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 four outstanding interest rate swaps that have been designated as cash flow hedges of the interest rate risk associated with forecasted interest payments. As of September 30, 2017, the aggregate notional amount of our interest rate swaps designated as cash flow hedges of interest rate risk totaled $40.0 million. Under these agreements, we will pay fixed monthly coupons at fixed rates ranging from 0.64% 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 November 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 nine months ended September 30, 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 expenses. We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of 44 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. We entered into these forward contracts 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 contracts, and credit index instruments as of September 30, 2017 (notional amounts in thousands):


Type of Derivative	Number of Contracts	Aggregate Notional Amount	Notional Currency	Maturity
Fx contracts – Sell Euros ("EUR") (1)	44	283,394	EUR	November 2017 – June 2020
Fx contracts – Sell Pounds Sterling ("GBP")	129	263,925	GBP	October 2017 – July 2020
Interest rate swaps – Paying fixed rates	30	815,730	USD	April 2019 – September 2027
Interest rate caps	2	294,000	EUR	May 2020
Interest rate caps	8	68,194	USD	June 2018 – October 2021
Credit index instruments	10	59,000	USD	September 2058 – November 2059
Total	223

(1)

Includes 33 Fx contracts entered into to hedge our Euro currency exposure created by our acquisition of the Ireland Portfolio. As of September 30, 2017, these contracts have an aggregate notional amount of €231.1 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 September 30, 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
	September 30,		December 31,		September 30,		December 31,
	2017		2016		2017		2016
Derivatives designated as hedging instruments:
Interest rate swaps	$	33	$	30	$	2	$	56
Total derivatives designated as hedging instruments		33		30		2		56
Derivatives not designated as hedging instruments:
Interest rate contracts		23,961		26,591		—		3,484
Foreign exchange contracts		13,644		62,295		22,888		364
Credit index instruments		655		445		—		—
Total derivatives not designated as hedging instruments		38,260		89,331		22,888		3,848
Total derivatives	$	38,293	$	89,361	$	22,890	$	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 and nine months ended September 30, 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 September 30,	(effective portion)		(effective portion)		(ineffective portion)		Recognized in Income
2017	$	(3)	$	19	$	—	Interest expense
2016	$	107	$	(78)	$	—	Interest expense

For the Nine Months Ended September 30,
2017	$	45	$	(11)	$	—	Interest expense
2016	$	(397)	$	(261)	$	—	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 September 30,				Nine Months Ended September 30,
as Hedging Instruments	Recognized in Income	2017		2016		2017		2016
Interest rate contracts	Loss on derivative financial instruments	$	(3,836)	$	(626)	$	(10,190)	$	(25,899)
Foreign exchange contracts	Loss on derivative financial instruments		(19,650)		(189)		(54,814)		21,160
Credit index instruments	Loss on derivative financial instruments		(738)		(1,513)		(1,155)		(2,054)
		$	(24,224)	$	(2,328)	$	(66,159)	$	(6,793)