Risk Management and Use of Derivative Financial Instruments

Risk Management

In the normal course of our ongoing business operations, we encounter economic risk. There are four main components of economic risk that impact us: interest rate risk, credit risk, market risk, and foreign currency risk. We are primarily subject to interest rate risk on our interest-bearing liabilities, including the Senior Unsecured Credit Facility (Note 12), at September 30, 2015. Credit risk is the risk of default on our operations and our tenants’ inability or unwillingness to make contractually required payments. Market risk includes changes in the value of our properties and related loans, as well as changes in the value of our other securities and the shares we hold in the Managed REITs due to changes in interest rates or other market factors. We own investments in Europe, Asia, and Australia and are subject to risks associated with fluctuating foreign currency exchange rates.

Derivative Financial Instruments

When we use derivative instruments, it is generally to reduce our exposure to fluctuations in interest rates and foreign currency exchange rate movements. We have not entered into, and do not plan to enter into, financial instruments for trading or speculative purposes. In addition to entering into derivative instruments on our own behalf, we may also be a party to derivative instruments that are embedded in other contracts, and we may be granted common stock warrants by lessees when structuring lease transactions, which are considered to be derivative instruments. The primary risks related to our use of derivative instruments include a counterparty to a hedging arrangement defaulting on its obligation and a downgrade in the credit quality of a counterparty to such an extent that our ability to sell or assign our side of the hedging transaction is impaired. While we seek to mitigate these risks by entering into hedging arrangements with large financial institutions that we deem to be creditworthy, it is possible that our hedging transactions, which are intended to limit losses, could adversely affect our earnings. Furthermore, if we terminate a hedging arrangement, we may be obligated to pay certain costs, such as transaction or breakage fees. We have established policies and procedures for risk assessment and the approval, reporting, and monitoring of derivative financial instrument activities.

We measure derivative instruments at fair value and record them as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For a derivative designated, and that qualified, as a cash flow hedge, the effective portion of the change in fair value of the derivative is recognized in Other comprehensive loss until the hedged item is recognized in earnings. For a derivative designated, and that qualified, as a net investment hedge, the effective portion of the change in the fair value and/or the net settlement of the derivative is reported in Other comprehensive loss as part of the cumulative foreign currency translation adjustment. Amounts are reclassified out of Other comprehensive loss into earnings when the hedged investment is either sold or substantially liquidated. The ineffective portion of the change in fair value of any derivative is immediately recognized in earnings.

The following table sets forth certain information regarding our derivative instruments (in thousands):



Derivatives Designated as Hedging Instruments	Balance Sheet Location	Asset Derivatives Fair Value at				Liability Derivatives Fair Value at
Derivatives Designated as Hedging Instruments	Balance Sheet Location	September 30, 2015		December 31, 2014		September 30, 2015			December 31, 2014
Foreign currency forward contracts	Other assets, net	$	40,539	$	16,307	$	—		$	—
Foreign currency collars	Other assets, net	4,543		—		—			—
Interest rate swaps	Other assets, net	—		285		—			—
Interest rate cap	Other assets, net	—		3		—			—
Interest rate swaps	Accounts payable, accrued expenses and other liabilities	—		—		(6,352		)	(5,660		)
Foreign currency collars	Accounts payable, accrued expenses and other liabilities	—		—		(257		)	—
Derivatives Not Designated as Hedging Instruments
Stock warrants	Other assets, net	3,886		3,753		—			—
Interest rate swaps ^(a)	Accounts payable, accrued expenses and other liabilities	—		—		(3,768		)	(7,496		)
Total derivatives		$	48,968	$	20,348	$	(10,377	)	$	(13,156	)

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(a)	These interest rate swaps do not qualify for hedge accounting; however, they do protect against fluctuations in interest rates related to the underlying variable-rate debt.

All derivative transactions with an individual counterparty are governed by a master International Swap and Derivatives Association agreement, which can be considered as a master netting arrangement; however, we report all our derivative instruments on a gross basis on our consolidated financial statements. At both September 30, 2015 and December 31, 2014, no cash collateral had been posted nor received for any of our derivative positions.

The following tables present the impact of our derivative instruments in the consolidated financial statements (in thousands):



	Amount of (Loss) Gain Recognized on Derivatives in Other Comprehensive (Loss) Income (Effective Portion) ^(a)
	Three Months Ended September 30,					Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationships	2015			2014		2015			2014
Foreign currency collars	$	2,028		$	—	$	4,094		$	—
Interest rate swaps	(1,776		)	689		(1,620		)	(928		)
Foreign currency forward contracts	1,056			15,372		15,109			12,256
Interest rate caps	2			14		3			(7		)
Derivatives in Net Investment Hedging Relationships^(b)
Foreign currency forward contracts	5,105			—		8,411			—
Total	$	6,415		$	16,075	$	25,997		$	11,321



		Amount of (Loss) Gain on Derivatives Reclassified from Other Comprehensive Income (Loss) (Effective Portion) ^(c)
Derivatives in Cash Flow Hedging Relationships	Location of Gain (Loss) Recognized in Income	Three Months Ended September 30,						Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationships	Location of Gain (Loss) Recognized in Income	2015			2014			2015			2014
Foreign currency forward contracts	Other income and (expenses)	$	1,642		$	337		$	5,371		$	(487	)
Interest rate swaps and caps	Interest expense	(672		)	(661		)	(1,890		)	(2,024		)
Foreign currency collars	Other income and (expenses)	—			—			357			—
Total		$	970		$	(324	)	$	3,838		$	(2,511	)

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(a)	Excludes net losses of less than $0.1 million and net gains of $0.1 million recognized on unconsolidated jointly-owned investments for the three months ended September 30, 2015 and 2014, respectively, and net gains of $0.9 million and $0.3 million for the nine months ended September 30, 2015 and 2014, respectively.


(b)	The effective portion of the change in fair value and the settlement of these contracts are reported in the foreign currency translation adjustment section of Other comprehensive loss until the underlying investment is sold, at which time we reclassify the gain or loss to earnings.


(c)	Excludes net gains recognized on unconsolidated jointly-owned investments of $0.1 million and $0.4 million for the three and nine months ended September 30, 2014, respectively. There were no such gains or losses recognized for the three and nine months ended September 30, 2015.

Amounts reported in Other comprehensive loss related to interest rate swaps will be reclassified to Interest expense as interest payments are made on our variable-rate debt. Amounts reported in Other comprehensive loss related to foreign currency derivative contracts will be reclassified to Other income and (expenses) when the hedged foreign currency contracts are settled. As of September 30, 2015, we estimate that an additional $2.2 million and $7.3 million will be reclassified as interest expense and other income, respectively, during the next 12 months.



		Amount of Gain (Loss) on Derivatives Recognized in Income
Derivatives Not in Cash Flow Hedging Relationships	Location of Gain (Loss) Recognized in Income	Three Months Ended September 30,				Nine Months Ended September 30,
Derivatives Not in Cash Flow Hedging Relationships	Location of Gain (Loss) Recognized in Income	2015		2014		2015			2014
Interest rate swaps	Interest expense	$	1,013	$	1,007	$	3,097		$	1,992
Foreign currency collars	Other income and (expenses)	238		—		243			—
Foreign currency forwards	Other income and (expenses)	52		—		(296		)	—
Stock warrants	Other income and (expenses)	—		268		134			134
Derivatives in Cash Flow Hedging Relationships
Interest rate swaps ^(a)	Interest expense	140		—		476			—
Foreign currency forward contracts	Other income and (expenses)	68		—		71			—
Foreign currency collars	Other income and (expenses)	41		—		64			—
Total		$	1,552	$	1,275	$	3,789		$	2,126

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(a)	Relates to the ineffective portion of the hedging relationship.

See below for information on our purposes for entering into derivative instruments and for information on derivative instruments owned by unconsolidated investments, which are excluded from the tables above.

Interest Rate Swaps and Cap

We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our investment partners may obtain variable-rate, non-recourse mortgage loans and, as a result, we have entered into, and may continue to enter into, interest rate swap agreements or interest rate cap agreements with counterparties. Interest rate swaps, which effectively convert the variable-rate debt service obligations of a loan to a fixed rate, are agreements in which one party exchanges a stream of interest payments for a counterparty’s stream of cash flow over a specific period. The face amount on which the swaps are based is not exchanged. Interest rate caps limit the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements.

The interest rate swaps and cap that our consolidated subsidiaries had outstanding at September 30, 2015 are summarized as follows (currency in thousands):



	Number of Instruments	Notional Amount		Fair Value at September 30, 2015 ^(a)
Interest Rate Derivatives	Number of Instruments	Notional Amount		Fair Value at September 30, 2015 ^(a)
Designated as Cash Flow Hedging Instruments
Interest rate swaps	13	123,141	USD	$	(5,673	)
Interest rate swaps	1	6,035	EUR	(679		)
Interest rate cap ^(b)	1	42,554	EUR	—
Not Designated as Cash Flow Hedging Instruments
Interest rate swaps ^(c)	3	105,442	EUR	(3,752		)
Interest rate swaps ^(c)	1	3,160	USD	(16		)
				$	(10,120	)

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(a)	Fair value amounts are based on the exchange rate of the euro at September 30, 2015, as applicable.


(b)	The applicable interest rate of the related debt was 0.9%, which was below the strike price of the cap of 3.0% at September 30, 2015.


(c)	These interest rate swaps do not qualify for hedge accounting; however, they do protect against fluctuations in interest rates related to the underlying variable-rate debt.

Foreign Currency Contracts and Collars

We are exposed to foreign currency exchange rate movements, primarily in the euro and, to a lesser extent, the British pound sterling, the Australian dollar, and certain other currencies. We manage foreign currency exchange rate movements by generally placing our debt service obligation on an investment in the same currency as the tenant’s rental obligation to us. This reduces our overall exposure to the net cash flow from that investment. However, we are subject to foreign currency exchange rate movements to the extent that there is a difference in the timing and amount of the rental obligation and the debt service. Realized and unrealized gains and losses recognized in earnings related to foreign currency transactions are included in Other income and (expenses) in the consolidated financial statements.

In order to hedge certain of our foreign currency cash flow exposures, we enter into foreign currency forward contracts and collars. A foreign currency forward contract is a commitment to deliver a certain amount of currency at a certain price on a specific date in the future. A foreign currency collar consists of a written call option and a purchased put option to sell the foreign currency at a range of predetermined exchange rates. By entering into forward contracts and holding them to maturity, we are locked into a future currency exchange rate for the term of the contract. A foreign currency collar guarantees that the exchange rate of the currency will not fluctuate beyond the range of the options’ strike prices.

The following table presents the foreign currency derivative contracts we had outstanding at September 30, 2015, which were designated as cash flow hedges (currency in thousands):



	Number of Instruments	Notional Amount		Fair Value at September 30, 2015 ^(a)
Foreign Currency Derivatives	Number of Instruments	Notional Amount		Fair Value at September 30, 2015 ^(a)
Designated as Cash Flow Hedging Instruments
Foreign currency forward contracts	56	134,974	EUR	$	26,092
Foreign currency forward contracts	17	21,502	AUD	3,079
Foreign currency collars	23	92,375	EUR	2,426
Foreign currency collars	24	50,750	GBP	1,860
Foreign currency forward contracts	13	6,960	GBP	392
Designated as Net Investment Hedging Instruments
Foreign currency forward contracts	5	84,522	AUD	10,976
				$	44,825

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(a)	Fair value amounts are based on the applicable exchange rate of the foreign currency at September 30, 2015.

Credit Risk-Related Contingent Features

We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of any collateral received. No collateral was received as of September 30, 2015. At September 30, 2015, our total credit exposure and the maximum exposure to any single counterparty was $41.0 million and $28.2 million, respectively.

Some of the agreements we have with our derivative counterparties contain cross-default provisions that could trigger a declaration of default on our derivative obligations if we default, or are capable of being declared in default, on certain of our indebtedness. At September 30, 2015, we had not been declared in default on any of our derivative obligations. The estimated fair value of our derivatives in a net liability position was $11.5 million and $14.2 million at September 30, 2015 and December 31, 2014, respectively, which included accrued interest and any nonperformance risk adjustments. If we had breached any of these provisions at September 30, 2015 or December 31, 2014, we could have been required to settle our obligations under these agreements at their aggregate termination value of $11.8 million and $14.5 million, respectively.

Net Investment Hedges

At September 30, 2015 and December 31, 2014, the amounts borrowed in euro outstanding under our Revolver (Note 12) were €295.0 million and €345.0 million, respectively, and the amounts borrowed in British pounds were none and £40.0 million, respectively. Additionally, we have issued senior notes denominated in euro with a principal amount of €500.0 million (Note 12). These borrowings are designated as, and are effective as, economic hedges of our net investments in foreign entities. Variability in the exchange rates of the foreign currencies with respect to the U.S. dollar impacts our financial results as the financial results of our foreign subsidiaries are translated to U.S. dollars each period, with the effect of changes in the foreign currencies to U.S. dollar exchange rates being recorded in Other comprehensive loss as part of the cumulative foreign currency translation adjustment. As a result, the borrowings in euro and British pounds sterling under our Revolver are recorded at cost in the consolidated financial statements and all changes in the value related to changes in the spot rates will be reported in the same manner as a translation adjustment, which is recorded in Other comprehensive loss as part of the cumulative foreign currency translation adjustment.

At September 30, 2015, we had foreign currency forward contracts that were designated as net investment hedges, as discussed in “Derivative Financial Instruments” above.