DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to interest rate risk related to its variable interest rate debt, and it manages this risk by utilizing interest rate derivatives. To add stability to interest costs by reducing the Company's exposure to interest rate movements, the Company uses interest rate swaps and caps as part of its 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 the Company's fixed‑rate payments over the life of the agreements without exchange of the underlying notional amount. 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 Company's interest rate caps are not currently designated as hedges, and therefore, any gain or loss is recognized in current period earnings. These derivatives are recorded on a gross basis at fair value.

The change 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 within the same income statement line item being hedged. During the three months ended March 31, 2017, the ineffective portion recorded in Other income, net was $0.7 million. As discussed in Note 2 - Accounting Policies and Pronouncements, the Company reclassified this ineffectiveness to Accumulated deficit as of January 1, 2018, upon adoption of ASU 2017-12.

Assessments of hedge effectiveness are performed quarterly using regression analysis. HHC is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company evaluates counterparty credit risk through monitoring the creditworthiness of counterparties, which includes review of debt ratings and financial performance. To mitigate its credit risk, the Company enters into agreements with counterparties that are considered credit-worthy, such as large financial institutions with favorable credit ratings. As of March 31, 2018 and 2017, 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 certain terms of the Company's derivative contracts:



					Fixed				Fair Value Asset (Liability)
					Interest		Effective	Maturity	March 31,		December 31,
(In thousands)		Balance Sheet Location	Notional		Rate		Date	Date	2018		2017
Currently-paying contracts:
Interest Rate Swap	(a)	Accounts payable and accrued expenses	$	18,926	2.96	%	5/10/2011	10/31/2019	$	—	$	(286	)
Interest Rate Swap	(b)	Prepaid expenses and other assets, net	40,000		1.66	%	5/6/2015	5/1/2020	571		299
Interest Rate Swap	(b)	Prepaid expenses and other assets, net	119,359		1.14	%	10/3/2016	9/12/2021	5,313		4,007
Interest Rate Cap	(c)	Prepaid expenses and other assets, net	75,000		5.00	%	9/1/2017	8/31/2019	6		—
Interest Rate Cap	(d)	Prepaid expenses and other assets, net	230,000		2.50	%	12/22/2016	12/23/2019	469		164
Interest Rate Swap	(b)	Prepaid expenses and other assets, net	50,000		2.65	%	12/31/2017	12/31/2027	541		(1,124		)
Interest Rate Swap	(b)	Prepaid expenses and other assets, net	100,000		2.68	%	12/31/2017	12/31/2027	830		(2,509		)
Interest Rate Swap	(b)	Prepaid expenses and other assets, net	100,000		2.62	%	12/31/2017	12/31/2027	1,281		(2,042		)
Total fair value derivative assets									$	9,011	$	4,470
Total fair value derivative liabilities									$	—	$	(5,961	)


(a)	On January 19, 2018 HHC repaid in full the $18.9 million mortgage loan for 110 North Wacker and settled the related swap liability of $0.3 million.


(b)	Denotes derivatives designated as hedging instruments.


(c)	Denotes a derivative contract that is not currently designated as a hedging instrument. Interest (income) expense included in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 related to this contract is not material.


(d)	Denotes a derivative contract that is not currently designated as a hedging instrument. Interest (income) expense of 0.3 million is included in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 related to this contract.

The tables below present the effect of the Company's derivative financial instruments on the Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017:



	Amount of Loss Recognized
	in AOCI on Derivative
(In thousands)	Three Months Ended
Derivatives in Cash Flow Hedging Relationships	2018		2017
Interest rate swaps	$	8,261	$	235



	Amount of Loss Reclassified from
	AOCI into Operations
(In thousands)	Three Months Ended March 31,
Location of Loss Reclassified from AOCI into Operations	2018			2017
Interest expense	$	(216	)	$	198



	Total Interest Expense Presented
	in the Results of Operations in which
	the Effects of Cash Flow Hedges are Recorded
(In thousands)	Three Months Ended March 31,
Interest Expense Presented in Results of Operations	2018		2017
Interest expense	$	16,609	$	17,858