency derivatives designated and that qualify as cash flow hedges of foreign exchange risk is recorded in AOCI and reclassified into earnings in the period that the hedged forecasted transaction affects earnings within the same income statement line item as the earnings effect of the hedged transaction. As of March 31, 2022, the Company estimates that during the twelve months ending March 31, 2023, $0.1 million of losses will be reclassified from AOCI to other expense.

Net Investment Hedges

The Company is exposed to fluctuations in the USD-CAD exchange rate on its net investments in Canada. As such, the Company uses either currency forward agreements or cross-currency swaps to manage its exposure to changes in foreign exchange rates on certain of its foreign net investments. As of March 31, 2022, the Company had the following cross-currency swaps designated as net investment hedges:

Fixed rate	Notional Amount (in millions, CAD)		Maturity
$1.32 CAD per USD	$	100.0	July 1, 2023
$1.32 CAD per USD	100.0		July 1, 2023
Total	$	200.0

The cross-currency swaps also have a monthly settlement feature locked in at an exchange rate of $1.32 CAD per USD on $4.5 million of CAD annual cash flows, the net effect of which is an excluded component from the effectiveness testing of this hedge.

On April 29, 2022, the Company de-designated these CAD to USD cross-currency swaps in conjunction with entering into new agreements, effectively terminating the cross-currency swap agreements. These contracts were previously designated as net investment hedges. The Company paid $3.8 million in connection with the settlement of the CAD to USD cross-currency swap agreements.

On April 29, 2022, the Company entered into two forward contracts with a fixed notional value of $200.0 million CAD and $156.0 million USD with a settlement date of October 1, 2024. The exchange rate of this forward contract is approximately $1.28 CAD per USD.

For qualifying foreign currency derivatives designated as net investment hedges, the change in the fair value of the derivatives are reported in AOCI as part of the cumulative translation adjustment. Amounts are reclassified out of AOCI into earnings when the hedged net investment is either sold or substantially liquidated. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with the Company's accounting policy election. The earnings recognition of excluded components are presented in other income.

Below is a summary of the effect of derivative instruments on the consolidated statements of changes in equity and income for the three months ended March 31, 2022 and 2021.

Effect of Derivative Instruments on the Consolidated Statements of Changes in Equity and Comprehensive Income for the Three Months Ended March 31, 2022 and 2021 (Dollars in thousands)

	Three Months Ended March 31,
Description	2022		2021
Cash Flow Hedges
Interest Rate Swaps
Amount of Gain Recognized in AOCI on Derivative	$	825	$	259
Amount of Expense Reclassified from AOCI into Earnings (1)	(76)		(2,033)
Cross-Currency Swaps
Amount of Loss Recognized in AOCI on Derivative	(26)		(93)
Amount of Expense Reclassified from AOCI into Earnings (2)	(54)		(49)
Net Investment Hedges
Cross-Currency Swaps
Amount of Loss Recognized in AOCI on Derivative	(3,019)		(1,786)
Amount of Income Recognized in Earnings (2) (3)	99		102
Total
Amount of Loss Recognized in AOCI on Derivatives	$	(2,220)	$	(1,620)
Amount of Expense Reclassified from AOCI into Earnings	(130)		(2,082)
Amount of Income Recognized in Earnings	99		102
Interest expense, net in accompanying consolidated statements of income (loss) and comprehensive income	$	33,260	$	39,194
Other income in accompanying consolidated statements of income (loss) and comprehensive income	$	9,305	$	678

(1) Included in "Interest expense, net" in the accompanying consolidated statements of income (loss) and comprehensive income for the three months ended March 31, 2022 and 2021.

(2) Included in "Other income" in the accompanying consolidated statements of income (loss) and comprehensive income for the three months ended March 31, 2022 and 2021.

(3) Amounts represent derivative gains excluded from the effectiveness testing.

Credit-risk-related Contingent Features

The Company has an agreement with its interest rate derivative counterparty that contains a provision where if the Company defaults on any of its obligations for borrowed money or credit in an amount exceeding $50.0 million and such default is not waived or cured within a specified period of time, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its interest rate derivative obligations.

As of March 31, 2022, the fair value of the Company's derivatives in a liability position related to these agreements was $7.6 million. If the Company breached any of the contractual provisions of these derivative contracts, it would be required to settle its obligations under the agreements at their termination value of $7.1 million. As of March 31, 2022, the Company had not posted any collateral related to these agreements and was not in breach of any provisions in these agreements.