Derivatives and Non-Derivative Hedging Instruments

3 Months Ended

Mar. 31, 2018

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Non-Derivative Hedging Instruments

Derivatives and Non-Derivative Hedging Instruments

In the normal course of business, the Company is exposed to the effect of interest rate changes and foreign exchange rate changes. The Company limits these risks by following established risk management policies and procedures including the use of derivatives and net investment hedges. The Company uses a variety of derivative instruments to manage, or hedge, interest rate risk. The Company enters into hedging and derivative instruments that will be maximally effective in reducing the interest rate risk and foreign currency exchange rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract. The Company uses a variety of commonly used derivative products that are considered “plain vanilla” derivatives. These derivatives typically include interest rate swaps, forward starting swaps, caps, collars and floors. The Company expressly prohibits the use of unconventional derivative instruments and the use of derivative instruments for trading or speculative purposes. Further, the Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors.

The Company recognizes all derivatives on the Consolidated Balance Sheets at fair value within other assets or other liabilities, depending on the balance at the end of the period. Derivatives that are not designated as hedges must be adjusted to fair value through income. If a derivative is designated and qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will be recognized in other comprehensive income until the hedged item is recognized in earnings. Prior to the Company’s adoption of ASU 2017-12 on January 1, 2018, described in Note 2, the ineffective portion of the change in fair value of a derivative designated as a hedge was immediately recognized in earnings, however subsequent to adoption, the entire change in fair value is recognized in other comprehensive income until the hedged item is recognized in earnings. As a result of adoption, the Company recorded a decrease to its opening retained earnings balance and a corresponding increase to its opening accumulated other comprehensive income balance of $103 as of January 1, 2018, which represents the cumulative amount of hedge ineffectiveness recorded in the Consolidated Statements of Operations at the time of adoption. Derivative accounting may increase or decrease reported net income and shareholders’ equity prospectively, depending on future levels of the LIBOR swap spreads and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows, provided the contract is carried through to full term. Refer to Note 7 for additional information on the Company's derivative instruments, including the fair value measurement of these instruments.

Borrowings on the Company’s multicurrency tranche of the 2015 Revolving Credit Facility, which are designated as non-derivative net investment hedges, are recognized at par value based on the exchange rate in effect on the date of the draw. Subsequent changes in the exchange rates of the Company’s non-derivative net investment hedges are recognized as part of the cumulative foreign currency translation adjustment within other comprehensive income.

The Company’s derivatives and hedging instruments as of March 31, 2018 are as follows:

	Benchmark Rate	Notional Value	Strike Rate	Effective Date	Expiration Date	Fair Value
Interest Rate Swap - Waco	1 mo. USD-LIBOR-BBA	14,815 USD	4.55%	12/19/2013	12/19/2020	$	(13	)
Interest Rate Swap - 3-Year Term Loan	1 mo. USD-LIBOR-BBA	100,000 USD	1.22%	12/19/2016	12/17/2018	615
Interest Rate Swap - 3-Year Term Loan	1 mo. USD-LIBOR-BBA	100,000 USD	1.23%	12/19/2016	12/17/2018	612
Interest Rate Swap - 3-Year Term Loan	1 mo. USD-LIBOR-BBA	100,000 USD	1.24%	12/19/2016	12/17/2018	604
Interest Rate Swap - 5-Year Term Loan	1 mo. USD-LIBOR-BBA	750,000 USD	1.60%	12/17/2015	12/17/2020	17,010
Interest Rate Swap - 7-Year Term Loan	1 mo. USD-LIBOR-BBA	175,000 USD	1.82%	12/17/2015	1/9/2023	5,660
Interest Rate Swap - 7-Year Term Loan	1 mo. USD-LIBOR-BBA	60,000 USD	1.95%	10/13/2017	1/9/2023	1,599
Interest Rate Swap - 7-Year Term Loan	1 mo. USD-LIBOR-BBA	40,000 USD	2.01%	10/13/2017	1/9/2023	953
Interest Rate Swap - 7-Year Term Loan	1 mo. USD-LIBOR-BBA	39,500 USD	1.96%	10/13/2017	1/9/2023	1,016
Interest Rate Swap - 7-Year Term Loan	1 mo. USD-LIBOR-BBA	31,500 USD	1.96%	10/13/2017	1/9/2023	809
Interest Rate Swap - 7-Year Term Loan	1 mo. USD-LIBOR-BBA	31,500 USD	2.00%	10/13/2017	1/9/2023	765
Interest Rate Swap - 7-Year Term Loan	1 mo. USD-LIBOR-BBA	22,500 USD	1.95%	10/13/2017	1/9/2023	593
Forward Starting Swap1	3 mo. USD-LIBOR-BBA	250,000 USD	2.23%	12/20/2017	12/20/2027	11,652
Net Investment Hedge in GBP-denominated investments	USD-GBP exchange rate	9,000 GBP	N/A	7/15/2016	N/A	—
Net Investment Hedge in EUR-denominated investments	USD-EUR exchange rate	4,000 EUR	N/A	3/8/2018	N/A	—
Total hedging instruments						$	41,875

1. The forward starting swap has a mandatory early termination date of June 20, 2018.

As of March 31, 2018, the Company’s derivative instruments consisted of interest rate swaps, which are cash flow hedges used to hedge exposure to variability in future interest payments on its debt facilities. The Company's interest rate swap derivative instruments were reported in other assets at fair value of $41,888 and in other liabilities at fair value of $(13) at March 31, 2018.

The table below details the location in the financial statements of the gain or loss recognized on the interest rate swaps designated as cash flow hedges for the three months ended March 31, 2018 and 2017:

	Three Months Ended March 31,
	2018		2017
Accumulated other comprehensive income:
Gain recognized in accumulated other comprehensive income1	$	22,153	$	—
Interest expense:
Gain reclassified from accumulated other comprehensive income into interest expense1	$	268	$	268
Gain recognized in interest expense (ineffective portion)2	—		46
Total recognized in interest expense on statements of operations	$	268	$	314

1. Periods prior to January 1, 2018, when the Company adopted ASU 2017-12, include only the effective portion and periods subsequent to January 1, 2018 include both the effective and ineffective portions as the two amounts are no longer separately measured and reported. The first quarter of 2018 includes $103 related to the adoption of ASU 2017-02.

2. Represents the ineffective portion and pertains only to periods prior to January 1, 2018, when the Company adopted ASU 2017-12.

During the next 12 months, the Company expects that $(7,947) will be reclassified from other comprehensive income as an increase in interest expense for the Company’s interest rate swaps as of March 31, 2018. Additionally, the Company will recognize $1,295 in interest expense on a straight-line basis over the remaining original term of terminated swaps through June 2019, representing amortization of the remaining accumulated other comprehensive income balance related to the swap, and of this amount $1,087 will be recognized in interest expense during the next 12 months.

The Company hedges exposure to changes in the exchange rates underlying its investments based in foreign currencies using non-derivative net investment hedges in conjunction with borrowings under the multicurrency tranche of its 2015 Revolving Credit Facility. In March 2018, the Company entered into a non-derivative net investment hedge on its euro-denominated investment in the Gramercy European Property Fund III and in prior periods, from September 2015 until disposal of the underlying investments in July 2017, the Company had a non-derivative net investment hedge on its investments in the Gramercy European Property Fund and the Goodman Europe JV, all of which had euros as their functional currencies. The Company’s non-derivative net investment hedge on its British pound sterling-denominated investments, which was entered into in July 2016, is used to hedge exposure to changes in the British pound sterling U.S. dollar exchange rate underlying its unconsolidated equity investment in the Goodman UK JV, which has British pounds sterling as its functional currency. The Company’s non-derivative net investment hedge values are reported at carrying value and are included in the balance of the senior unsecured revolving credit facility on the Consolidated Balance Sheets. During the three months ended March 31, 2018 and 2017, the Company recorded a net loss of $459 and $923, respectively, in other comprehensive income from the impact of exchange rates related to the non-derivative net investment hedges. When the non-derivative net investments being hedged are sold or substantially liquidated, the balance of the translation adjustment accumulated in other comprehensive income will be reclassified into earnings.