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Derivative Instruments and Hedging Activities
6 Months Ended
Jun. 30, 2024
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, collars, 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 collars designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above an established ceiling rate and payment of variable amounts to a counterparty if interest rates fall below an established floor rate, in exchange for an upfront premium. No payments or receipts are exchanged on interest rate collar contracts unless interest rates rise above or fall below the established ceiling and floor rates. 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 upfront premium. Certain of 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 on the 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 June 30, 2024, or as of December 31, 2023.

If the derivative contracts are terminated prior to their maturity, the amounts previously recorded in AOCI are recognized in earnings over the period that the hedged transaction impacts earnings. The Company recorded an immaterial reduction in interest expense in 2023 and 2024 related to the amortization of 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 $4.4 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 Other assets, net and derivative liabilities in Accounts payable and other liabilities.
     Fair Value Asset (Liability)
thousands Notional AmountFixed Interest Rate (a)Effective DateMaturity DateJune 30, 2024December 31, 2023
Derivative instruments not designated as hedging instruments: (b)
Interest rate cap75,000 2.50 %10/12/20219/29/2025$2,111 $2,274 
Interest rate cap59,500 2.50 %10/12/20219/29/20251,675 1,804 
Interest rate collar57,732 
2.00% - 4.50%
6/1/20236/1/2025844 417 
Interest rate collar106,903 
2.00% - 4.50%
6/1/20236/1/2025936 440 
Interest rate cap40,500 6.00 %6/20/20247/15/202680 — 
Interest rate cap4,500 6.00 %6/20/20247/15/202610 — 
Derivative instruments designated as hedging instruments:
Interest rate swap (c)175,000 3.69 %1/3/20231/1/20272,735 117 
Interest rate cap127,000 5.50 %11/10/202211/7/20247 28 
Interest rate cap73,680 5.00 %12/22/202212/21/2025201 223 
Interest rate swap40,800 1.68 %3/1/20222/18/20272,754 2,496 
Interest rate swap34,632 4.89 %11/1/20191/1/20323,357 2,519 
Total fair value derivative assets$14,710 $10,318 
(a)These rates represent the swap rate and cap strike rate on the Company’s interest rate swaps, caps, and collars.
(b)Interest income related to these contracts was $0.9 million for the three months ended June 30, 2024, $3.1 million for the six months ended June 30, 2024, $3.3 million for the three months ended June 30, 2023, and $2.1 million for the six months ended June 30, 2023.
(c)In the first quarter of 2024, the Company terminated a portion of this swap, reducing the notional amount from $200.0 million to $175.0 million.

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, 2024 and 2023:
Amount of Gain (Loss) Recognized in AOCI on Derivatives
Derivatives in Cash Flow Hedging RelationshipsThree Months Ended June 30,Six Months Ended June 30,
thousands2024202320242023
Interest rate derivatives$1,236 $6,286 $5,066 $3,635 
 
Location of Gain (Loss) Reclassified from AOCI into Statements of OperationsAmount of Gain (Loss) Reclassified from AOCI into
Statements of Operations
Three Months Ended June 30,Six Months Ended June 30,
thousands2024202320242023
Interest expense$1,198 $3,538 $2,403 $6,217 

Credit-risk-related Contingent Features The Company has agreements at the property level with certain derivative counterparties that contain a provision where if the Company defaults on the related property level 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 related derivative obligations. The Company also has agreements at the property level 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 June 30, 2024.