Risk Management and Use of Derivative Financial Instruments

6 Months Ended

Jun. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Risk Management and Use of Derivative Financial Instruments

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 our Senior Unsecured Credit Facility and Senior Unsecured Notes (Note 10). 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 or limited partnership units we hold in the Managed Programs due to changes in interest rates or other market factors. We own investments in North America, Europe, and Japan and are subject to risks associated with fluctuating foreign currency exchange rates.

Derivative Financial Instruments

There have been no significant changes in our derivative financial instrument policies from what was disclosed in the 2019 Annual Report. At both June 30, 2020 and December 31, 2019, no cash collateral had been posted nor received for any of our derivative positions.

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

Derivatives Designated as Hedging Instruments	Balance Sheet Location	Derivative Assets Fair Value at				Derivative Liabilities Fair Value at
		June 30, 2020		December 31, 2019		June 30, 2020			December 31, 2019
Foreign currency collars	Other assets, net	$	24,772	$	14,460	$	—		$	—
Interest rate caps	Other assets, net	1		1		—			—
Foreign currency forward contracts	Other assets, net	—		9,689		—			—
Interest rate swaps	Accounts payable, accrued expenses and other liabilities	—		—		(6,676		)	(4,494		)
Foreign currency collars	Accounts payable, accrued expenses and other liabilities	—		—		(365		)	(1,587		)
		24,773		24,150		(7,041		)	(6,081		)
Derivatives Not Designated as Hedging Instruments
Stock warrants	Other assets, net	3,700		5,000		—			—
Interest rate swap (a)	Other assets, net	—		8		—			—
Interest rate swap (a)	Accounts payable, accrued expenses and other liabilities	—		—		(71		)	(93		)
		3,700		5,008		(71		)	(93		)
Total derivatives		$	28,473	$	29,158	$	(7,112	)	$	(6,174	)

__________

(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.

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

	Amount of Gain (Loss) Recognized on Derivatives in  Other Comprehensive Income (Loss) (a)
	Three Months Ended June 30,						Six Months Ended June 30,
Derivatives in Cash Flow Hedging Relationships	2020			2019			2020			2019
Foreign currency collars	$	(6,311	)	$	262		$	11,505		$	3,878
Foreign currency forward contracts	(2,943		)	(2,289		)	(5,272		)	(1,170		)
Interest rate swaps	(122		)	(562		)	(2,359		)	(2,377		)
Interest rate caps	(1		)	176			1			149
Derivatives in Net Investment Hedging Relationships (b)
Foreign currency collars	(20		)	1			25			1
Foreign currency forward contracts	—			(1		)	—			(1		)
Total	$	(9,397	)	$	(2,413	)	$	3,900		$	480

		Amount of Gain (Loss) on Derivatives Reclassified from  Other Comprehensive Income (Loss)
Derivatives in Cash Flow Hedging Relationships	Location of Gain (Loss) Recognized in Income	Three Months Ended June 30,						Six Months Ended June 30,
		2020			2019			2020			2019
Foreign currency forward contracts	Other gains and (losses)	$	2,917		$	2,120		$	5,716		$	4,554
Foreign currency collars	Other gains and (losses)	1,917			1,285			2,901			2,373
Interest rate swaps and caps	Interest expense	(468		)	(1,547		)	(706		)	(1,614		)
Total		$	4,366		$	1,858		$	7,911		$	5,313

__________

(a) Excludes net losses of less than $0.1 million and $1.0 million recognized on unconsolidated jointly owned investments for the three months ended June 30, 2020 and 2019, respectively, and net losses of $0.5 million and $1.9 million for the six months ended June 30, 2020 and 2019, respectively.

(b) The changes in fair value of these contracts are reported in the foreign currency translation adjustment section of Other comprehensive income (loss).

Amounts reported in Other comprehensive income (loss) related to interest rate derivative contracts will be reclassified to Interest expense as interest is incurred on our variable-rate debt. Amounts reported in Other comprehensive income (loss) related to foreign currency derivative contracts will be reclassified to Other gains and (losses) when the hedged foreign currency contracts are settled. As of June 30, 2020, we estimate that an additional $3.0 million and $7.8 million will be reclassified as interest expense and other gains, respectively, during the next 12 months.

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

		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 June 30,						Six Months Ended June 30,
		2020			2019			2020			2019
Stock warrants	Other gains and (losses)	$	(1,400	)	$	(300	)	$	(1,300	)	$	(300	)
Foreign currency forward contracts	Other gains and (losses)	(267		)	(31		)	(43		)	(261		)
Foreign currency collars	Other gains and (losses)	(208		)	154			431			195
Interest rate swaps	Interest expense	15			13			30			22
Interest rate swaps	Other gains and (losses)	—			(26		)	—			(26		)
Derivatives in Cash Flow Hedging Relationships
Interest rate swaps	Interest expense	547			(1,062		)	864			(1,127		)
Interest rate caps	Interest expense	—			(54		)	—			(95		)
Foreign currency forward contracts	Other gains and (losses)	—			—			—			(132		)
Foreign currency collars	Other gains and (losses)	—			—			—			7
Total		$	(1,313	)	$	(1,306	)	$	(18	)	$	(1,717	)

See below for information on our purposes for entering into derivative instruments.

Interest Rate Swaps and Caps

We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we generally seek long-term debt financing on a fixed-rate basis. However, from time to time, we or our investment partners have obtained, and may in the future 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 notional, or 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 caps that our consolidated subsidiaries had outstanding at June 30, 2020 are summarized as follows (currency in thousands):

Interest Rate Derivatives	Number of Instruments	Notional Amount		Fair Value at June 30, 2020 (a)
Designated as Cash Flow Hedging Instruments
Interest rate swaps	5	74,998	USD	$	(5,149	)
Interest rate swaps	2	49,041	EUR	(1,527		)
Interest rate cap	1	11,232	EUR	1
Interest rate cap	1	6,394	GBP	—
Not Designated as Hedging Instruments
Interest rate swap (b)	1	4,549	EUR	(71		)
				$	(6,746	)

__________ 

(a) Fair value amounts are based on the exchange rate of the euro or British pound sterling at June 30, 2020, as applicable.

(b) This interest rate swap does not qualify for hedge accounting; however, it does protect against fluctuations in interest rates related to the underlying variable-rate debt.

Foreign Currency Collars

We are exposed to foreign currency exchange rate movements, primarily in the euro and, to a lesser extent, the British pound sterling, the Danish krone, the Norwegian krone, and certain other currencies. In order to hedge certain of our foreign currency cash flow exposures, we enter into foreign currency collars. 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. A foreign currency collar guarantees that the exchange rate of the currency will not fluctuate beyond the range of the options’ strike prices. Our foreign currency collars have maturities of 62 months or less.

The following table presents the foreign currency collars that we had outstanding at June 30, 2020 (currency in thousands):

Foreign Currency Derivatives	Number of Instruments	Notional Amount		Fair Value at June 30, 2020
Designated as Cash Flow Hedging Instruments
Foreign currency collars	88	296,800	EUR	$	20,322
Foreign currency collars	64	42,400	GBP	4,035
Foreign currency collars	2	1,300	NOK	17
Designated as Net Investment Hedging Instruments
Foreign currency collar	1	2,500	NOK	33
				$	24,407

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 June 30, 2020. At June 30, 2020, our total credit exposure and the maximum exposure to any single counterparty was $23.0 million and $7.9 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 June 30, 2020, 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 $11.0 million and $9.6 million at June 30, 2020 and December 31, 2019, respectively, which included accrued interest and any nonperformance risk adjustments. If we had breached any of these provisions at June 30, 2020 or December 31, 2019, we could have been required to settle our obligations under these agreements at their aggregate termination value of $11.6 million and $9.9 million, respectively.

Net Investment Hedges

We have completed five offerings of euro-denominated senior notes, each with a principal amount of €500.0 million, which we refer to as the 2.0% Senior Notes due 2023, 2.25% Senior Notes due 2024, 2.250% Senior Notes due 2026, 2.125% Senior Notes due 2027, and 1.350% Senior Notes due 2028 (Note 10). In addition, at June 30, 2020, the amount borrowed in Japanese yen outstanding under our Unsecured Revolving Credit Facility (Note 10) was ¥2.4 billion. Also, at June 30, 2020, the amounts borrowed in British pound sterling and euro outstanding under our Unsecured Term Loans (Note 10) were £150.0 million and €96.5 million, respectively. These borrowings are designated as, and are effective as, economic hedges of our net investments in foreign entities. Exchange rate variations impact our financial results because the financial results of our foreign subsidiaries are translated to U.S. dollars each period, with the effect of exchange rate variations being recorded in Other comprehensive income (loss) as part of the cumulative foreign currency translation adjustment. As a result, changes in the value of our borrowings under our euro-denominated senior notes and changes in the value of our euro, Japanese yen, and British pound sterling borrowings under our Senior Unsecured Credit Facility, related to changes in the spot rates, will be reported in the same manner as foreign currency translation adjustments, which are recorded in Other comprehensive income (loss) as part of the cumulative foreign currency translation adjustment. Such (losses) gains related to non-derivative net investment hedges were $(62.9) million and $(30.5) million for the three months ended June 30, 2020 and 2019, respectively, and $22.0 million and $13.6 million for the six months ended June 30, 2020 and 2019, respectively.

At June 30, 2020, we also had a foreign currency collar that was designated as a net investment hedge, as discussed in “Derivative Financial Instruments” above.