Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

As of September 30, 2016, the Company has entered into interest rate swap contracts with an aggregate notional amount of $225 million that effectively fixed the interest rate on the $225 million unsecured term loan at 2.4%. These derivatives qualify for hedge accounting.

As of September 30, 2016, the Company has interest rate caps, which are not accounted for as hedges, totaling a notional amount of $20.7 million that effectively limit the Company’s exposure to interest rate risk by providing a ceiling on the underlying variable interest rate for $20.7 million of the Company’s tax exempt variable rate debt.

As of September 30, 2016 and December 31, 2015, the aggregate carrying value of the interest rate swap contracts was a liability of $0.2 million and $1.0 million, respectively, and is included in other liabilities on the condensed consolidated balance sheets. The aggregate carrying value of the interest rate caps was zero on the condensed consolidated balance sheets as of both September 30, 2016 and December 31, 2015.

Hedge ineffectiveness related to cash flow hedges, which is included in interest expense on the condensed consolidated income statements, net was not significant for both the three and nine months ended September 30, 2016 and 2015.

Additionally, the Company has entered into total return swaps that effectively convert $257.3 million of mortgage notes payable to a floating interest rate based on SIFMA plus a spread. The total return swaps provide fair market value protection on the mortgage notes payable to our counterparties during the initial period of the total return swap until the Company's option to call the mortgage notes at par can be exercised. The Company can currently call the total return swaps with $114.4 million of the outstanding debt at par, while the call option on the total return swaps relating to the remaining $142.9 million of outstanding debt can be exercised starting on January 1, 2017. These derivatives do not qualify for hedge accounting and had a carrying and fair value of $16 thousand and $4 thousand at September 30, 2016 and December 31, 2015, respectively. These total return swaps are scheduled to mature between September 2021 and November 2022. Realized gains of $3.1 million and $9.1 million are reported in the condensed consolidated income statements as total return swap income for the three and nine months ended September 30, 2016, respectively. There was no total return swap income for both the three and nine months ended September 30, 2015.