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 assets and liabilities, including the Senior Credit Facility (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 investments due to changes in interest rates or other market factors. We own investments in Europe and Asia 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 income (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 are reported in Other comprehensive income (loss) as part of the cumulative foreign currency translation adjustment. Amounts are reclassified out of Other comprehensive income (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		Asset Derivatives Fair Value at				Liability Derivatives Fair Value at
Derivatives Designated as Hedging Instruments	Balance Sheet Location	March 31, 2016		December 31, 2015		March 31, 2016			December 31, 2015
Foreign currency forward contracts	Other assets, net	$	32,198	$	41,850	$	—		$	—
Foreign currency collars	Other assets, net	—		4		—			—
Interest rate swaps	Accounts payable, accrued expenses and other liabilities	—		—		(13,331		)	(10,732		)
Foreign currency collars	Accounts payable, accrued expenses and other liabilities	—		—		(519		)	(109		)
Derivatives Not Designated as Hedging Instruments
Stock warrants	Other assets, net	1,782		1,782		—			—
Swaption	Other assets, net	148		309		—			—
Total derivatives		$	34,128	$	43,945	$	(13,850	)	$	(10,841	)

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 March 31, 2016 and December 31, 2015, no cash collateral had been posted or 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 Gain (Loss) Recognized on Derivatives in Other Comprehensive Loss (Effective Portion)
	Three Months Ended March 31,
Derivatives in Cash Flow Hedging Relationships	2016			2015
Foreign currency forward contracts	$	(8,855	)	$	24,205
Interest rate swaps	(2,462		)	(1,451		)
Foreign currency collars	(395		)	—

Derivatives in Net Investment Hedging Relationships ^(a)
Foreign currency forward contracts	(585		)	188
Foreign currency collars	(15		)	—
Total	$	(12,312	)	$	22,942



		Amount of Gain (Loss) Reclassified from Other Comprehensive Loss into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships	Location of Gain (Loss) Reclassified to Income	Three Months Ended March 31,
Derivatives in Cash Flow Hedging Relationships	Location of Gain (Loss) Reclassified to Income	2016			2015
Foreign currency forward contracts	Other income and (expenses)	$	2,380		$	3,129
Interest rate swaps	Interest expense	(1,801		)	(2,284		)
Total		$	579		$	845

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(a)	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 income (loss) until the underlying investment is sold, at which time we reclassify the gain or loss to earnings.

Amounts reported in Other comprehensive income (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 income (loss) related to foreign currency derivative contracts will be reclassified to Other income and (expenses) when the hedged foreign currency contracts are settled. At March 31, 2016, we estimated that an additional $4.5 million and $6.1 million will be reclassified as interest expense and as other expenses, 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 March 31,
Derivatives Not in Cash Flow Hedging Relationships	Location of Gain (Loss) Recognized in Income	2016			2015
Swaption	Other income and (expenses)	$	(161	)	$	(92	)
Embedded credit derivatives	Other income and (expenses)	—			237
Stock warrants	Other income and (expenses)	—			(165		)
Foreign currency forward contracts	Other income and (expenses)	—			(4		)

Derivatives in Cash Flow Hedging Relationships
Interest rate swaps ^(a)	Interest expense	24			84
Foreign currency collar ^(a)	Interest expense	(4		)	—
Total		$	(141	)	$	60

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

See below for information regarding why we enter into our derivative instruments and concerning derivative instruments owned by unconsolidated investments, which are excluded from the tables above.

Interest Rate Swaps and Swaption

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 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 swaptions 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. A swaption gives us the right but not the obligation to enter into an interest rate swap, of which the terms and conditions are set on the trade date, on a specified date in the future. Our objective in using these derivatives is to limit our exposure to interest rate movements.

The interest rate swaps and swaption that our consolidated subsidiaries had outstanding at March 31, 2016 are summarized as follows (currency in thousands):



Interest Rate Derivatives	Number of Instruments	Notional Amount		Fair Value at March 31, 2016 ^(a)
Designated as Cash Flow Hedging Instruments
Interest rate swaps	14	233,117	USD	$	(10,113	)
Interest rate swaps	8	196,581	EUR	(3,218		)
Not Designated as Hedging Instrument
Swaption	1	13,230	USD	148
				$	(13,183	)

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(a)	Fair value amount is based on the exchange rate of the euro at March 31, 2016, as applicable.

The interest rate swap that one of our unconsolidated jointly-owned investments had outstanding at March 31, 2016, which was designated as a cash flow hedge, is summarized as follows (currency in thousands):



Interest Rate Derivative	Ownership Interest in Investee at March 31, 2016	Number of Instruments	Notional Amount		Fair Value at March 31, 2016 ^(a)
Interest rate swap	85%	1	10,952	EUR	$	(615	)

__________


(a)	Fair value amount is based on the exchange rate of the euro at March 31, 2016.

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 Japanese yen, the Norwegian krone, and the Indian rupee. 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. Our foreign currency forward contracts and foreign currency collars have maturities of 78 months or less.

The following table presents the foreign currency derivative contracts we had outstanding and their designations at March 31, 2016 (currency in thousands):



Foreign Currency Derivatives	Number of Instruments	Notional Amount		Fair Value at March 31, 2016
Designated as Cash Flow Hedging Instruments
Foreign currency forward contracts	74	145,934	EUR	$	28,585
Foreign currency zero-cost collars	2	15,100	EUR	(496		)
Foreign currency forward contracts	16	11,529	NOK	161
Foreign currency zero-cost collars	3	2,000	NOK	(10		)
Designated as Net Investment Hedging Instruments
Foreign currency forward contracts	8	940,952	JPY	3,366
Foreign currency forward contracts	4	6,090	NOK	86
Foreign currency zero-cost collar	1	2,500	NOK	(13		)
				$	31,679

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 March 31, 2016. At March 31, 2016, our total credit exposure was $30.7 million and the maximum exposure to any single counterparty was $11.6 million.

Some of the agreements 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 March 31, 2016, 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 $15.2 million and $11.4 million at March 31, 2016 and December 31, 2015, respectively, which included accrued interest and any nonperformance risk adjustments. If we had breached any of these provisions at March 31, 2016 or December 31, 2015, we could have been required to settle our obligations under these agreements at their aggregate termination value of $16.2 million and $11.9 million, respectively.

Portfolio Concentration Risk

Concentrations of credit risk arise when a number of tenants are engaged in similar business activities or have 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. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Portfolio Overview for more information about our portfolio concentration risk.

For the three months ended March 31, 2016, the following tenants represented 5% or more of our total revenues:


•	KBR, Inc. (8%);


•	A-American self-storage portfolio (7%);


•	The New York Times Company (7%);


•	Metro Cash & Carry Italia S.p.A. (6%); and


•	Agrokor d.d. (5%).