Derivatives and Hedging Activity

12 Months Ended

Dec. 31, 2016

Derivatives and Hedging Activity

Derivatives and Hedging Activity

13. 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. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, foreign exchange, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates, credit spreads, and foreign exchange rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of the known or expected cash receipts and known or expected cash payments principally related to our investments, anticipated level of loan sales, and borrowings.

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 December 31, 2016, the aggregate notional amount of our interest rate swaps designated as cash flow hedges of interest rate risk totaled $55.6 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 years ended December 31, 2016, 2015 and 2014, 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 immaterial amount 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 53 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 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 July 2020. These forward contracts were entered into to economically fix the USD amounts of foreign denominated cash flows expected to be received by us related to certain 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 December 31, 2016 (notional amounts in thousands):

Type of Derivative	Number of Contracts	Aggregate Notional Amount	Notional Currency	Maturity
Fx contracts – Sell Danish Krone ("DKK")	1	5,960	DKK	September 2017
Fx contracts – Sell Euros ("EUR") (1)	59	297,128	EUR	February 2017 – June 2020
Fx contracts – Sell Pounds Sterling ("GBP")	163	266,402	GBP	January 2017 – July 2020
Fx contracts – Sell Norwegian Krone ("NOK")	1	836	NOK	September 2017
Fx contracts – Sell Swedish Krona ("SEK")	1	1,317	SEK	September 2017
Interest rate swaps – Paying fixed rates	24	705,955	USD	April 2019 – January 2027
Interest rate swaps – Receiving fixed rates	1	8,000	USD	July 2017
Interest rate caps	2	294,000	EUR	May 2020
Interest rate caps	6	52,210	USD	June 2018 – October 2021
Credit index instruments	4	14,000	USD	September 2058
Total	262

(1) Includes 42 Fx contracts entered into to hedge our Euro currency exposure created by our acquisition of the Ireland Portfolio.  As of December 31, 2016, these contracts have an aggregate notional amount of €239.3 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 consolidated balance sheets as of December 31, 2016 and 2015 (amounts in thousands):

	Fair Value of Derivatives				Fair Value of Derivatives
	in an Asset Position (1)				in a Liability Position (2)
	as of December 31,				as of December 31,
	2016		2015		2016		2015
Derivatives designated as hedging instruments:
Interest rate swaps	$	30	$	57	$	56	$	122
Total derivatives designated as hedging instruments		30		57		56		122
Derivatives not designated as hedging instruments:
Interest rate swaps and caps		26,591		2,360		3,484		4,970
Foreign exchange contracts		62,295		41,137		364		104
Credit index instruments		445		1,537		—		—
Total derivatives not designated as hedging instruments		89,331		45,034		3,848		5,074
Total derivatives	$	89,361	$	45,091	$	3,904	$	5,196

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

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

The tables below present the effect of our derivative financial instruments on the consolidated statements of operations and of comprehensive income for the years ended December 31, 2016, 2015 and 2014 (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 December 31,	(effective portion)		(effective portion)		(ineffective portion)		Recognized in Income
2016	$	(284)	$	(323)	$	—	Interest expense
2015	$	(709)	$	(741)	$	—	Interest expense
2014	$	(865)	$	(1,372)	$	—	Interest expense

		Amount of Gain (Loss)
		Recognized in Income for the
Derivatives Not Designated	Location of Gain (Loss)	Year Ended December 31,
as Hedging Instruments	Recognized in Income	2016		2015		2014
Interest rate swaps and caps	Gain on derivative financial instruments	$	21,741	$	(22,675)	$	(15,662)
Foreign exchange contracts	Gain on derivative financial instruments		51,818		44,089		37,207
Credit index instruments	Gain on derivative financial instruments		(2,825)		184		(1,094)
		$	70,734	$	21,598	$	20,451