Derivative Instruments

Risk Management Objective of Using Derivatives

We are exposed to certain risks relating to our ongoing business operations, including the effect of changes in interest rates.

We 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 any interest rate risk associated with any borrowings. The principal objective of such arrangements would reduce the risks and/or costs associated with our operating and financial structure as well as hedge specific anticipated transactions. We do not intend to utilize derivatives for speculative or other 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 reduce this risk, we only enter into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which we and our affiliates may also have other financial relationships.

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage any exposure to interest rate movements. To accomplish this objective, we may use interest rate swaps, caps, or other similar instruments as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for us making 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-rate amounts if interest rates rise above the cap strike rate.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in cumulative other comprehensive loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2018, such derivatives were used to hedge the variable cash flows associated with variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

We previously had interest rate swap agreements to manage our interest rate risk exposure on $167.8 million of mortgage debt at 1735 Market Street, which required interest at a spread over LIBOR. The interest rate swap agreements utilized by us qualified as cash flow hedges and effectively modified our exposure to interest rate risk by converting our floating interest rate debt to a fixed interest rate basis for this loan through December 1, 2016, thus reducing the impact of interest rate changes on future interest expense. On November 10, 2016 we repaid at par the mortgage debt at 1735 Market Street and terminated the related interest rate swap agreement. We recognized $0.2 million of expense in interest and other income on the consolidated statement of operations for the year ended December 31, 2016 related to the early termination of the interest rate swap agreement.

On March 8, 2018, we terminated an interest rate cap that had a LIBOR strike price of 2.50%, a notional amount of $400.0 million and a maturity date of March 1, 2019. We recognized $0.3 million of expense in interest and other income, net on the consolidated statement of operations for the year ended December 31, 2018 related to the early termination of the interest rate cap agreement. As of December 31, 2018, we do not have any outstanding interest rate derivatives designated as cash flow hedges of interest rate risk.

The table below presents the fair value of derivative financial instruments as well as classification on the consolidated balance sheets as of December 31, 2018, and 2017 (amounts in thousands):



		Fair Value as of December 31,
Interest Rate Derivative Designated as Hedging Instrument	Balance Sheet Location	2018		2017
Interest rate cap	Other assets	$	—	$	17

The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the years ended December 31, 2018, 2017, and 2016 (amounts in thousands):



	Year Ended December 31,
	2018		2017			2016
Amount of gain (loss) recognized in cumulative other comprehensive loss (effective portion)	$	84	$	(297	)	$	(554	)
Amount of loss reclassified from cumulative other comprehensive loss into interest expense (effective portion)	79		49			3,792
Amount of loss recognized in income (ineffective portion and amount excluded from effectiveness testing)	293		—			241