DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

12 Months Ended

Dec. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

9. 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. 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. Derivatives accounted for as cash flow hedges are classified in the same category in the Consolidated Statements of Cash Flows as the items being hedged. Gains and losses from derivative financial instruments are reported in Cash provided by (used in) operating activities within the 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. There were no events of default as of December 31, 2020 and 2019.

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 year ended December 31, 2020, there were no termination events, and during the year ended December 31, 2019, there was one termination event, as discussed below. During the year ended December 31, 2020, the Company recorded $3.2 million reduction in Interest expense related to the amortization of terminated swaps. The Company has deferred the effective portion of the fair value changes of two interest rate swap agreements in Accumulated other comprehensive loss on the accompanying Consolidated Balance Sheets and will recognize the impact as a component of Interest expense over the next 7.0 and 0.7 years, which are what remain of the original forecasted periods.

During the year ended December 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, recorded interest income of $0.2 million and received payment of $0.2 million.

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 $25.1 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	December 31,		December 31,
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	75,000	5.00%	8/31/2020	10/17/2022	$	—	$	—
Total fair value derivative assets							—		—
Derivative instruments designated as hedging instruments:
Interest rate collar	(c)	Accounts payable and accrued expenses	193,967	2.00% - 3.00%	5/1/2019	5/1/2020	—		(182)
Interest rate collar	(d)	Accounts payable and accrued expenses	354,217	2.25% - 3.25%	5/1/2020	5/1/2021	—		(2,074)
Interest rate collar	(d)	Accounts payable and accrued expenses	381,404	2.75% - 3.50%	5/1/2021	4/30/2022	—		(4,578)
Interest rate swap	(e)	Accounts payable and accrued expenses	615,000	2.96%	9/21/2018	9/18/2023	(46,613)		(31,187)
Interest rate swap	(f)	Accounts payable and accrued expenses	34,918	4.89%	11/1/2019	1/1/2032	(5,307)		(2,114)
Total fair value derivative liabilities							(51,920)		(40,135)
Total fair value derivatives, net							$	(51,920)	$	(40,135)

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

(b)In the third quarter of 2020, the Company executed an agreement to extend the maturing position of this cap. Interest income included in the Consolidated Statements of Operations for the years ended December 31, 2020 and 2019, related to this contract was not meaningful.

(c)On May 1, 2020, the $194.0 million interest rate collar matured as scheduled.

(d)As of September 30, 2020, the Company deconsolidated 110 North Wacker including the associated liabilities related to its interest rate collars. Refer to Note 3 - Real Estate and Other Affiliates for additional information.

(e)Concurrent with the funding of the new $615.0 million Term Loan in 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 in 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 Consolidated Statements of Operations for the years ended December 31:

	Amount of Gain (Loss) Recognized in AOCI on Derivatives
thousands	December 31,
Derivatives in Cash Flow Hedging Relationships	2020		2019		2018
Interest rate derivatives	$	(32,134)	$	(19,245)	$	2,090

	Amount of Gain (Loss) Reclassified from AOCI into Operations
thousands	December 31,
Location of Gain (Loss) Reclassified from AOCI into Operations	2020		2019		2018
Interest expense	$	(9,064)	$	1,939	$	2,153

	Total Interest Expense Presented in the Results of Operations in which the Effects of Cash Flow Hedges are Recorded
thousands	December 31,
Interest Expense Presented in Results of Operations	2020		2019		2018
Interest expense	$	132,257	$	105,374	$	82,028

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.

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 $54.6 million as of December 31, 2020, and $41.6 million as of December 31, 2019. If the Company had breached any of these provisions at December 31, 2020, it could have been required to settle its obligations under the agreements at their termination value of $54.6 million.