Derivative Instruments

9 Months Ended

Sep. 30, 2015

Summary of Derivative Instruments [Abstract]

Derivative Instruments

11. Derivative Instruments

We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates. We may elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on our policy to manage the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. In addition, non-U.S. investments expose us to the potential losses associated with adverse changes in foreign currency to U.S. Dollar exchange rates. We may elect to manage this risk through the use of forward contracts and issuing debt in foreign currencies.

Interest Rate Swap Contracts and Foreign Currency Forward Contracts Designated as Cash Flow Hedges

For instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”), and reclassified into earnings in the same period or periods, during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in earnings. Approximately $2,775,000 of gains, which are included in accumulated other comprehensive income (“AOCI”), are expected to be reclassified into earnings in the next 12 months.

Foreign Currency Hedges

For instruments that are designated and qualify as net investment hedges, the variability in the foreign currency to U.S. Dollar of the instrument is recorded as a cumulative translation adjustment component of OCI. During the nine months ended September 30, 2015, we settled certain net investment hedges generating cash proceeds of $103,615,000.  The balance of the cumulative translation adjustment will be reclassified to earnings when the hedged investment is sold or substantially liquidated.

The following presents the notional amount of derivatives and other financial instruments as of the dates indicated (in thousands):

		September 30, 2015		December 31, 2014
Derivatives designated as net investment hedges:
Denominated in Canadian Dollars	$	1,175,000	$	900,000
Denominated in Pounds Sterling	£	550,000	£	350,000
Financial instruments designated as net investment hedges:
Denominated in Canadian Dollars	$	250,000	$	250,000
Denominated in Pounds Sterling	£	1,050,000	£	1,050,000
Derivatives designated as cash flow hedges
Denominated in U.S. Dollars	$	57,000	$	57,000
Denominated in Canadian Dollars	$	72,000	$	58,000
Denominated in Pounds Sterling	£	57,000	£	40,000
Derivative instruments not designated:(1)
Denominated in Canadian Dollars	$	700,000	$	12,000
(1) These non-designated instruments represent off-setting forward exchange contracts to manage against adverse movements in exchange rates with regards to the purchase price on pending foreign acquisitions.

The following presents the impact of derivative instruments on the Consolidated Statements of Comprehensive Income for the periods presented (in thousands):

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
	Location		2015		2014		2015		2014
Gain (loss) on interest rate swap recognized in OCI (effective portion)	OCI	$	-	$	(4)	$	(1)	$	(11)
Gain (loss) on interest rate swaps reclassified from AOCI into income (effective portion)	Interest expense		(462)		(459)		(1,390)		(1,338)
Gain (loss) on forward exchange contracts recognized in income	Interest expense		2,347		-		6,285		-
Gain (loss) on forward exchange contracts recognized in income	Gain (loss) on derivatives, net		-		(49)		-		(400)
Loss (gain) on option exercise(1)	Loss (gain) on derivatives, net		-		-		(58,427)		-
Gain on release of cumulative translation adjustment related to net investment hedge of an equity investment	Income (loss) from unconsolidated entities		-		528		-		528
Gain (loss) on foreign exchange contracts and term loans designated as net investment hedge recognized in OCI	OCI		174,239		12,880		208,854		6,833
(1) In April 2011, we completed the acquisition of substantially all of the real estate assets of privately-owned Genesis Healthcare Corporation. In conjunction with this transaction, we received the option to acquire an ownership interest in Genesis Healthcare. In February 2015, Genesis Healthcare closed on a transaction to merge with Skilled Healthcare Group to become a publicly traded company which required us to record the value of the derivative asset due to the net settlement feature.