Risk Management and Use of Derivative Financial Instruments

3 Months Ended

Mar. 31, 2013

Risk Management and Use of Deriviative Financial Instruments

Derivative Instruments And Hedging Activities Disclosure

Note9.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 three main components of economic risk that impact us: interest rate risk, credit risk and market risk. We are primarily subject to interest rate risk on our interest-bearing assets and liabilities. Credit risk is the risk of default on our operations and 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 ourother investments due to changes in interest rates or other market factors. In addition, we own investments in Europeand in Asia and are subject to the risks associated with changing foreign currency exchange rates.

Use of 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, and do not plan to enter, into financial instruments for trading or speculative purposes. In addition to derivative instruments that we entered into on our own behalf, we may also be a party to derivative instruments that are embedded in other contracts, and we may own common stock warrants, granted to us by lessees when structuring lease transactions, which are considered to be derivative instruments. The primary risks related to our use of derivative instruments include default by a counterparty to a hedging arrangement 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 counterparties that are 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) incomeuntil the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is immediately 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 are reported in Other comprehensive (loss) incomeas part of the cumulative foreign currency translation adjustment. The ineffective portion of the change in fair value of the derivative is recognized directly in earnings. Amounts are reclassified out of Other comprehensive (loss) incomeinto earnings when the hedged investment is either sold or substantially liquidated.

The following table sets forth certain information regarding our derivative instrumentsfor the periods presented (in thousands):

		Asset Derivatives Fair Value at				Liability Derivatives Fair Value at
	Balance Sheet Location	March 31, 2013		December 31, 2012		March 31, 2013		December 31, 2012
Derivatives Designated
as Hedging Instruments
Foreign currency forwards	Other assets, net	$	8,707	$	4,229	$	-	$	-
Foreign currency collars	Other assets, net		3,542		2,743		-		-
Interest rate cap	Other assets, net		-		1		-		-
Foreign currency forwards	Accounts payable,
	accrued expenses and
	other liabilities		-		-		(198)		(2,533)
Interest rate swaps	Accounts payable,
	accrued expenses and
	other liabilities		-		-		(17,840)		(20,142)
Derivatives Not Designated
as Hedging Instruments
Embedded derivatives (a)	Accounts payable,
	accrued expenses and
	other liabilities		-		-		(193)		(1,141)
Stock warrants (b)	Other assets, net		1,650		1,485		-		-
Foreign currency forward	Other assets, net		818		-		-		-
Put options	Accounts payable,
	accrued expenses and
Total derivatives		$	14,717	$	8,458	$	(18,231)	$	(23,816)

__________

• In connection with anADC Arrangementwith IDL Wheel Tenant, LLC, we agreed to fund a portion of the loan in euro and we locked the euro toU.S. dollar exchange rate at $1.278 to the developer at the time of the transaction (Note 6). This component of the loan is deemed to be an embedded derivative.
• As part of the purchase of an interest in Hellweg Die Profi-Baumärkte GmbH & Co. KG (“Hellweg 2”) from Corporate Property Associates 14 Incorporated (“CPA®:14”) in May 2011, we acquired warrants from CPA®:14, which were granted by Hellweg2 to CPA®:14. These warrants give us participation rights to any distributions made by Hellweg2 and we are entitled to a cash distribution that equals a certain percentage of the liquidity event price of Hellweg2, should a liquidity event occur.

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 the balance sheet. At March 31, 2013, no cash collateral has been posted nor received for any of our derivative positions.

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

	Amount of Gain (Loss) Recognized in
	Other Comprehensive (Loss) Income on Derivatives (Effective Portion)
	Three Months Ended March 31,
Derivatives in Cash Flow Hedging Relationships	2013		2012
Foreign currency forward contract	$	5,205	$	(1,263)
Interest rate swaps		1,967		(694)
Foreign currency collars		1,017		(2,617)
Interest rate cap (a)		147		75
Put options		-		192
Derivatives in Net Investment Hedging Relationships (b)
Foreign currency contracts		1,863		(1,343)
Total	$	10,199	$	(5,650)

	Amount of Gain (Loss) Reclassified from
	Other Comprehensive (Loss) Income into Income (Effective Portion)
	Three Months Ended March 31,
Derivatives in Cash Flow Hedging Relationships	2013		2012
Foreign currency collars (c)	$	417	$	618
Foreign currency forwards (c)		288		138
Interest rate cap		(267)		(182)
Interest rate swaps		(674)		(706)
Total	$	(236)	$	(132)

__________

• Includesgains attributable to noncontrolling interests of $0.1million and less than $0.1 millionfor the three months ended March 31, 2013 and 2012, respectively.
• 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) incomeuntil the underlying investment is sold, at which time we reclassify the gain or loss to earnings.
• Gains(losses) reclassified from Other comprehensive (loss) incomeinto income (loss) for contracts and collars that have matured are included in Other income and (expenses).

		Amount of Gain (Loss) Recognized in
		Income on Derivatives
	Location of Gain (Loss)	Three Months Ended March 31,
Derivatives Not in Cash Flow Hedging Relationships	Recognized in Income	2013		2012
Embedded derivatives	Other income and (expenses)	$	948	$	-
Foreign currency contracts	Other income and (expenses)		563		-
Interest rate swap (a)	Interest expense		103		(29)
Stock warrants	Other income and (expenses)		165		-
Total		$	1,779	$	(29)

___________

• 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, may 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 the 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. An interest rate cap limits 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 we had outstanding on our consolidated investments at March 31, 2013that were designated as cash flow hedges are summarized as follows (currency in thousands):

		Notional		Effective	Effective	Expiration	Fair Value at
Description	Type	Amount		Interest Rate	Date	Date	March 31, 2013 (a)
6-Month Euro Interbank Offered Rate (“Euribor”)	“Pay-fixed” swap	€	164,250	4.2%	9/2011	9/2016	$	(9,416)
3-Month Euribor	“Pay-fixed” swap	€	12,750	8.5%	3/2013	3/2020		(212)
3-Month Euribor	“Pay-fixed” swap	€	9,990	4.4%	2/2013	2/2018		(236)
3-Month Euribor	“Pay-fixed” swap	€	5,814	5.8%	7/2010	11/2017		(572)
3-Month Euribor	“Pay-fixed” swap	€	3,836	4.3%	6/2012	5/2017		(153)
3-Month London Interbank Offered Rate (“LIBOR”) (b)	Interest rate cap	$	118,374	N/A	8/2009	8/2014		-
1-Month LIBOR	“Pay-fixed” swap	$	92,400	3.9%	2/2012	2/2017		(2,466)
3-Month LIBOR	“Pay-fixed” swap	$	25,689	6.6%	1/2010	12/2019		(3,563)
1-Month LIBOR	“Pay-fixed” swap	$	19,941	4.8%	12/2012	12/2022		(182)
1-Month LIBOR	“Pay-fixed” swap	$	9,000	5.0%	3/2012	3/2022		(341)
1-Month LIBOR	“Pay-fixed” swap	$	4,429	4.6%	6/2012	7/2022		(70)
1-Month LIBOR	“Pay-fixed” swap	$	4,270	4.8%	10/2012	11/2022		(54)
1-Month LIBOR	“Pay-fixed” swap	$	4,097	6.0%	1/2011	1/2021		(507)
1-Month LIBOR	“Pay-fixed” swap	$	1,593	4.8%	12/2011	12/2021		(68)
							$	(17,840)

__________

(a)Amounts are based on the exchange rate of the euroat March 31, 2013, as applicable.

(b)The applicable interest rate of the related debt was 2.8%, which was below the interest rate of the cap of 4.0% at March 31, 2013. The notional amount and fair value of $53.3 million and less than $0.1 million, respectively, attributable to noncontrolling interests is included in this swap.

Foreign Currency Contracts

We are exposed to foreign currency exchange rate movements,primarily in the euro and, to a lesser extent, the British pound sterling and the Japanese yen. 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 of the difference in the timing and amount of the rental obligation and the debt service. We may also face challenges with repatriating cash from our foreign investments. We may encounter instances where it is difficult to repatriate cash because of jurisdictional restrictions or because repatriating cash may result in current or future tax liabilities. 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 contractsand 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. 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 consists of a written call option and a purchased put option to sell the foreign currency. These instruments lock the range in which the foreign currency exchange rate will fluctuate.

The following table presents the foreign currency derivative contracts we had outstanding and their designationsat March 31, 2013 (currencyin thousands, except strike price):

	Notional		Strike		Effective	Expiration	Fair Value at
Type	Amount		Price		Date	Date	March 31, 2013
Designated as Cash Flow Hedging Instruments
Collars	€	30,365	$	1.40 - 1.42	9/2011	6/2013 - 9/2014	$	3,542
Forward contracts	€	56,700		1.28 - 1.29	5/2012	12/2014 - 6/2017		(198)
Forward contracts	€	45,000		1.39	7/2011	7/2013		4,745
Forward contracts	€	24,628		1.34 - 1.35	9/2011	9/2013 - 3/2015		1,405
Forward contracts	€	17,100		1.34	12/2012	9/2017 - 3/2018		525
Forward contracts	€	11,342		1.34	1/2013	9/2015 - 3/2016		544
Forward contracts	¥	1,002,834		.0122 - .0128	12/2012	6/2013 - 12/2017		1,488
Not Designated as a Hedging Instrument
Foreign currency forward contracts	¥	610,129		.0128	12/2012	12/2017		818
							$	12,869

Other

Amounts reported in Other comprehensive (loss) incomerelated 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) incomerelated to foreign currency contracts will be reclassified to Other income and (expenses) when the hedged foreign currency proceeds from foreign operations are repatriated to the U.S. At March 31, 2013, we estimate that an additional $7.6 million, inclusive of amounts attributable to noncontrolling interests of $0.6 million, and $3.5 million will be reclassified as interest expense and other income, respectively, during the next 12 months.

We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of collateral received, if any. No collateral was received as of March 31, 2013. At March 31, 2013, our total credit exposure was $9.9 million, inclusive of noncontrolling interest, and the maximum exposure to any single counterparty was $6.5 million.

Some of the agreements we have with our derivative counterparties contain certain credit contingent provisions that could result in a declaration of default against us regarding our derivative obligations if we either default or are capable of being declared in default on certain of our indebtedness. At March 31, 2013, we had not been declared in default on any of our derivative obligations. The estimated fair value of our derivatives that were in a net liability position was $19.2million and $23.0million at March 31, 2013 andDecember 31, 2012, respectively, which included accrued interest and any adjustment for nonperformance risk. If we had breached any of these provisions at either March 31, 2013 or December 31, 2012, we could have been required to settle our obligations under these agreements at their aggregate termination value of $20.8million or $25.1million, respectively.

Portfolio Concentration Risk

Concentrations of credit risk arise when a group of tenants is engaged in similar business activities or is subject to similar economic risks or conditions that could cause them to default on their lease obligations to us. We regularly monitor our portfolio to assess potential concentrations of credit risk. While we believe our portfolio is reasonably well diversified, it does contain concentrations in excess of 10%, based on the percentage of our annualized contractual minimum base rent for the first quarter of 2013, in certain areas. There were no significant changes to our portfolio concentrations at March 31, 2013 as compared to December 31, 2012.