Hedge Accounting |
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| Hedge Accounting | Note 10—Hedge Accounting Cash Flow Hedging Strategy The Company manages economic risks, including interest rate, liquidity, and credit risk, by managing the amount, sources, duration and interest rate exposure of its financing sources. The Company may also use interest rate derivative financial instruments, primarily interest rate swaps. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the entire change in the fair value of the Company’s designated cash flow hedges is recorded to accumulated other comprehensive income, a component of stockholders’ equity in the Company’s consolidated balance sheets. On March 26, 2020, the Company terminated its existing swap agreement and entered into a new interest rate swap agreement to obtain a more favorable interest rate and to manage interest rate risk exposure, which was effective April 1, 2020. An interest rate swap agreement utilized by the Company effectively modified the Company’s exposure to interest rate risk by converting the Company’s floating-rate debt to a fixed rate basis for the next six years on 50% of the outstanding amount to Rabobank at the time of the agreement, thus reducing the impact of interest rate changes on future interest expense. This agreement involves the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreement without an exchange of the underlying principal amount. The fair value of the de-designated swap was $2.6 million on the termination date. The Company amortized the de-designated swap over the original term utilizing a forward curve analysis of determining monthly amortization out of Other Comprehensive Income through the original termination date (March 1, 2023). The Company’s $2.6 million termination fee was rolled into the new swap and was paid through March 1, 2026. Termination fees paid during the six months ended June 30, 2026 and 2025 were $0.0 million and $0.1 million, respectively. On October 17, 2024, as a result of the reduction in the outstanding indebtedness under the Rabobank Mortgage Note, the Company amended its existing swap agreement to adjust the total notional amount from $33.2 million to $11.8 million, effectively reducing the Company’s floating rate exposure to $0.0 million. No other terms of the existing swap agreement were amended. The amendment resulted in proportional partial de-designation of the existing swap. The fair value for the portion de-designated was $0.5 million on the amendment date. In May and June 2025, as a result of additional reductions in the Company’s outstanding indebtedness under the Rabobank Mortgage, the Company amended its swap agreement to reduce the notional from $11.8 million to $7.7 million in May 2025 and $4.9 million in June 2025. No other terms of the swap agreement were changed. The amendments resulted in proportional partial de-designation of the swap. The fair value for the portion de-designated was $0.1 million and less than $0.1 million on each of the amendment dates, respectively. The Company amortized these amounts through Other Comprehensive Income utilizing a forward curve analysis over the remaining term of the swap. During the three months ended June 30, 2026 and 2025, amortization was $0.0 million and $0.3 million, respectively. Amortization was $0.2 million and $0.4 million, respectively, during the six months ended June 30, 2026 and 2025. As of March 1, 2026, the swap agreement expired. The Company determined the hedge effectiveness of its interest rate swaps at inception by applying a quantitative evaluation of effectiveness using regression analysis. On an ongoing basis the Company applies an initial qualitative assessment of on-going effectiveness and reviews hedge effectiveness through assessing the hedge relationship by comparing the current terms of the swap and the associated debt to ensure they continue to coincide through the continued ability of the Counterparty to the swap to honor its obligations under the swap contract. If the qualitative assessment indicates that the hedge relationship was not highly effective, the Company would then perform a quantitative evaluation using regression analysis. The Company concluded the hedge was highly effective at inception and remained highly effective through its expiration on March 1, 2026. The effect of derivative instruments on the consolidated statements of operations for the periods ended June 30, 2026 and 2025 is set out below:
During the three months ended June 30, 2026 and 2025, the net change associated with current period hedging transactions was $0.0 million and less than $0.1 million, respectively. The net change associated with current period hedging transactions was $0.2 million and less than $0.1 million, respectively, during the six months ended June 30, 2026 and 2025. During the three months ended June 30, 2026 and 2025, the amortization of frozen Accumulated Other Comprehensive Income was $0.0 million and $0.3 million, respectively. The amortization of frozen Accumulated Other Comprehensive Income was $0.2 million and $0.4 million, respectively, during the six months ended June 30, 2026 and 2025. The fair values of the Company’s interest rate swap agreements are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts, which is considered a Level 2 measurement under the fair value hierarchy. Level 2 is defined as inputs other than quoted prices in active markets that are either directly or indirectly observable. There were no Levels 1, 2 or 3 during the six months ended June 30, 2026. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The following table outlines the movements in the other comprehensive income account as of June 30, 2026 and December 31, 2025:
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