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Derivative Instruments and Hedging Activities
 9 Months Ended
Sep. 30, 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 within Interest expense in the Company’s Condensed Consolidated Statements of Operations. 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 derivative counterparty defaults as of September 30, 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 nine months ended September 30, 2022, and the year ended December 31, 2021, there were no termination events. The Company recorded an immaterial reduction in Interest expense in 2021 and 2022 related to the amortization of previously terminated swaps.

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 $10.6 million of net gain 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. The Company reports derivative assets in Prepaid expenses and other assets, net and derivative liabilities in Accounts payable and accrued expenses.
     Fair Value Asset (Liability)
thousands Notional AmountFixed Interest Rate (a)Effective DateMaturity DateSeptember 30, 2022December 31, 2021
Derivative instruments not designated as hedging instruments: (b)
Interest rate cap(c)$285,000 2.00 %3/12/20219/15/2023$6,268 $300 
Interest rate cap(c)83,200 2.00 %3/12/20219/15/20231,830 87 
Interest rate cap75,000 5.00 %8/31/202010/17/2022— — 
Interest rate cap(d)75,000 2.50 %10/12/20219/29/20253,881 485 
Interest rate cap(e)59,500 2.50 %10/12/20219/29/20253,079 385 
Derivative instruments designated as hedging instruments:
Interest rate swap(f)$615,000 2.96 %9/21/20189/18/2023$8,008 $(23,477)
Interest rate swap(g)40,800 1.68 %3/1/20222/18/20273,489 — 
Interest rate swap(h)35,404 4.89 %11/1/20191/1/20323,157 (2,975)
Total fair value derivative assets$29,712 $1,257 
Total fair value derivative liabilities— (26,452)
Total fair value derivative asset (liability), net $29,712 $(25,195)
(a)These rates represent the swap rate and cap strike rate on HHC’s interest swaps and caps.
(b)Interest income related to these contracts was $5.6 million for the three months ended September 30, 2022, $13.8 million for the nine months ended September 30, 2022, and was not material in 2021.
(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 and nine months ended September 30, 2022 and 2021:
Amount of Gain (Loss) Recognized in AOCI on Derivatives
Derivatives in Cash Flow Hedging RelationshipsThree Months Ended September 30,Nine Months Ended September 30,
thousands2022202120222021
Interest rate derivatives$6,794 $(201)$24,355 $2,046 
 
Location of Gain (Loss) Reclassified from AOCI into OperationsAmount of Gain (Loss) Reclassified from AOCI into Operations
Three Months Ended September 30,Nine Months Ended September 30,
thousands2022202120222021
Interest expense$(728)$(3,172)$(6,709)$(9,186)

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. None of the Company’s derivatives which contain credit-risk-related features were in a net liability position as of September 30, 2022.