DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

6 Months Ended

Jun. 30, 2017

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. To add stability to interest costs by reducing our exposure to interest rate movements, we use interest rate swaps, forward-starting swaps, and caps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our fixed‑rate payments over the life of the agreements without exchange of the underlying notional amount. Forward-starting interest rate swaps were designated as cash flow hedges of the variability of anticipated future fixed-rate debt issuance for 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. Our $230.0 million interest rate cap is not designated as a hedge, and therefore, the gain or loss on the derivative contract is recognized in current period earnings. These derivatives are recorded on a gross basis at fair value.

The effective portion of changes in the fair value of derivatives designated and qualifying 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 six months ended June 30, 2017 and 2016 the ineffective portion recorded was insignificant.

Assessments of hedge effectiveness are performed quarterly using regression analysis and the measurement of hedge ineffectiveness is based on the hypothetical derivative method. We are exposed to credit risk in the event of non-performance by our derivative counterparties. We evaluate counterparty credit risk through monitoring the creditworthiness of counterparties, which includes review of debt ratings and financial performance. To mitigate its credit risk, we enter into agreements with counterparties we consider credit-worthy, such as large financial institutions with favorable credit ratings. As of June 30, 2017 and 2016, there were no termination events or events of default related to the interest rate swaps.

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.

The following table summarizes details related to our derivative contracts:

					Fixed				Fair Value Asset (Liability)
			Notional		Interest		Effective	Maturity	June 30,		December 31,
(In thousands)		Balance Sheet Location	Amount		Rate		Date	Date	2017		2016
Currently-paying contracts:
Interest Rate Swap	(a)	Accounts payable and accrued expenses	$	20,815	2.96	%	5/10/2011	10/31/2019	$	(519)	$	(740)
Interest Rate Swap	(a)	Accounts payable and accrued expenses		40,000	1.66		5/6/2015	5/1/2020		(25)		(143)
Interest Rate Swap	(a)	Accounts payable and accrued expenses		119,359	1.14		10/3/2016	9/12/2021		3,119		3,368
Interest Rate Cap	(a)	Accounts payable and accrued expenses		100,000	5.00		8/31/2015	8/31/2017		—		—
Interest Rate Cap	(b)	Accounts payable and accrued expenses		230,000	2.50		12/22/2016	12/23/2019		246		768
Forward-starting contracts:
Interest Rate Swap	(a)	Accounts payable and accrued expenses		50,000	2.65		12/31/2017	12/31/2027		(1,324)		(610)
Interest Rate Swap	(a)	Accounts payable and accrued expenses		100,000	2.68		12/31/2017	12/31/2027		(2,907)		(1,479)
Interest Rate Swap	(a)	Accounts payable and accrued expenses		100,000	2.62		12/31/2017	12/31/2027		(2,443)		(1,015)
Total fair value derivative assets									$	3,365	$	4,136
Total fair value derivative liabilities									$	(7,218)	$	(3,987)

(a) Denotes derivatives designated as hedging instruments.

(b) Denotes derivative contract that could not be designated as a hedging instrument as of June 30, 2017 as this cap hedges debt that is not yet drawn. Interest (income) expense of $(0.2) million and $0 million is included in the condensed consolidated statement of operations for the three months ended June 30, 2017 and 2016, respectively, related to this contract. Interest (income) expense of $(0.5) million and $0 million is included in the condensed consolidated statement of operations for the six months ended June 30, 2017 and 2016, respectively, related to this contract.

The tables below present the effect of our derivative financial instrument on the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016:

	Amount of Loss Recognized				Amount of Loss Recognized
	in AOCI on Derivative				in AOCI on Derivative
	(Effective Portion)				(Effective Portion)
	Three Months Ended June 30,				Six Months Ended June 30,
Derivatives in Cash Flow Hedging Relationships	2017		2016		2017		2016
Interest rate swaps	$	(2,816)	$	(5,957)	$	(2,581)	$	(16,116)

	Amount of Loss Reclassified from				Amount of Loss Reclassified from
	AOCI into Operations				AOCI into Operations
	(Effective Portion)				(Effective Portion)
	Three Months Ended June 30,				Six Months Ended June 30,
Location of Loss Reclassified from AOCI into Operations	2017		2016		2017		2016
Interest expense	$	(133)	$	(367)	$	(331)	$	(743)