DERIVATIVE INSTRUMENTS

9 Months Ended

Sep. 30, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Centerspace’s objective in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate fluctuations. To accomplish this objective, the Company primarily uses interest rate swap contracts to fix the variable interest rate debt.

Changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income (“OCI”) and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income for the interest rate swaps will be reclassified to interest expense as interest payments are incurred on the hedged variable rate debt. During the next twelve months, the Company estimates an additional $1.9 million will be reclassified as an increase to interest expense.

At September 30, 2021, the Company had one interest rate swap contract designated as a cash flow hedge of interest rate risk with a total notional amount of $75.0 million to fix the interest rate on the line of credit.

As of December 31, 2020, Centerspace had three interest rate swap contracts designated as cash flow hedges of interest rate risk with a notional amount of $195.0 million and one additional interest rate swap that becomes effective on January 31, 2023, with a notional amount of $70.0 million. These interest rate swaps fixed the interest rate on the term loans and a portion of the line of credit.

During the three months ended September 30, 2021, Centerspace paid $3.8 million to terminate its $50.0 million interest rate swap and its $70.0 million interest rate swap in connection with the pay down of the Company’s term loans (see Note 5 - Debt for additional details). The Company accelerated the reclassification of a $5.4 million loss from OCI into other income loss in the Condensed Consolidated Statement of Operations as a result of the hedged transactions becoming probable not to occur.

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 strict hedge accounting requirements. Changes in fair value of derivatives not designated in hedging relationships are recorded directly to earnings within other income loss in the Condensed Consolidated Statement of Operations. As of September 30, 2021, the Company had one interest rate swap with a notional amount of $70.0 million that is not effective until January 31, 2023 and was not designated as a hedge in a qualifying hedging relationship. For the three and nine months ended September 30, 2021, the Company recorded a gain of $60,000 related to the interest rate swap not designated in a hedging relationship.

As of December 31, 2020, the Company did not have any outstanding interest rate derivatives that were not designated as hedges in a qualifying hedging relationships.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020.


	(in thousands)
		September 30, 2021		December 31, 2020
	Balance Sheet Location	Fair Value		Fair Value
Total derivative instruments designated as hedging instruments - interest rate swaps	Accounts Payable and Accrued Expenses	$	6,012	$	15,905
Total derivative instruments not designated as hedging instruments - interest rate swaps	Accounts Payable and Accrued Expenses	$	1,457	$	—

The table below presents the effect of the Company’s derivative financial instruments on the Condensed Consolidated Statements of Operations as of September 30, 2021 and 2020.


	(in thousands)
	Gain (Loss) Recognized in OCI				Location of Gain (Loss) Reclassified from Accumulated OCI into Income	Gain (Loss) Reclassified from Accumulated OCI into Income
Three months ended September 30,	2021		2020			2021		2020
Total derivatives in cash flow hedging relationships - Interest rate contracts	$	(70)	$	(210)	Interest expense	$	(940)	$	(1,093)

Nine months ended September 30,
Total derivatives in cash flow hedging relationships - Interest rate contracts	$	1,555	$	(11,314)	Interest expense	$	(3,156)	$	(1,665)

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