Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its affiliates may also have other financial relationships. The Company does not anticipate that any of the counterparties will fail to meet their obligations.

As of March 31, 2018 and December 31, 2017, the Company had no interest rate derivatives that were designated as cash flow hedges of interest rate risk. As of March 31, 2018 and December 31, 2017, the Company had the following outstanding interest rate derivatives that were not designated as qualifying hedging relationships (dollar amounts in thousands):



Interest Rate Swap	March 31, 2018		December 31, 2017
Number of Instruments	2		2
Notional Amount	$	78,573	$	78,949

The table below presents the fair value of the Company’s derivative financial instruments not designated as a hedge as well as their classification in the consolidated balance sheets as of March 31, 2018 and December 31, 2017 (in thousands):



Derivatives Not Designated as Hedging Instruments	Balance Sheet Location	March 31, 2018		December 31, 2017
Interest rate swaps	Rent and tenant receivables and other assets, net	$	848	$	627

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the requirements to be classified as hedging instruments. A gain of $0.3 million for the three months ended March 31, 2018 related to the change in the fair value of derivatives not designated as hedging instruments was recorded in gain (loss) on derivative instruments, net in the accompanying consolidated statements of operations. The Company recorded a gain of $0.1 million for the three months ended March 31, 2017. During the three months ended March 31, 2017, the Company had interest rate derivatives that were designated as cash flow hedges of interest rate risk and recorded a gain of $0.7 million in earnings related to the ineffective portion of the change in fair value of these derivatives, which is included in gain (loss) on derivative instruments, net in the accompanying consolidated statement of operations.

Tabular Disclosure of Offsetting Derivatives

The table below details a gross presentation, the effects of offsetting and a net presentation of the Company’s derivatives as of March 31, 2018 and December 31, 2017 (in thousands). The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value.



	Offsetting of Derivative Assets and Liabilities
	Gross Amounts of Recognized Assets		Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Assets Presented in the Consolidated Balance Sheets		Net Amounts of Liabilities Presented in the Consolidated Balance Sheets		Financial Instruments		Cash Collateral Received		Net Amount
March 31, 2018	$	848	$	—	$	—	$	848	$	—	$	—	$	—	$	848
December 31, 2017	$	627	$	—	$	—	$	627	$	—	$	—	$	—	$	627

Credit Risk Related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision specifying that if the Company either defaults or is capable of being declared in default on any of its indebtedness, the Company could also be declared in default on its derivative obligations.

Effect of hedge accounting on the Condensed Consolidated Statements of Income

As discussed in Note 2 – Summary of Significant Accounting Policies, ASU 2017-12, all changes in the fair value of highly effective cash flow hedges will be recorded in accumulated other comprehensive income rather than separately recognizing any ineffective portion directly in earnings. The following table summarizes the gains and (losses) from hedging activities recognized in the accompanying consolidated statements of operations for the three months ended March 31, 2018 and 2017 (in thousands):



	Three Months Ended March 31,
	2018		2017
Reclassification of previous unrealized loss on interest rate derivatives into net income	$	105	$	470
Total interest expense presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded	$	70,425	$	73,743

Amount of gain recognized in income on cash flow hedges	$	273	$	824