COPT Defense Properties Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Interest Rate Derivatives

Interest Rate Derivatives

12 Months Ended

Dec. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The following table sets forth the key terms and fair values of our interest rate swap derivatives (dollars in thousands):


Notional Amount						Effective Date	Expiration Date	Fair Value at December 31,
			Fixed Rate		Floating Rate Index			2022		2021
$	10,880	(1)	1.678	%	SOFR plus 0.10%	8/1/2019	8/1/2026	$	806	$	(234)
$	22,775	(2)	0.573	%	SOFR plus 0.10%	4/1/2020	3/26/2025	1,825		355
$	100,000		1.901	%	One-Month LIBOR	9/1/2016	12/1/2022	—		(1,361)
$	100,000		1.905	%	One-Month LIBOR	9/1/2016	12/1/2022	—		(1,365)
$	50,000	(3)	1.908	%	One-Month LIBOR	9/1/2016	N/A	—		(684)
								$	2,631	$	(3,289)

(1)The notional amount of this instrument is scheduled to amortize to $10.0 million. Effective December 1, 2022, we amended this swap to change the floating rate index from one-month LIBOR to SOFR plus 0.10%. We made elections under reference rate reform related accounting guidance to not result in a dedesignation of this hedging relationship.

(2)The notional amount of this instrument is scheduled to amortize to $22.1 million. Effective December 1, 2022, we amended this swap to change the floating rate index from one-month LIBOR to SOFR plus 0.10%. We made elections under reference rate reform related accounting guidance to not result in a dedesignation of this hedging relationship.

(3)We cash settled this swap and accrued interest thereon for $625,000 on January 28, 2022.

Each of these swaps was designated as a cash flow hedge of interest rate risk except for the swap with a $50.0 million notional amount. We discontinued hedge accounting for this swap effective in December 2021 when we determined that some of its hedged forecasted transactions were probable not to occur due to our entry into a contract to sell our wholesale data center and the debt pay down expected upon completion of the sale. This resulted in our reclassification of $221,000 in losses from AOCL to interest expense in our statement of operations.

The table below sets forth the fair value of our interest rate derivatives as well as their classification on our consolidated balance sheets (in thousands):


		Fair Value at December 31,
Derivatives	Balance Sheet Location	2022		2021
Interest rate swaps designated as cash flow hedges	Prepaid expenses and other assets, net	$	2,631	$	355
Interest rate swaps designated as cash flow hedges	Other liabilities	$	—	$	(2,960)
Interest rate swap not designated	Other liabilities	$	—	$	(684)

The tables below present the effect of our interest rate derivatives on our consolidated statements of operations and comprehensive income (in thousands):


	Amount of Income (Loss) Recognized in AOCI/AOCL on Derivatives						Amount of Loss Reclassified from AOCI/AOCL into Interest Expense on Statement of Operations
	For the Years Ended December 31,						For the Years Ended December 31,
Derivatives in Hedging Relationships	2022		2021		2020		2022		2021		2020
Interest rate derivatives	$	4,730	$	1,379	$	(39,454)	$	(996)	$	(5,048)	$	(3,725)

	Amount of Loss Reclassified from AOCL into Loss on Interest Rate Derivatives on Statement of Operations						Amount of Loss Recognized on Undesignated Swaps in Loss on Interest Rate Derivatives on Statement of Operations
	For the Years Ended December 31,						For the Years Ended December 31,
Derivatives in Hedging Relationships	2022		2021		2020		2022		2021		2020
Interest rate derivatives	$	—	$	—	$	(51,865)	$	—	$	—	$	(1,265)

As described further in Note 10, in September 2020, we completed our issuance of the 2.25% Notes. In August 2020, in anticipation of pursuing such an issuance, we determined that the forecasted transactions hedged by three interest rate swaps with an effective date of June 30, 2020 and an aggregate notional amount of $225.0 million were no longer probable of occurring, resulting in our discontinuance of hedge accounting on these swaps. When we consummated the note issuance in September 2020, we determined that it was probable that the forecasted transactions would not occur, resulting in our reclassification of $51.9 million in losses from AOCL to loss on interest rate derivatives on our statements of operations. On September 22, 2020, we cash settled these swaps and accrued interest thereon for an aggregate amount of $53.1 million.

Based on the fair value of our derivatives as of December 31, 2022, we estimate that approximately $1.3 million of gains will be reclassified from AOCI as a decrease to interest expense over the next 12 months.

We have agreements with each of our interest rate derivative counterparties that contain provisions under which, if we default or are capable of being declared in default on defined levels of our indebtedness, we could also be declared in default on our derivative obligations. Failure to comply with the loan covenant provisions could result in our being declared in default on any derivative instrument obligations covered by the agreements. As of December 31, 2022, we were not in default with any of these provisions. As of December 31, 2022, we did not have any derivatives in liability positions.