DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

9 Months Ended

Sep. 30, 2016

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 10 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We are exposed to interest rate risk related to our variable interest rate debt, and we manage this risk by utilizing interest rate derivatives. Our objective in using interest rate derivatives is to add stability to interest costs by reducing our exposure to interest rate movements. To accomplish this objective, we use interest rate swaps, forward-starting swaps, and caps as part of our interest rate risk management strategy. As of September 30, 2016, we had interest rate swaps with gross notional amounts of $326.0 million and a $100.0 million interest rate cap, all of which were designated as effective cash flow hedges of interest rate risk. We also have $250.0 million in gross notional amounts of forward-starting interest rate swaps that become effective December 31, 2017 to hedge a portion of anticipated future fixed-rate debt issuance.

Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company’s fixed‑rate payments over the life of the agreements without exchange of the underlying notional amount. The forward-starting interest rate swaps are designated as cash flow hedges of the variability of the anticipated interest rate of our long-term financing needs at our Downtown Summerlin property. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up‑front premium.

The effective portion of changes in the fair value of 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. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and nine months ended September 30, 2016 and September 30, 2015, the ineffective portion recorded in earnings was insignificant.

If the derivative contracts are terminated prior to their maturity, the amounts previously recorded in AOCI are recognized into earnings over the period that the hedged transaction impacts earnings. If the hedging relationship is discontinued because it is probable that the forecasted transaction will not occur according to the original strategy, any related amounts previously recorded in AOCI are recognized in earnings immediately.

Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on our variable‑rate debt. Over the next 12 months, we estimate that an additional $1.9 million will be reclassified to interest expense.

The table below presents the fair value of our derivative financial instruments, which are included in accounts payable and accrued liabilities in the condensed consolidated balance sheets:

	September 30,		December 31,
(In thousands)	2016		2015
Interest Rate Swaps & Caps	$	3,035	$	2,292
Forward-Starting Swaps		24,759		1,925
Total derivatives designated as hedging instruments	$	27,794	$	4,217

The tables below present the effect of our derivative financial instruments on the condensed consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015:

	Three Months Ended September 30,					Three Months Ended September 30,
	2016		2015		Location of Loss	2016		2015
(In thousands) Cash Flow Hedges	Amount of (Loss) Recognized in OCI		Amount of (Loss) Recognized in OCI		Reclassified from AOCI into Earnings	Amount of (Loss) Reclassified from AOCI into Earnings		Amount of (Loss) Reclassified from AOCI into Earnings
Interest Rate Swaps & Caps	$	(203)	$	(877)	Interest Expense	$	(356)	$	(466)
Forward-Starting Swaps		344		—	Interest Expense		—		—
	$	141	$	(877)		$	(356)	$	(466)

	Nine Months Ended September 30,					Nine Months Ended September 30,
	2016		2015		Location of Loss	2016		2015
(In thousands) Cash Flow Hedges	Amount of (Loss) Recognized in OCI		Amount of (Loss) Recognized in OCI		Reclassified from AOCI into Earnings	Amount of (Loss) Reclassified from AOCI into Earnings		Amount of (Loss) Reclassified from AOCI into Earnings
Interest Rate Swaps & Caps	$	(1,409)	$	(979)	Interest Expense	$	(1,099)	$	(1,276)
Forward-Starting Swaps		(14,566)		—	Interest Expense		—		—
	$	(15,975)	$	(979)		$	(1,099)	$	(1,276)