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Derivative Instruments and Hedging Activities
 3 Months Ended
Mar. 31, 2022
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 (loss) (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 provided by (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. To mitigate its credit risk, the Company reviews the creditworthiness of counterparties and enters into agreements with those that are considered credit-worthy, such as large financial institutions with favorable credit ratings. There were no events of default as of March 31, 2022, or as of December 31, 2021.
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 months ended March 31, 2022, and the year ended December 31, 2021, there were no termination events. The Company recorded a $0.3 million reduction in Interest expense during the three months ended March 31, 2022, and a $0.8 million reduction in Interest expense during the three months ended March 31, 2021, related to the amortization of terminated swaps.

The Company did not settle any derivatives during the three months ended March 31, 2022, or the year ended December 31, 2021.

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 $6.6 million of net loss will be reclassified to Interest expense including amounts related to the amortization of terminated swaps.

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 DateMarch 31, 2022December 31, 2021
Derivative instruments not designated as hedging instruments: (b)
Interest rate cap(c)Prepaid expenses and other assets, net$285,000 2.00 %3/12/20219/15/2023$2,577 $300 
Interest rate cap(c)Prepaid expenses and other assets, net83,200 2.00 %3/12/20219/15/2023753 87 
Interest rate capPrepaid expenses and other assets, net75,000 5.00 %8/31/202010/17/2022— — 
Interest rate cap(d)Prepaid expenses and other assets, net75,000 2.50 %10/12/20219/29/20251,862 485 
Interest rate cap(e)Prepaid expenses and other assets, net59,500 2.50 %10/12/20219/29/20251,477 385 
Derivative instruments designated as hedging instruments:
Interest rate swap(f)Accounts payable and accrued expenses$615,000 2.96 %9/21/20189/18/2023$(7,193)$(23,477)
Interest rate swap(g)Prepaid expenses and other assets, net40,800 3.43 %3/1/20222/18/2027996 — 
Interest rate swap(h)Accounts payable and accrued expenses35,479 4.89 %11/1/20191/1/2032(420)(2,975)
Total fair value derivative assets$7,665 $1,257 
Total fair value derivative liabilities(7,613)(26,452)
Total fair value derivatives, net $52 $(25,195)
(a)These rates represent the strike rate on HHC’s interest swaps and caps.
(b)Interest expense included in the Condensed Statements of Operations for the three months ended March 31, 2022, and the year ended December 31, 2021, related to these contracts was not material.
(c)Concurrent with the closing of the $368.2 million construction loan for Victoria Place in 2021, the Company entered into two new LIBOR interest rate caps.
(d)Concurrent with the closing of the $75.0 million construction loan for 1700 Pavilion in 2021, the Company entered into this interest rate cap.
(e)Concurrent with the closing of the $59.5 million construction loan for Tanager Echo in 2021, the Company entered into this interest rate cap.
(f)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. This swap covers the outstanding balance on the Term Loan in addition to other LIBOR-based debt held by the Company.
(g)Concurrent with the closing of the $40.8 million financing of Two Summerlin in the first quarter of 2022, the Company entered into this interest rate swap which is designated as a cash flow hedge.
(h)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 Condensed Consolidated Statements of Operations for the three months ended March 31, 2022, and 2021:
Amount of Gain (Loss) Recognized in AOCI on Derivatives
Derivatives in Cash Flow Hedging RelationshipsThree Months Ended March 31,
thousands20222021
Interest rate derivatives$11,742 $3,383 
 
Amount of Gain (Loss) Reclassified from AOCI into Operations
Location of Gain (Loss) Reclassified from AOCI into OperationsThree Months Ended March 31,
thousands20222021
Interest expense$(3,335)$(2,973)

Total Interest Expense Presented in the Results of Operations in which the Effects of Cash Flow Hedges are Recorded
Interest Expense Presented in Results of OperationsThree Months Ended March 31,
thousands20222021
Interest expense$27,438 $34,210 

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 $9.4 million as of March 31, 2022, and $28.5 million as of December 31, 2021. If the Company had breached any of these provisions at March 31, 2022, it could have been required to settle its obligations under the agreements at their termination value of $9.4 million.