Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

The Company uses interest rate swaps and interest rate cap contracts to manage certain interest rate risks. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.

In November 2016, the Company replaced its $225.0 million term loan with a new $350 millionfive-year term loan with a delayed draw feature. The new term loan carries a variable interest rate of LIBOR plus 95 basis points. Also in November 2016, four interest rate swaps related to the replaced term loan, with a total notional balance of $200.0 million, matured. An additional swap with a notional of $25.0 million, with a maturity date in July 2017, was still in place as of December 31, 2016 and was hedging a portion of the $100 million drawn on the $350.0 million term loan as of December 31, 2016. In 2016, the Company entered into four new forward starting interest rate swaps (settlement payments begin in March 2017) related to the new $350.0 million term. These four new swaps, with a total notional amount of $150.0 million bear an average fixed interest rate of 2.2% and are scheduled to mature in February 2022. These derivatives qualify for hedge accounting.

As of December 31, 2016, the Company had 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 December 31, 2016 and 2015, the aggregate carrying value of the interest rate swap contracts was an asset of $4.4 million and zero, respectively and is included in prepaid expenses and other assets on the consolidated balance sheets and a liability of $0.03 million and $1.0 million, respectively, and is included in other liabilities on the consolidated balance sheets. The aggregate carrying value of the interest rate cap was zero on the balance sheet as of December 31, 2016 and December 31, 2015.

Hedge ineffectiveness related to cash flow hedges, which is reported in current year income as interest expense was $0.3 million of income for the year ended December 31, 2016. Hedge ineffectiveness was not significant for the years ended 2015 and 2014.

Additionally, the Company has entered into four 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 one of the total return swaps with $114.4 million of the outstanding debt at par, while the call option on the other three total return swaps relating to $142.9 million of the 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 zero and $4 thousand at December 31, 2016 and 2015, respectively. These total return swaps are scheduled to mature between September 2021 and November 2022. The realized gains of $11.7 million and $5.7 million as of December 31, 2016 and 2015, respectively, were reported in current year income as total return swap income. No such income or expense was incurred for the year ended December 31, 2014.