Risk Management and Derivatives
 12 Months Ended
Dec. 31, 2019
Risks and Uncertainties [Abstract]  
Risk Management and Derivatives Risk Management and Derivatives
In the normal course of its ongoing business operations, the Company encounters credit risk. Credit risk is the risk of default on the Company’s leases that result from a tenant’s inability or unwillingness to make contractually required payments.

Risk concentrations—Concentrations of credit risks arise when the Company has multiple leases with a particular tenant or credit party, or a number of the Company’s tenants are engaged in similar business activities, or activities in the same geographic region, or have similar economic features, such that their ability to meet contractual obligations, including those to the Company, could be similarly affected by changes in economic conditions.

Although the Company’s Ground Leases are geographically diverse and the tenants operate in a variety of industries and property types, to the extent the Company has a significant concentration of operating lease income from any tenant, the inability of that tenant to make its payment could have a material adverse effect on the Company. During the year ended December 31, 2019, the Company’s two largest tenants by revenues accounted for approximately 17.3% and 14.9%, respectively, of the Company’s revenues.

The gross carrying value of five hotels leased by the Company under a master lease guaranteed by Park Intermediate Holdings LLC represented 8.6% of the Company’s total assets as of December 31, 2019. Park Intermediate Holdings LLC is a subsidiary of Park Hotels & Resorts Inc., which is a public reporting company. According to Park Hotels & Resorts Inc.’s public Securities and Exchange Commission filings, Park Hotels & Resorts Inc. conducts substantially all of its business and holds substantially all of its assets through Park Intermediate Holdings LLC. For detailed financial information regarding Park Hotels & Resorts Inc., please refer to its financial statements, which are publicly available on the website of the Securities and Exchange Commission at http://www.sec.gov.

Derivative instruments and hedging activity—The Company's use of derivative financial instruments is associated with debt issuances and primarily limited to the utilization of interest rate swaps, interest rate caps or other instruments to manage interest rate risk exposure. The Company does not enter into derivatives for trading purposes.

The Company recognizes derivatives as either assets or liabilities on the Company's consolidated balance sheets at fair value. Interest rate hedge assets are recorded in "Deferred expenses and other assets, net" and interest rate hedge liabilities are recorded in "Accounts payable, accrued expenses and other liabilities" on the Company's consolidated balance sheets. If certain conditions are met, a derivative may be specifically designated as a hedge of the exposure to changes in the fair value of a recognized asset or liability, a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability.

For the Company's derivatives designated and qualifying as cash flow hedges, changes in the fair value of the derivatives are reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into interest expense in the same periods during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s debt. The Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of 30 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).

For the Company's derivatives not designated as hedges, the changes in the fair value of the derivatives are reported in "Interest expense" in the Company's consolidated statements of operations. Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements.

The table below presents the Company's derivatives as well as their classification on the consolidated balance sheets as of December 31, 2019 and 2018 ($ in thousands):(1) 
 
 
December 31, 2019
 
December 31, 2018
 
Balance Sheet
Location
Derivative Type
 
Fair Value(2)
 
Assets
 
 
 
 
 
 
Interest rate swaps
 
$
7

 
$
2,987

 
Deferred expenses and other assets, net
Interest rate cap(3)
 
—

 
4

 
Deferred expenses and other assets, net
 
 
$
7

 
$
2,991

 
 
Liabilities
 
 
 
 
 
 
Interest rate swaps
 
$
13,672

 
$
10,092

 
Accounts payable, accrued expenses and other liabilities
 
 
$
13,672

 
$
10,092

 
 
____________________________________________________________________________
(1)
For the years ended December 31, 2019 and 2018, the Company recorded $32.5 million and $6.7 million, respectively, of unrealized losses in accumulated other comprehensive income (loss).
(2)
The fair value of the Company's derivatives are based upon widely accepted valuation techniques utilized by a third-party specialist using observable inputs such as interest rates and contractual cash flow and are classified as Level 2 within the fair value hierarchy. Over the next 12 months, the Company expects that $1.4 million related to cash flow hedges will be reclassified from "Accumulated other comprehensive income (loss)" as an increase to interest expense.
(3)
This derivative is not designated in a hedging relationship.
    
Credit Risk-Related Contingent Features—The Company reports derivative instruments on a gross basis in its consolidated financial statements. The Company has agreements with each of its derivative counterparties that contain a provision whereby if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. In connection with its interest rate derivatives which were in a liability position as of December 31, 2019 and 2018, the Company posted collateral of $20.1 million and $8.0 million, respectively, which is included in "Restricted cash" on the Company's consolidated balance sheets. As of December 31, 2019 and 2018, the Company would not have been required to post any additional collateral to settle these contracts had the Company been declared in default on its derivative obligations.

The tables below present the effect of the Company's derivative financial instruments in the consolidated statements of operations and the consolidated statements of comprehensive income (loss) for the years ended December 31, 2019 and 2018 ($ in thousands):
Derivatives Designated in Hedging Relationships
 
Location of Gain (Loss)
Recognized in Income
 
Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Earnings
For the Year Ended December 31, 2019
 
 
 
 
 
 
Interest rate swaps
 
Interest expense
 
$
(32,518
)
 
$
(271
)
 
 
 
 
 
 
 
For the Year Ended December 31, 2018
 
 
 
 
 
 
Interest rate swaps
 
Interest expense
 
$
(6,745
)
 
$
252


 
 
Location of Gain or
(Loss) Recognized in
Income
 
Amount of Gain or (Loss) Recognized in Income
Derivatives not Designated in Hedging Relationships
 
For the Year Ended December 31, 2019
 
 
 
 
Interest rate cap
 
Interest expense
 
$
(4
)
 
 
 
 
 
For the Year Ended December 31, 2018
 
 
 
 
Interest rate cap
 
Interest expense
 
$
(13
)