DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

6 Months Ended

Jun. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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, in exchange for an up-front premium. 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 on the balance sheet.

Assessments of hedge effectiveness are performed quarterly using regression analysis. 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.

The Company 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 June 30, 2019 and December 31, 2018, there was one termination event and four termination events, respectively, as discussed below. There were no events of default as of June 30, 2019 and December 31, 2018.

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 six months ended June 30, 2019, the Company recorded a $0.9 million and $2.0 million reduction in Interest expense, respectively, related to the amortization of terminated swaps.

During the six months ended June 30, 2019, the Company settled one interest rate cap agreement with a notional amount of $230.0 million and received payment of $0.2 million. During the year ended December 31, 2018, the Company settled four interest rate swap agreements with notional amounts of $18.9 million, $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 $15.8 million, net of a termination fee of $0.3 million. The Company has deferred the effective portion of the fair value changes of three interest rate swap agreements in Accumulated other comprehensive loss on the accompanying Condensed Consolidated Balance Sheets and will recognize the impact as a component of Interest expense, net, over the next 8.5, 2.2 and 0.8 years, which are what remain of 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 $3.6 million of net loss will be reclassified to Interest expense.

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



					Fixed				Fair Value Asset (Liability)
			Notional		Interest		Effective	Maturity	June 30,			December 31,
(In thousands)		Balance Sheet Location	Amount		Rate (a)		Date	Date	2019			2018
Derivative instruments not designated as hedging instruments:
Interest rate cap	(b)	Prepaid expenses and other assets, net	$	75,000	5.00	%	9/1/2017	8/31/2019	$	—		$	—
Interest rate cap	(b) (c)	Prepaid expenses and other assets, net	230,000		2.50	%	12/22/2016	12/23/2019	—			333
Derivative instruments designated as hedging instruments:
Interest rate collar	(d) (e)	Prepaid expenses and other assets, net	51,592		1.50% - 2.50%		7/1/2018	5/1/2019	—			13
Interest rate collar	(d)	Accounts payable and accrued expenses	193,967		2.00% - 3.00%		5/1/2019	5/1/2020	(276		)	(37		)
Interest rate collar	(d)	Accounts payable and accrued expenses	354,217		2.25% - 3.25%		5/1/2020	5/1/2021	(2,275		)	(730		)
Interest rate collar	(d)	Accounts payable and accrued expenses	381,404		2.75% - 3.50%		5/1/2021	4/30/2022	(4,415		)	(1,969		)
Interest rate swap	(f)	Accounts payable and accrued expenses	615,000		2.96	%	9/21/2018	9/18/2023	(32,206		)	(13,781		)
Interest rate swap	(g)	Accounts payable and accrued expenses	1,810		4.89	%	11/1/2019	1/1/2032	(1,676		)	—
Total fair value derivative assets									$	—		$	346
Total fair value derivative liabilities									$	(40,848	)	$	(16,517	)


(a)	These rates represent the strike rate on HHC's interest swaps, caps and collars.


(b)	There was no interest income included in the Condensed Consolidated Statements of Operations for the three months ended June 30, 2019 related to these contracts. Interest income of $0.2 million is included in the Condensed Consolidated Statements of Operations for the six months ended June 30, 2019 and the year ended December 31, 2018 related to these contracts.


(c)	The Company settled this Interest rate cap on February 1, 2019.


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


(e)	On May 1, 2019, the $51.6 million interest rate collar matured as scheduled.


(f)	Concurrent with the funding of the $615.0 million term loan on September 21, 2018, the Company entered into this interest rate swap which is designated as a cash flow hedge.


(g)	Concurrent with the closing of the $35.5 million construction loan for 8770 New Trails on June 27, 2019, 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 six months ended June 30, 2019 and 2018 (in thousands):



	Amount of (Loss) Gain Recognized					Amount of (Loss) Gain Recognized
	in AOCI on Derivative					in AOCI on Derivative
	Three Months Ended June 30,					Six Months Ended June 30,
Derivatives in Cash Flow Hedging Relationships	2019			2018		2019			2018
Interest rate derivatives	$	(13,016	)	$	6,005	$	(18,832	)	$	14,266



	Amount of Gain Reclassified				Amount of Gain Reclassified
	from AOCI into Operations				from AOCI into Operations
	Three Months Ended June 30,				Six Months Ended June 30,
Location of Gain Reclassified from AOCI into Operations	2019		2018		2019		2018
Interest expense	$	92	$	652	$	220	$	868



	Total Interest Expense Presented				Total Interest Expense Presented
	in the Results of Operations in which the				in the Results of Operations in which the
	Effects of Cash Flow Hedges are Recorded				Effects of Cash Flow Hedges are Recorded
	Three Months Ended June 30,				Six Months Ended June 30,
Interest Expense Presented in Results of Operations	2019		2018		2019		2018
Interest expense	$	24,203	$	18,903	$	47,529	$	35,512

Credit-risk-related Contingent Features

The Company has agreements with certain derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company also has agreements with certain derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness.

As of June 30, 2019 and December 31, 2018, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $43.8 million and $18.2 million, respectively. As of June 30, 2019, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at June 30, 2019, it could have been required to settle its obligations under the agreements at their termination value of $43.8 million.