Derivative and Hedging Activities

9 Months Ended

Sep. 30, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Hedging Activities

Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. Certain of the Company's foreign operations expose the Company to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value of the Company's cash receipts and payments in the Company's functional currency, the U.S. dollar. The Company enters into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of its functional currency.

The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company's operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its affiliates may also have other financial relationships.

Cash Flow Hedges of Interest Rate Risk

The Company's objectives in using interest rate derivatives are to manage its exposure to interest rate movements and add stability to interest expense. To accomplish this objective, the Company primarily uses interest rate swaps. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction impacts earnings. During 2014, such derivatives were used to hedge the variable cash flows associated with variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the nine months endedSeptember 30, 2014 and year ended December 31, 2013, the Company recorded no hedge ineffectiveness in 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 variable-rate debt. During the next 12 months, the Company estimates that an additional $2.4 million will be reclassified from other comprehensive income as an increase to interest expense.

As of September 30, 2014 and December 31, 2013, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

	September 30, 2014			December 31, 2013
Derivatives	Number of Instruments	Notional Amount		Number of Instruments	Notional Amount
		(In thousands)			(In thousands)
Interest rate swaps	21	$	425,585	7	$	35,465

Net Investment Hedges

The Company is exposed to fluctuations in foreign exchange rates on property investments it holds in foreign countries which pay rental income, property related expenses and hold debt instruments in foreign currencies. The Company uses foreign currency derivatives including cross currency swaps to hedge its exposure to changes in foreign exchange rates on certain of its foreign investments. Cross currency swaps involve fixing the applicable exchange rate for delivery of a specified amount of foreign currency on specified dates.

For derivatives designated as net investment hedges, the effective portion of changes in the fair value of the derivatives are reported in accumulated other comprehensive income (outside of earnings) as part of the cumulative translation adjustment. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts are reclassified out of accumulated other comprehensive income into earnings when the hedged net investment is either sold or substantially liquidated.

As of September 30, 2014 and December 31, 2013, the Company had the following outstanding cross currency swaps that were used to hedge its net investments in foreign operations:

	September 30, 2014			December 31, 2013
Derivatives	Number of Instruments	Notional Amount		Number of Instruments	Notional Amount
		(In thousands)			(In thousands)
Foreign currency swaps (1)	12	$	132,391	7	$	35,597

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(1) Payments and obligations pursuant to these foreign currency swap agreements are guaranteed by AR Capital, LLC, the entity which wholly owns the Sponsor.

Non-designated Hedges

The Company is exposed to fluctuations in various foreign currencies against its functional currency, the US dollar. The Company uses foreign currency derivatives including currency forward agreements to manage its exposure to fluctuations in GBP-USD and EUR-USD exchange rate. While these derivatives are hedging the fluctuations in foreign currencies, they do not meet the strict hedge accounting requirements to be classified as hedging instruments. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and a gain of $0.6 million was recognized for the nine months endedSeptember 30, 2014. The company did not have any derivatives that were not designated in 2013.

As of September 30, 2014 and December 31, 2013, the Company had the following outstanding derivatives that were not designated as hedges under qualifying hedging relationships.

	September 30, 2014			December 31, 2013
Derivatives	Number of Instruments	Notional Amount		Number of Instruments	Notional Amount
		(In thousands)			(In thousands)
EUR-USD forwards	16	$	4,944	—	$	—
GBP-USD forwards	71	$	13,354	—	$	—

The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the Balance Sheet as of September 30, 2014 and December 31, 2013:

(In thousands)	Balance Sheet Location	September 30, 2014			December 31, 2013
Derivatives designated as hedging instruments:
Interest rate swaps	Derivative assets, at fair value	$	355		$	734
Foreign currency swaps	Derivative assets, at fair value	$	2,996		$	—
GBP-USD Forwards	Derivative assets, at fair value	$	460		$	—
EUR-USD Forwards	Derivative assets, at fair value	$	245		$	—
Interest rate swaps	Derivative liabilities, at fair value	$	(1,708	)	$	—
Foreign currency swaps	Derivative liabilities, at fair value	$	(1,783	)	$	(2,565	)
GBP-USD Forwards	Derivative liabilities, at fair value	$	(29	)	$	—

The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three and nine months endedSeptember 30, 2014 and 2013.

	Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands)	2014			2013		2014			2013
Amount of gain (loss) recognized in accumulated other comprehensive income from derivatives (effective portion)	$	5,735		(1,993	)	$	(84	)	(1,553	)
Amount of loss reclassified from accumulated other comprehensive income into income as interest expense (effective portion)	$	(595	)	(41	)	$	(1,197	)	(51	)
Amount of gain (loss) recognized in income on derivative instruments (ineffective portion and amount excluded from effectiveness testing)	$	—		—		$	—		—

Tabular Disclosure Offsetting Derivatives

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of September 30, 2014 and December 31, 2013. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the accompanying consolidated balance sheets.

											Gross Amounts Not Offset on the Balance Sheet
Derivatives (In thousands)	Gross Amounts of Recognized Assets		Gross Amounts of Recognized (Liabilities)			Gross Amounts Offset on the Balance Sheet		Net Amounts of Assets (Liabilities) presented on the Balance Sheet			Financial Instruments		Cash Collateral Received (Posted)		Net Amount
September 30, 2014	$	4,056	$	(3,520	)	$	—	$	536		$	—	$	—	$	536
December 31, 2013	$	734	$	(2,565	)	$	—	$	(1,831	)	$	—	$	—	$	(1,831	)

Credit-risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision where 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.

As of September 30, 2014, the fair value of derivatives in net liability position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $3.9 million. As of September 30, 2014, the Company had not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value.