RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2019

RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS

RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS

10.  RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS

The Company’s use of derivative instruments is limited to the utilization of interest rate swap agreements or other instruments to manage interest rate risk exposures and not for speculative purposes. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure, as well as to hedge specific transactions. The counterparties to these arrangements are major financial institutions with which the Company and its subsidiaries may also have other financial relationships. The Company is potentially exposed to credit loss in the event of non-performance by these counterparties. However, because of the high credit ratings of the counterparties, the Company does not anticipate that any of the counterparties will fail to meet these obligations as they come due. The Company does not hedge credit or property value market risks.

During 2018, the Company entered into interest rate swap agreements that qualified and were designated as cash flow hedges designed to reduce the impact of interest rate changes on a forecasted issuance of long-term debt. Therefore, the interest rate swaps were recorded on the consolidated balance sheets at fair value and the related gains or losses were deferred in shareholders’ equity as accumulated other comprehensive loss. These deferred gains and losses are amortized into interest expense during the period or periods in which the related interest payments affect earnings.

The Company formally assessed, both at inception of the hedge and on an on-going basis, whether each derivative was highly-effective in offsetting changes in cash flows of the hedged item. If management determined that the derivative was highly-effective as a hedge, then the Company accounted for the derivative using hedge accounting, pursuant to which gains or losses inherent in the derivative did not impact the Company’s results of operations. If management determined that the derivative was not highly-effective as a hedge or if a derivative ceased to be a highly-effective hedge, the Company discontinued hedge accounting prospectively and reflected in its statement of operations realized and unrealized gains and losses with respect to the derivative.

The following table summarizes the terms and fair values of the Company’s derivative financial instruments as of December 31, 2019 and 2018 (in thousands):

Hedge	Hedge	Notional Amount						Effective		Fair Value
Product	Type	December 31, 2019		December 31, 2018		Strike		Date	Maturity	December 31, 2019		December 31, 2018
Swap	Cash flow (1)	$	—	$	75,000	2.8015	%	6/28/2019	6/28/2029	$	—	$	(516)
Swap	Cash flow (1)		—		50,000	2.8030	%	6/28/2019	6/28/2029		—		(350)
Swap	Cash flow (1)		—		25,000	2.8020	%	6/28/2019	6/28/2029		—		(173)
		$	—	$	150,000					$	—	$	(1,039)

(1) These interest rate swaps were entered into on December 24, 2018 to protect the Company against adverse fluctuations in interest rates by reducing exposure to variability in cash flows relating to interest payments on a forecasted issuance of long-term debt. On January 24, 2019, in conjunction with the issuance of the 2029 Notes, the Company settled these interest rate swaps for $0.8 million. The termination premium will be reclassified from accumulated other comprehensive loss as an increase to interest expense over the life of the 2029 Notes, which mature on February 15, 2029.

The Company measured its derivative instruments at fair value and recorded them in the balance sheet as a liability. As of December 31, 2019, all derivative instruments had been settled. As of December 31, 2018, all derivative instruments were included in Accounts payable,

accrued expenses and other liabilities on the accompanying consolidated balance sheets. The effective portions of changes in the fair value of the derivatives are reported in accumulated other comprehensive loss. Amounts reported in accumulated other comprehensive loss related to derivatives are reclassified to interest expense as interest payments are made on the Company’s 2029 Notes. The change in unrealized losses on interest rate swaps reflects a reclassification of $0.1 million of unrealized losses from accumulated other comprehensive loss as an increase to interest expense during 2019. The Company estimates that $0.1 million will be reclassified as an increase to interest expense in 2020.