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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 3 Months Ended
Mar. 31, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES 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. The Company uses interest rate swaps, collars and caps to add stability to interest costs by reducing the Company’s exposure to interest rate movements. 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 cap is not currently designated as a hedge, and therefore, any gain or loss is recognized in current-period earnings. This derivative is 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. Derivatives accounted for as cash flow hedges are classified in the same category in the Condensed Consolidated Statements of Cash Flows as the items being hedged. Gains and losses from derivative financial instruments are reported in Cash used in operating activities within the Condensed Consolidated Statements of Cash Flows.

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 March 31, 2020, and December 31, 2019, there were no events of default.
 
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. As of March 31, 2020, there were no termination events, and as of December 31, 2019, there was one termination event, as discussed below. During the three months ended March 31, 2020, the Company recorded a $0.9 million reduction in Interest expense, related to the amortization of terminated swaps.

During the three months ended March 31, 2020, the Company did not settle any derivatives. During the year ended December 31, 2019, the Company settled one interest rate cap agreement with a notional amount of $230.0 million and received payment of $0.2 million. The Company has deferred the effective portion of the fair value changes of three previously settled 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 over the next 7.8, 1.5 and 0.1 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 $19.6 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
 
March 31,
 
December 31,
(In thousands)
 
 
 
Balance Sheet Location
 
Amount
 
Rate (a)
 
Date
 
Date
 
2020
 
2019
Derivative instruments not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate cap
 
(b)
 
Prepaid expenses and other assets, net
 
$
230,000

 
2.50
%
 
12/22/2016
 
12/23/2019
 
$
—

 
$
—

Interest rate cap
 
(c)
 
Prepaid expenses and other assets, net
 
75,000

 
5.00
%
 
8/31/2019
 
8/31/2020
 
—

 
—

Derivative instruments designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate collar
 
(d)
 
Accounts payable and accrued expenses
 
193,967

 
2.00% - 3.00%

 
5/1/2019
 
5/1/2020
 
(164
)
 
(182
)
Interest rate collar
 
(d)
 
Accounts payable and accrued expenses
 
354,217

 
2.25% - 3.25%

 
5/1/2020
 
5/1/2021
 
(5,791
)
 
(2,074
)
Interest rate collar
 
(d)
 
Accounts payable and accrued expenses
 
381,404

 
2.75% - 3.50%

 
5/1/2021
 
4/30/2022
 
(9,182
)
 
(4,578
)
Interest rate swap
 
(e)
 
Accounts payable and accrued expenses
 
615,000

 
2.96
%
 
9/21/2018
 
9/18/2023
 
(55,955
)
 
(31,187
)
Interest rate swap
 
(f)
 
Accounts payable and accrued expenses
 
1,810

 
4.89
%
 
11/1/2019
 
1/1/2032
 
(6,271
)
 
(2,114
)
Total fair value derivative liabilities
 
 
 
 
 
 
 
 
 
$
(77,363
)
 
$
(40,135
)
 
(a)
These rates represent the strike rate on HHC’s interest swaps, caps and collars.
(b)
The Company settled this Interest rate cap on February 1, 2019. Interest income of $0.2 million is included in the Condensed Consolidated Statements of Operations for the year ended December 31, 2019, related to this contract.
(c)
On August 30, 2019, the Company executed an agreement to extend the maturing position of this cap. Interest income included in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2020, and the year ended December 31, 2019, related to this contract was not meaningful.
(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)
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.
(f)
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 months ended March 31, 2020, and 2019 (in thousands):
 
 
Amount of Loss Recognized
 
 
in AOCI on Derivative
 
 
Three Months Ended March 31,
Derivatives in Cash Flow Hedging Relationships
 
2020
 
2019
Interest rate derivatives
   
$
(31,340
)
 
$
(5,816
)
 
 
 
Amount of (Loss) Gain Reclassified
 
 
from AOCI into Operations
 
 
Three Months Ended March 31,
Location of (Loss) Gain Reclassified from AOCI into Operations
 
2020
 
2019
Interest expense
   
$
(1,093
)
 
$
128


 
 
Total Interest Expense Presented
 
 
in the Results of Operations in which the
 
 
Effects of Cash Flow Hedges are Recorded
 
 
Three Months Ended March 31,
Interest Expense Presented in Results of Operations
 
2020
 
2019
Interest expense
 
$
34,448

 
$
23,326



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 March 31, 2020, and December 31, 2019, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for non-performance risk, related to these agreements was $79.9 million and $41.6 million, respectively. As of March 31, 2020, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at March 31, 2020, it could have been required to settle its obligations under the agreements at their termination value of $79.9 million.