Derivative Financial Instruments and Hedging Activities

12 Months Ended

Dec. 31, 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 primarily involve the receipt of variable-rate or 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 year ended December 31, 2023, we reclassified gains of $25.8 million out of accumulated other comprehensive income into interest expense, inclusive of the Company's acceleration of the reclassification of amounts in accumulated other comprehensive income given that certain hedged forecasted transactions are not expected to occur. During the third quarter of 2023, the Company accelerated a gain of $11.5 million into earnings due to the early payoff of the hedged term loans previously designated. During the year ended December 31, 2022, we reclassified losses of $0.3 million out of accumulated other comprehensive income into interest expense. As of December 31, 2023, we estimate that during the next 12 months, we will reclassify into earnings approximately $6.7 million of the unrealized gain in accumulated other comprehensive income.

Changes in fair value of derivatives not designated in a hedge relationship, or economic hedges, are recognized in gain on derivative instruments, net, in our consolidated statements of operations. During the year ended December 31, 2023, we recorded gains of $16.7 million. During the year ended December 31, 2022, no amounts were recognized related to derivatives not designated in a hedge relationship.

During the second quarter of 2023, we de-designated $830 million of notional value pay-fixed, receive-floating interest rate swaps. As a result, the accumulated unrealized gains at time of de-designation of $29.5 million was expected to be reclassified into earnings over the remaining term of the forecasted transactions. During the year ended December 31, 2023, $4.2 million of this balance was reclassified out of accumulated other comprehensive income into interest expense, and $11.5 million was accelerated into interest expense. The remaining balance of $13.8 million is included within accumulated other comprehensive income as of December 31, 2023 and will be reclassified into earnings over the remaining term of the forecasted transaction.

During the year ended December 31, 2023, we fully terminated eight and partially terminated two interest rate swap positions not designated as hedging instruments. Four of the fully terminated instruments and one of the partially terminated instruments were pay-floating, receive-fixed interest rate swaps with a notional value of $330 million and $100 million, respectively. Four of the fully terminated and one of the partially terminated instruments were offsetting pay-fixed, receive-floating interest rate swaps with a notional value of $330 million, and $100 million, respectively. Upon termination, AIR received $15.5 million in cash.

During the fourth quarter of 2023, AIR entered into a notional value $125 million pay-fixed, receive-floating interest rate swap, economically hedging the remaining $125 million of variable-rate term loans, which results in the outstanding term loan balance of $475 million, with an effective interest rate of 4.3%.

As of December 31, 2023, AIR had a notional value of $555 million of pay-fixed, receive-floating interest rate swaps that are not designated as hedging instruments, and a notional value of $50 million of forward starting interest rate swaps that are not designated as hedging instruments. These derivative instruments are partially offset by a notional value of $80 million of pay-floating, receive-fixed interest rate swaps that are not designated as hedging instruments. Accordingly, the changes in the fair value of these derivatives are recognized in gain on derivative instruments, net, in our consolidated statements of operations. As a result of the $80 million of pay-floating, receive-fixed interest rate swaps that are not designated as hedging instruments, we expect to receive monthly fixed interest income representing the spread between the offsetting pay-fixed and receive-fixed legs of our interest rate swap positions over a weighted-average term of 2.8 years.

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


	As of December 31, 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 not designated as hedging instruments:
Interest rate swaps - pay-fixed, receive floating	7	$	555,000	$	15,266	$	(587)
Interest rate swaps - pay-floating, receive fixed	2	$	80,000	$	472	$	(7)
Interest rate swap, forward starting	1	$	50,000	$	331	$	—


	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 lock	1	$	100,000	$	319	$	—
Interest rate swaps - pay-fixed, receive floating	10	$	830,000	$	32,222	$	—

Subsequent to the year ended December 31, 2023, AIR entered into three pay-fixed, receive floating interest rate swaps, with a notional value of $200 million and a term of 2.2 years. The pay-fixed, receive-floating interest rate swaps, economically hedges the balance of our variable-rate revolving credit facility at a weighted-average all-in rate of 4.9%. Additionally, AIR restructured one forward starting interest rate swap on our anticipated fixed-rate property debt and one pay-fixed, receive-floating interest rate swap, on our term loans