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, collars 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 collars designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above an established ceiling rate and payment of variable amounts to a counterparty if interest rates fall below an established floor rate. No payments or receipts are exchanged on interest rate collar contracts unless interest rates rise above or fall below the established ceiling and floor rates. 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 and nine months ended September 30, 2017, the ineffective portion recorded was insignificant. As discussed in Note 2 - Accounting Policies and Pronouncements, the Company reclassified ineffectiveness recorded in 2017 and prior 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 September 30, 2018, there were four termination events and no events of default related to the interest rate swaps. There were no termination events or events of default in the year ended December 31, 2017.

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 in accordance with the original strategy, any related amounts previously recorded in AOCI are recognized in earnings immediately. During the three and nine months ended September 30, 2018, the Company recorded $0.2 million and $0.5 million in Other (loss) income, net, respectively, related to missed forecasts and the amortization of terminated swaps.

During the nine months ended September 30, 2018, the Company settled three interest rate swap agreements with notional amounts of $250.0 million, $40.0 million and $119.4 million, all designated as cash flow hedges of interest rate variability, and received total payments of $16.1 million. The Company has deferred the effective portion of the fair value changes of these interest rate swap agreements in Accumulated other comprehensive income (loss) on the accompanying Condensed Consolidated Balance Sheets and will recognize the impact as a component of interest expense, net, over the next 9.5, 1.6 and 3.0 years, respectively, which are the original forecasted periods. .

Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable‑rate debt. Over the next 12 months, HHC estimates that an additional $1.4 million of net gains will be reclassified to interest expense.

The following table summarizes certain terms of the Company's derivative contracts:



									Fair Value Asset (Liability)
					Fixed Interest		Effective	Maturity	September 30,			December 31,
(In thousands)		Balance Sheet Location	Notional		Rate		Date	Date	2018			2017
Interest Rate Swap	(a)	Accounts payable and accrued expenses	$	18,926	2.96	%	5/10/2011	10/31/2019	$	—		$	(286	)
Interest Rate Swap	(b) (e)	Prepaid expenses and other assets, net	40,000		1.66	%	5/6/2015	5/1/2020	—			299
Interest Rate Swap	(b) (e)	Prepaid expenses and other assets, net	119,359		1.14	%	10/3/2016	9/12/2021	—			4,007
Interest Rate Cap	(c)	Prepaid expenses and other assets, net	75,000		5.00	%	9/1/2017	8/31/2019	—			—
Interest Rate Cap	(d)	Prepaid expenses and other assets, net	230,000		2.50	%	12/22/2016	12/23/2019	751			164
Interest Rate Swap	(e) (f)	Prepaid expenses and other assets, net	50,000		2.65	%	12/31/2017	12/31/2027	—			(1,124		)
Interest Rate Swap	(e) (f)	Prepaid expenses and other assets, net	100,000		2.68	%	12/31/2017	12/31/2027	—			(2,509		)
Interest Rate Swap	(e) (f)	Prepaid expenses and other assets, net	100,000		2.62	%	12/31/2017	12/31/2027	—			(2,042		)
Interest Rate Collar	(e) (g)	Prepaid expenses and other assets, net	51,592		1.50% - 2.50%		7/1/2018	5/1/2019	26			—
Interest Rate Collar	(e) (g)	Prepaid expenses and other assets, net	193,967		2.00% - 3.00%		5/1/2019	5/1/2020	168			—
Interest Rate Collar	(e) (g)	Prepaid expenses and other assets, net	354,217		2.25% - 3.25%		5/1/2020	5/1/2021	343			—
Interest Rate Collar	(e) (g)	Accounts payable and accrued expenses	381,404		2.75% - 3.50%		5/1/2021	4/30/2022	(394		)	—
Interest Rate Swap	(e) (h)	Accounts payable and accrued expenses	615,000		2.96	%	9/21/2018	9/18/2023	(1,355		)	—
Total fair value derivative assets									$	1,288		$	4,470
Total fair value derivative liabilities									$	(1,749	)	$	(5,961	)


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


(b)	On September 21, 2018, the Company settled $40.0 million and $119.4 million, respectively, in interest rate swaps.


(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 and nine months ended September 30, 2018 related to this contract is not meaningful.


(d)	Denotes a derivative contract that is not currently designated as a hedging instrument. Interest (income) expense of $0.1 million and $0.6 million is included in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018, respectively, related to this contract.


(e)	Denotes derivatives designated as hedging instruments.


(f)	On May 17, 2018, the Company settled $250.0 million in forward starting swaps.


(g)	On May 17, 2018 and May 18, 2018, the Company entered into interest rate collars which are designated as cash flow hedges.


(h)	Concurrent with the funding of the new $615.0 million term loan discussed in Note 7 - Mortgages, Notes and Loans Payable, on September 21, 2018, the Company entered into this interest rate swap which is designated as a cash flow hedge.

The tables below present the effect of the Company's derivative financial instruments on the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017 (in thousands):



	Amount of Gain (Loss) Recognized					Amount of Gain (Loss) Recognized
	in AOCI on Derivative					in AOCI on Derivative
	Three Months Ended September 30,					Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationships	2018		2017			2018		2017
Interest rate swaps	$	28	$	(7	)	$	14,293	$	(272	)
Forward starting swaps	—		—			—		(2,316		)



	Amount of Gain (Loss) Reclassified from					Amount of Gain (Loss) Reclassified from
	AOCI into Operations					AOCI into Operations
	Three Months Ended September 30,					Nine Months Ended September 30,
Location of Loss Reclassified from AOCI into Operations	2018		2017			2018		2017
Interest expense	$	394	$	(68	)	$	1,262	$	(399	)



	Total Interest Expense Presented				Total Interest Expense Presented
	in the Results of Operations in which				in the Results of Operations in which
	the Effects of Cash Flow Hedges are Recorded				the Effects of Cash Flow Hedges are Recorded
	Three Months Ended September 30,				Nine Months Ended September 30,
Interest Expense Presented in Results of Operations	2018		2017		2018		2017
Interest expense	$	21,670	$	17,241	$	57,182	$	49,547