Derivatives and Hedging Activity

3 Months Ended

Mar. 31, 2017

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

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 March 31, 2017, the aggregate notional amount of our interest rate swaps designated as cash flow hedges of interest rate risk totaled $53.0 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 months ended March 31, 2017 and 2016, 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 a decrease to interest expense. We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of 50 months.

Non-designated Hedges

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 March 31, 2017 (notional amounts in thousands):

Type of Derivative	Number of Contracts	Aggregate Notional Amount	Notional Currency	Maturity
Fx contracts – Buy Danish Krone ("DKK")	1	5,947	DKK	September 2017
Fx contracts – Buy Euros ("EUR")	2	1,728	EUR	September 2017
Fx contracts – Buy Norwegian Krone ("NOK")	1	836	NOK	September 2017
Fx contracts – Buy Swedish Krona ("SEK")	1	1,138	SEK	September 2017
Fx contracts – Sell DKK	1	5,960	DKK	September 2017
Fx contracts – Sell EUR (1)	54	293,552	EUR	May 2017 – June 2020
Fx contracts – Sell Pounds Sterling ("GBP")	130	215,690	GBP	April 2017 – July 2020
Fx contracts – Sell NOK	1	836	NOK	September 2017
Fx contracts – Sell SEK	1	1,317	SEK	September 2017
Interest rate swaps – Paying fixed rates	37	780,033	USD	April 2019 – April 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	7	60,138	USD	June 2018 – October 2021
Credit index instruments	5	34,000	USD	September 2058 – November 2059
Total	244

(1) Includes 39 Fx contracts entered into to hedge our Euro currency exposure created by our acquisition of the Ireland Portfolio.  As of March 31, 2017, these contracts have an aggregate notional amount of €236.7 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 March 31, 2017 and December 31, 2016 (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
	March 31,		December 31,		March 31,		December 31,
	2017		2016		2017		2016
Derivatives designated as hedging instruments:
Interest rate swaps	$	62	$	30	$	14	$	56
Total derivatives designated as hedging instruments		62		30		14		56
Derivatives not designated as hedging instruments:
Interest rate swaps and caps		27,487		26,591		338		3,484
Foreign exchange contracts		42,461		62,295		1,215		364
Credit index instruments		1,030		445		—		—
Total derivatives not designated as hedging instruments		70,978		89,331		1,553		3,848
Total derivatives	$	71,040	$	89,361	$	1,567	$	3,904

(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 months ended March 31, 2017 and 2016 (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 March 31,	(effective portion)		(effective portion)		(ineffective portion)		Recognized in Income
2017	$	47	$	(29)	$	—	Interest expense
2016	$	(368)	$	(95)	$	—	Interest expense

		Amount of Gain (Loss)
		Recognized in Income for the
Derivatives Not Designated	Location of Gain (Loss)	Three Months Ended March 31,
as Hedging Instruments	Recognized in Income	2017		2016
Interest rate swaps and caps	Gain (loss) on derivative financial instruments	$	1,468	$	(18,000)
Foreign exchange contracts	Gain (loss) on derivative financial instruments		(5,742)		(6,550)
Credit index instruments	Gain (loss) on derivative financial instruments		(75)		(168)
		$	(4,349)	$	(24,718)