Derivatives and Hedging Activity

6 Months Ended

Jun. 30, 2016

Derivatives and Hedging Activity

Derivatives and Hedging Activity

12. Derivatives and Hedging Activity

Risk Management Objective of Using Derivatives

We are exposed to certain risks arising from both our business operations and economic conditions. Refer to Note 13 to the consolidated financial statements included in our Form 10-K for further discussion of our risk management objectives and policies.

Designated Hedges

Our objective in using interest rate derivatives is to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

In connection with our repurchase agreements, we have entered into six outstanding interest rate swaps that have been designated as cash flow hedges of the interest rate risk associated with forecasted interest payments. As of June 30, 2016, the aggregate notional amount of our interest rate swaps designated as cash flow hedges of interest rate risk totaled $66.4 million. Under these agreements, we will pay fixed monthly coupons at fixed rates ranging from 0.60% to 1.52% of the notional amount to the counterparty and receive floating rate LIBOR. Our interest rate swaps designated as cash flow hedges of interest rate risk have maturities ranging from August 2017 to May 2021.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in AOCI and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and six months ended June 30, 2016 and 2015, we did not recognize any hedge ineffectiveness in earnings.

Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the associated variable-rate debt. Over the next 12 months, we estimate that an additional $0.3 million will be reclassified as an increase to interest expense. We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of 59 months.

Non-designated Hedges

Derivatives not designated as hedges are derivatives that do not meet the criteria for hedge accounting under GAAP or which we have not elected to designate as hedges. We do not use these derivatives for speculative purposes but instead they are used to manage our exposure to foreign exchange rates, interest rate changes and certain credit spreads. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in gain (loss) on derivative financial instruments in our condensed consolidated statements of operations.

We have entered into a series of forward contracts whereby we agreed to sell an amount of foreign currency for an agreed upon amount of USD at various dates through June 2020. These forward contracts were executed to economically fix the USD amounts of foreign denominated cash flows expected to be received by us related to foreign denominated loan investments and properties.

The following table summarizes our non-designated foreign exchange (“Fx”) forwards, interest rate swaps, interest rate caps and credit index instruments as of June 30, 2016 (notional amounts in thousands):

		Aggregate
	Number	Notional	Notional
Type of Derivative	of Contracts	Amount	Currency	Maturity
Fx contracts – Buy Danish Krone ("DKK")	2	137	DKK	December 2016
Fx contracts – Buy Euros ("EUR")	2	94	EUR	December 2016
Fx contracts – Buy Norwegian Krone ("NOK")	2	15	NOK	December 2016
Fx contracts – Buy Swedish Krona ("SEK")	2	1,321	SEK	December 2016
Fx contracts – Sell Danish Krone ("DKK")	1	6,251	DKK	December 2016
Fx contracts – Sell Euros ("EUR") (1)	93	364,047	EUR	July 2016 – June 2020
Fx contracts – Sell Pounds Sterling ("GBP")	81	150,831	GBP	July 2016 – June 2019
Fx contracts – Sell Norwegian Krone ("NOK")	1	878	NOK	December 2016
Fx contracts – Sell Swedish Krona ("SEK")	1	7,032	SEK	December 2016
Interest rate swaps – Paying fixed rates	56	370,206	USD	July 2016 – July 2026
Interest rate swaps – Receiving fixed rates	2	9,800	USD	July 2017 – June 2026
Interest rate caps	2	294,000	EUR	May 2020
Interest rate caps	4	34,474	USD	June 2018 – October 2020
Credit index instruments	9	36,000	USD	September 2058
Total	258

(1) Includes 49 Fx contracts executed to hedge our Euro currency exposure created by our acquisition of the Ireland Portfolio.  As of June 30, 2016, these contracts have an aggregate notional amount of €246.9 million and varying maturities through June 2020.

The table below presents the fair value of our derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of June 30, 2016 and December 31, 2015 (amounts in thousands):

	Fair Value of Derivatives				Fair Value of Derivatives
	in an Asset Position (1) As of				in a Liability Position (2) As of
	June 30,		December 31,		June 30,		December 31,
	2016		2015		2016		2015
Derivatives designated as hedging instruments:
Interest rate swaps	$	—	$	57	$	386	$	122
Total derivatives designated as hedging instruments		—		57		386		122
Derivatives not designated as hedging instruments:
Interest rate swaps and caps		967		2,360		17,160		4,970
Foreign exchange contracts		39,399		41,137		324		104
Credit index instruments		2,326		1,537		—		—
Total derivatives not designated as hedging instruments		42,692		45,034		17,484		5,074
Total derivatives	$	42,692	$	45,091	$	17,870	$	5,196

(1) Classified as derivative assets in our condensed consolidated balance sheets.

(2) Classified as derivative liabilities in our condensed consolidated balance sheets.

The tables below present the effect of our derivative financial instruments on the condensed consolidated statements of operations and of comprehensive income for the three and six months ended June 30, 2016 and 2015 (amounts in thousands):

			Gain (Loss)
	Gain (Loss)		Reclassified		Gain (Loss)
	Recognized		from AOCI		Recognized
Derivatives Designated as Hedging Instruments	in OCI		into Income		in Income		Location of Gain (Loss)
For the Three Months Ended June 30,	(effective portion)		(effective portion)		(ineffective portion)		Recognized in Income
2016	$	(136)	$	(88)	$	—	Interest expense
2015	$	(71)	$	(194)	$	—	Interest expense
For the Six Months Ended June 30,
2016	$	(504)	$	(183)	$	—	Interest expense
2015	$	(538)	$	(398)	$	—	Interest expense

		Amount of Gain (Loss)				Amount of Gain (Loss)
		Recognized in Income for the				Recognized in Income for the
Derivatives Not Designated	Location of Gain (Loss)	Three Months Ended June 30,				Six Months Ended June 30,
as Hedging Instruments	Recognized in Income	2016		2015		2016		2015
Interest rate swaps and caps	Gain (loss) on derivative financial instruments	$	(7,273)	$	7,958	$	(25,273)	$	(4,964)
Foreign exchange contracts	Gain (loss) on derivative financial instruments		27,899		(27,799)		21,349		10,172
Credit index instruments	Gain (loss) on derivative financial instruments		(373)		311		(541)		(115)
		$	20,253	$	(19,530)	$	(4,465)	$	5,093