Note 7—Derivative Instruments

From time to time, we enter into derivative instruments to manage the economic risk of changes in interest rates. We do not enter into derivative transactions for speculative or trading purposes. Designated hedges are derivatives that meet the criteria for hedge accounting and for which we have elected to designate them as hedges. Non-designated hedges are derivatives that do not meet the criteria for hedge accounting or which we did not elect to designate as accounting hedges.

Designated Hedges

We have entered into various interest rate swap agreements, which are used to hedge the variable cash flows associated with variable-rate interest payments. Certain of the Invitation Homes Partnerships and certain Borrower Entities guaranteed the obligations under each of the interest rate swaps from the date the swaps were entered into through the date of the IPO. Each of these swaps was accounted for as a non-designated hedge until January 31, 2017, when the criteria for hedge accounting were met as a result of the Pre-IPO Transactions described in Note 1. At that time, we designated these swaps for hedge accounting purposes. Subsequent to that date, changes in the fair value of these swaps are recorded in other comprehensive income and are subsequently reclassified into earnings in the period in which the hedged forecasted transactions affect earnings.

In addition, in connection with the Mergers, we acquired various interest rate swap instruments, which we designated for hedge accounting purposes. On the Merger Date, we recorded these interest rate swaps at their aggregate estimated fair value of $21,135 (see Note 15). Over the terms of each swap, an amount equal to the Merger Date fair value will be amortized and recorded as an increase in interest expense and accumulated other comprehensive income.

The table below summarizes our interest rate swap instruments as of September 30, 2018:

Agreement Date

Forward
Effective Date

Maturity
Date

Strike
Rate

Index

Notional
Amount

December 21, 2016

February 28, 2017

January 31, 2022

1.97%

One-month LIBOR

750,000

December 21, 2016

February 28, 2017

January 31, 2022

1.97%

One-month LIBOR

750,000

January 12, 2017

February 28, 2017

August 7, 2020

1.59%

One-month LIBOR

1,100,000

January 13, 2017

February 28, 2017

June 9, 2020

1.63%

One-month LIBOR

595,000

January 20, 2017

February 28, 2017

March 9, 2020

1.60%

One-month LIBOR

325,000

January 10, 2017

January 15, 2018

January 15, 2019

1.58%

One-month LIBOR

550,000

February 23, 2016

March 15, 2018

March 15, 2019

1.10%

One-month LIBOR

800,000

February 23, 2016

March 15, 2018

March 15, 2019

1.06%

One-month LIBOR

800,000

June 3, 2016

July 15, 2018

July 15, 2019

1.12%

One-month LIBOR

450,000

January 10, 2017

January 15, 2019

January 15, 2020

1.93%

One-month LIBOR

550,000

April 19, 2018

January 31, 2019

January 31, 2025

2.86%

One-month LIBOR

400,000

March 29, 2017

March 15, 2019

March 15, 2022

2.21%

One-month LIBOR

800,000

April 19, 2018

March 15, 2019

November 30, 2024

2.85%

One-month LIBOR

400,000

April 19, 2018

March 15, 2019

February 28, 2025

2.86%

One-month LIBOR

400,000

June 3, 2016

July 15, 2019

July 15, 2020

1.30%

One-month LIBOR

450,000

January 10, 2017

January 15, 2020

January 15, 2021

2.13%

One-month LIBOR

550,000

April 19, 2018

January 31, 2020

November 30, 2024

2.90%

One-month LIBOR

400,000

May 8, 2018

March 9, 2020

June 9, 2025

2.99%

One-month LIBOR

325,000

May 8, 2018

June 9, 2020

June 9, 2025

2.99%

One-month LIBOR

595,000

June 3, 2016

July 15, 2020

July 15, 2021

1.47%

One-month LIBOR

450,000

June 28, 2018

August 7, 2020

July 9, 2025

2.90%

One-month LIBOR

1,100,000

January 10, 2017

January 15, 2021

July 15, 2021

2.23%

One-month LIBOR

550,000

During the three and nine months ended September 30, 2018, such derivatives were used to hedge the variable cash flows associated with existing variable-rate interest payments. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the next 12 months, we estimate that $47,621 will be reclassified to earnings as a decrease in interest expense.

Non-Designated Hedges

Concurrent with entering into certain of the mortgage loan agreements and in connection with the Mergers, we entered into or acquired and maintain interest rate cap agreements with terms and notional amounts equivalent to the terms and amounts of the mortgage loans made by the third-party lenders. To the extent that the maturity date of one or more of the mortgage loans is extended through an exercise of one or more of the extension options, replacement or extension interest rate cap agreements must be executed with terms similar to those associated with the initial interest rate cap agreements and strike prices equal to the greater of the interest rate cap strike price and the interest rate at which the debt service coverage ratio (as defined) is not less than 1.2 to 1.0. The interest rate cap agreements, including all of our rights to payments owed by the counterparties and all other rights, have been pledged as additional collateral for the mortgage loans. Additionally, in certain instances, in order to minimize the cash impact of purchasing required interest rate caps, we simultaneously sold interest rate caps (which have identical terms and notional amounts) such that the purchase price and sale proceeds of the related interest rate caps are intended to offset each other. The purchased and sold interest rates caps have strike prices ranging from approximately 3.00% to 3.95%.

Tabular Disclosure of Fair Values of Derivative Instruments on the Condensed Consolidated Balance Sheets

The table below presents the fair value of our derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017:



	Asset Derivatives					Liability Derivatives
		Fair Value as of					Fair Value as of
	Balance Sheet Location	September 30, 2018		December 31, 2017		Balance Sheet Location	September 30, 2018		December 31, 2017
Derivatives designated as hedging instruments:
Interest rate swaps	Other assets	$	155,287	$	57,612	Other liabilities	$	184	$	—

Derivatives not designated as hedging instruments:
Interest rate caps	Other assets	2,105		27		Other liabilities	1,912		—
Total		$	157,392	$	57,639		$	2,096	$	—

Offsetting Derivatives

The Company enters into master netting arrangements, which reduce risk by permitting net settlement of transactions with the same counterparty. The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of September 30, 2018. As of December 31, 2017, there were no derivatives classified as liabilities.



	As of September 30, 2018
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Assets/ Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets/ Liabilities Presented in the Statement of Financial Position		Financial Instruments			Cash Collateral Received		Net Amount
Offsetting assets:
Derivatives	$	157,392	$	—	$	157,392	$	(2,096	)	$	—	$	155,296
Offsetting liabilities:
Derivatives	$	2,096	$	—	$	2,096	$	(2,096	)	$	—	$	—

Tabular Disclosure of the Effect of Derivative Instruments on the Condensed Consolidated Statements of Operations

The tables below present the effect of our derivative financial instruments in the condensed consolidated statements of operations for the three months ended September 30, 2018 and 2017:



	Amount of Gain (Loss) Recognized in OCI on Derivative					Location of Gain (Loss) Reclassified from Accumulated OCI into Net Income (Loss)	Amount of Gain (Loss) Reclassified from Accumulated OCI into Net Income (Loss)					Total Amount of Interest Expense Presented in the Condensed Consolidated Statements of Operations
	Three Months Ended September 30,						Three Months Ended September 30,					Three Months Ended September 30,
	2018		2017				2018		2017			2018		2017
Derivatives in cash flow hedging relationships:
Interest rate swaps	$	39,488	$	(598	)	Interest expense	$	5,982	$	(4,193	)	$	97,564	$	56,796



	Location of Gain (Loss) Recognized in Net Loss on Derivative	Amount of Loss Recognized in Net Income (Loss) on Derivative
		Three Months Ended September 30,
		2018			2017
Derivatives not designated as hedging instruments:
Interest rate swaps	Interest expense	$	—		$	—
Interest rate caps	Interest expense	(10		)	(190		)
Total		$	(10	)	$	(190	)

The tables below present the effect of our derivative financial instruments in the condensed consolidated statements of operations for the nine months ended September 30, 2018 and 2017:



	Amount of Gain (Loss) Recognized in OCI on Derivative					Location of Gain (Loss) Reclassified from Accumulated OCI into Net Loss	Amount of Gain (Loss) Reclassified from Accumulated OCI into Net Loss					Total Amount of Interest Expense Presented in the Condensed Consolidated Statements of Operations
	For the Nine Months Ended September 30,						For the Nine Months Ended September 30,					For the Nine Months Ended September 30,
	2018		2017				2018		2017			2018		2017
Derivatives in cash flow hedging relationships:
Interest rate swaps	$	115,214	$	(4,796	)	Interest expense	$	9,307	$	(12,963	)	$	287,089	$	182,726



	Location of Gain (Loss) Recognized in Net Loss on Derivative	Amount of Loss Recognized in Net Loss on Derivative
		For the Nine Months Ended September 30,
		2018			2017
Derivatives not designated as hedging instruments:
Interest rate swaps	Interest expense	$	—		$	(3,674	)
Interest rate caps	Interest expense	(355		)	(318		)
Total		$	(355	)	$	(3,992	)

Credit-Risk-Related Contingent Features

We have agreements with certain of our derivative counterparties for our interest rate swap agreements that contain a provision where we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness.

As of September 30, 2018, there were no derivative counterparties with whom we were in a net liability position. As of December 31, 2017, we had posted collateral amounting to $15,120 related to certain of these agreements (see Note 4). As of September 30, 2018, no collateral deposits were required related for our interest rate swap agreements.