Derivative Financial Instruments and Hedging Activities

6 Months Ended

Jun. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments and Hedging Activities

Risk Management Objective of Using Derivatives

Our objectives in using interest rate derivatives are to add predictability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps and treasury locks as part of our interest rate management strategy. Interest rate swaps involve the receipt of variable-rate and fixed-rate amounts from a counterparty in exchange for us making fixed-rate or variable-rate payments over the life of the agreements without exchange of the underlying notional amounts.

Changes in fair value of derivatives designated as cash flow hedges are recognized in accumulated other comprehensive income and subsequently reclassified into earnings as an increase or decrease to interest expense. During the three and six months ended June 30, 2023, we reclassified gains of $5.4 million and $9.5 million out of accumulated other comprehensive income into interest expense, respectively. During the three and six months ended June 30, 2022, we reclassified losses of $2.0 million and $2.0 million out of accumulated other comprehensive income into interest expense, respectively.

Changes in fair value of derivatives not designated in a hedge relationship, or economic hedges, are recognized in gain on derivative instruments in our condensed consolidated statements of operations once realized. During the three and six months ended June 30, 2023, we recorded gains of $11.4 million and $9.3 million, respectively. During the three and six months ended June 30, 2022, no amounts were recognized related to derivatives not designated in a hedge relationship.

During the three months ended June 30, 2023, we decided to de-designate $830 million of pay-fixed, receive-floating interest rate swaps. As a result, the accumulated unrealized gains at time of de-designation of $29.5 million will be reclassified into earnings over the remaining term of the associated debt, and future changes in the fair value of these derivatives will be recognized in gain on derivative instruments, net in our condensed consolidated statements of operations.

As of June 30, 2023, we estimate that during the next 12 months, we will reclassify into earnings approximately $10.8 million of the unrealized gain in accumulated other comprehensive income.

During the three months ended June 30, 2023, we entered into $480 million of pay-floating, receive-fixed interest rate swaps, which will not be designated as accounting hedges and accordingly, the changes in the fair value of these derivatives are recognized in gain on derivative instruments, net, in our condensed consolidated statements of operations. These derivative instruments economically offset $480 million of the previously issued interest rate swaps noted above and were done in anticipation of the closing of the Core JV, as proceeds from the transaction were utilized to pay off $325 million of previously hedged term loans. As a result of these instruments, we expect to receive monthly fixed interest income representing the spread between the pay-fixed and receive-fixed legs of our interest rate swap positions over a weighted-average term of 3.4 years.

The following table summarizes our derivative financial instruments (dollars in thousands):


	As of June 30, 2023
	Number of	Aggregate Notional		Derivative Assets (included in Other Assets, net)		Derivative Liabilities (included in Accrued Liabilities and Other)
	Instruments	Amount		Fair Value
Derivatives designated as hedging instruments:
Treasury rate locks	1	$	150,000	$	2,236	$	—
Derivatives not designated as hedging instruments:
Interest rate swap, floating to fixed	10	$	830,000	$	35,395	$	—
Interest rate swap, fixed to floating	6	$	480,000	$	—	$	(1,959)


	As of December 31, 2022
	Number of	Aggregate Notional		Derivative Assets (included in Other Assets, net)		Derivative Liabilities (included in Accrued Liabilities and Other)
	Instruments	Amount		Fair Value
Derivatives designated as hedging instruments:
Treasury rate locks	1	$	100,000	$	319	$	—
Interest rate swaps, floating to fixed	10	$	830,000	$	32,222	$	—