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Derivative Instruments and Hedging Activities
 6 Months Ended
Jun. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities
8. 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 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 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 gains or losses are 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 Condensed Consolidated Statements of Cash Flows as the items being hedged. Gains and losses from derivative financial instruments are reported in Cash (used in) provided by 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 creditworthy, such as large financial institutions with favorable credit ratings. There were no events of default as of June 30, 2021, or as of December 31, 2020.

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 six months ended June 30, 2021, and the year ended December 31, 2020, there were no termination events. The Company recorded a $0.8 million reduction in Interest expense during the three months ended June 30, 2021 and a $1.5 million reduction in Interest expense during the six months ended June 30, 2021, related to the amortization of terminated swaps.

The Company did not settle any derivatives during the six months ended June 30, 2021 or the year ended December 31, 2020.

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, the Company estimates that an additional $16.9 million of net loss will be reclassified to Interest expense.

The following table summarizes certain terms of the Company’s derivative contracts:
      Fair Value Asset (Liability)
thousands Balance Sheet LocationNotional AmountFixed Interest Rate (a)Effective DateMaturity DateJune 30, 2021December 31, 2020
Derivative instruments not designated as hedging instruments:
Interest rate cap(b)Prepaid expenses and other assets, net285,000 2.00 %3/12/20219/15/2023$126 $— 
Interest rate cap(b)Prepaid expenses and other assets, net83,200 2.00 %3/12/20219/15/202338 — 
Interest rate cap(c)Prepaid expenses and other assets, net75,000 5.00 %8/31/202010/17/2022— — 
Total fair value derivative assets164 — 
Derivative instruments designated as hedging instruments:
Interest rate swap(d)Accounts payable and accrued expenses615,000 2.96 %9/21/20189/18/2023(36,219)(46,613)
Interest rate swap(e)Accounts payable and accrued expenses35,487 4.89 %11/1/20191/1/2032(3,608)(5,307)
Total fair value derivative liabilities(39,827)(51,920)
Total fair value derivatives, net $(39,663)$(51,920)
(a)These rates represent the strike rate on HHC’s interest swaps and caps.
(b)In March 2021, the Company entered into two new interest rate caps, which are not designated as hedging instruments. Interest expense included in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021, related to these contracts was not material.
(c)In the third quarter of 2020, the Company executed an agreement to extend the maturing position of this cap. Interest expense included in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021, and the year ended December 31, 2020, related to this contract was not material.
(d)Concurrent with the funding of the $615.0 million term loan in September 2018, the Company entered into this interest rate swap which is designated as a cash flow hedge.
(e)Concurrent with the closing of the $35.5 million construction loan for 8770 New Trails in June 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, 2021, and 2020:
Derivatives in Cash Flow Hedging RelationshipsAmount of Gain (Loss) Recognized in AOCI on Derivatives
Three Months Ended June 30,Six Months Ended June 30,
thousands2021202020212020
Interest rate derivatives$(1,136)$(4,197)$2,247 $(36,248)
 
Location of Gain (Loss) Reclassified from AOCI into OperationsAmount of Gain (Loss) Reclassified from AOCI into Operations
Three Months Ended June 30,Six Months Ended June 30,
thousands2021202020212020
Interest expense$(3,041)$(3,359)$(6,014)$(4,509)

Interest Expense Presented in Results of OperationsTotal Interest Expense Presented in the Results of Operations in which the Effects of Cash Flow Hedges are Recorded
Three Months Ended June 30,Six Months Ended June 30,
thousands2021202020212020
Interest expense$31,439 $32,397 $65,649 $66,845 

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 $50.0 million as of June 30, 2021, and $54.6 million as of December 31, 2020. If the Company had breached any of these provisions at June 30, 2021, it could have been required to settle its obligations under the agreements at their termination value of $50.0 million.