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Derivatives and Hedging Activities | 9 Months Ended
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Sep. 30, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives and Hedging Activities | Derivatives and Hedging Activities Risk Management Objective of Using Derivatives The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. Certain of the Company's foreign operations expose the Company to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value of the Company’s cash receipts and payments in terms of the Company’s functional currency. The Company enters into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of its functional currency, the USD. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company's operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes other than interest rate and currency risk management. The use of derivative financial instruments carries certain risks, including the risk that any counterparty to a contractual arrangement may not be able to perform under the agreement. To mitigate this risk, the Company only enters into a derivative financial instrument with a counterparty with a high credit rating with a major financial institution which the Company and its affiliates may also have other financial relationships with. The Company does not anticipate that any such counterparty will fail to meet its obligations. The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the consolidated balance sheets as of September 30, 2018 and December 31, 2017:
(In thousands) |  | Balance Sheet Location |  | September 30, 2018 |  | December 31, 2017
Derivatives designated as hedging instruments: |  |  |  |  |  |
Foreign currency forwards (EUR-USD) |  | Derivative liabilities, at fair value |  | $ | — |  |  | $ | (304 | )
Cross currency swaps (EUR) |  | Derivative liabilities, at fair value |  | — |  |  | (3,328 | )
Cross currency swaps (GBP) |  | Derivative assets, at fair value |  | 1,170 |  |  | — |
Cross currency swaps (GBP) |  | Derivative liabilities, at fair value |  | — |  |  | (1,183 | )
Interest rate swaps (USD) |  | Derivative assets, at fair value |  | 5,992 |  |  | 2,093 |
Interest rate swaps (GBP) |  | Derivative assets, at fair value |  | 391 |  |  | — |
Interest rate swaps (GBP) |  | Derivative liabilities, at fair value |  | — |  |  | (3,713 | )
Interest rate swaps (EUR) |  | Derivative liabilities, at fair value |  | (1,646 | ) |  | (2,446 | )
Total |  |  |  | $ | 5,907 |  |  | $ | (8,881 | )
Derivatives not designated as hedging instruments: |  |  |  |  |  |
Foreign currency forwards (GBP-USD) |  | Derivative assets, at fair value |  | $ | 1,709 |  |  | $ | 20 |
Foreign currency forwards (GBP-USD) |  | Derivative liabilities, at fair value |  | (46 | ) |  | (1,175 | )
Foreign currency forwards (EUR-USD) |  | Derivative assets, at fair value |  | 1,146 |  |  | — |
Foreign currency forwards (EUR-USD) |  | Derivative liabilities, at fair value |  | (12 | ) |  | (1,258 | )
Put options (EUR) |  | Derivative assets, at fair value |  | 34 |  |  | 63 |
Interest rate swaps (EUR) |  | Derivative liabilities, at fair value |  | (1,368 | ) |  | (2,384 | )
Total |  |  |  | $ | 1,463 |  |  | $ | (4,734 | )
Cash Flow Hedges of Interest Rate Risk The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction impacts earnings. During 2018, such derivatives were used to hedge the variable cash flows associated with variable-rate debt. During the three and nine months ended September 30, 2018, the Company recorded gains of approximately $0.1 million and $20,699 of ineffectiveness in earnings, respectively. During the three and nine months ended September 30, 2017, the Company recorded gains of approximately $46,000 and $0.1 million of ineffectiveness in earnings, respectively. Additionally, during the three and nine months ended September 30, 2018, the Company accelerated the reclassification of amounts in other comprehensive income to earnings as a result of the hedged forecasted transactions becoming probable not to occur. The accelerated amounts were losses of $90,899 and $0.1 million for the three and nine months ended September 30, 2018. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $1.5 million will be reclassified from other comprehensive income as an increase to interest expense. As of September 30, 2018 and December 31, 2017, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
|  | September 30, 2018 |  | December 31, 2017
Derivatives |  | Number of Instruments |  | Notional Amount |  | Number of Instruments |  | Notional Amount
|  |  |  | (In thousands) |  |  |  | (In thousands)
Interest rate swaps (GBP) |  | 48 |  | $ | 239,740 |  |  | 19 |  | $ | 301,155 |
Interest rate swaps (EUR) |  | 13 |  | 215,237 |  |  | 13 |  | 222,190 |
Interest rate swaps (USD) |  | 3 |  | 150,000 |  |  | 3 |  | 150,000 |
Total |  | 64 |  | $ | 604,977 |  |  | 35 |  | $ | 673,345 |
In connection with the July 24, 2017 refinancing of the Prior Credit Facility, the Company terminated an interest rate swap with notional amount of £160.0 million for a payment of $2.6 million. This swap was designated as a cash flow hedge on the Company's GBP borrowings which were partially paid off. As a result of the termination, the Company accelerated the reclassification of amounts in other comprehensive income to earnings as a result of the hedged forecasted transactions becoming probable not to occur. The portion of the termination payment relating to the GBP borrowings that were paid off resulted in a charge to earnings of $1.1 million, included in loss on derivative instruments in the third quarter of 2017. The remaining amount relating to GBP borrowings still outstanding will remain in AOCI and be recorded as an adjustment to interest expense over the term of the related GBP borrowings. In connection with the July 24, 2017 refinancing of the Prior Credit Facility, the Company novated an interest rate swap with a notional amount of €224.0 million. Subsequent to the novation, the swap no longer qualified for hedge accounting. The interest swap liability of $0.7 million at that date will remain in AOCI and be recorded as an adjustment to interest expense over the term of the related LIBOR borrowings. Subsequent changes in the value of the swap will be reflected in earnings. The table below details the location in the consolidated financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three and nine months ended September 30, 2018 and 2017.
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(In thousands) |  | 2018 |  | 2017 |  | 2018 |  | 2017
Amount of gain (loss) recognized in accumulated other comprehensive income (loss) from derivatives (effective portion) |  | $ | 2,018 |  |  | $ | (3,738 | ) |  | $ | 8,656 |  |  | $ | (12,364 | )
Amount of loss reclassified from accumulated other comprehensive income (loss) into income as interest expense (effective portion) |  | $ | (755 | ) |  | $ | (1,461 | ) |  | $ | (3,090 | ) |  | $ | (4,523 | )
Amount of gain (loss) recognized in income on derivative instruments (ineffective portion, reclassifications of missed forecasted transactions and amounts excluded from effectiveness testing) |  | $ | 16 |  |  | $ | (1,102 | ) |  | $ | (96 | ) |  | $ | (1,007 | )
Net Investment Hedges The Company is exposed to fluctuations in foreign currency exchange rates on property investments in foreign countries which pay rental income, incur property related expenses and hold debt instruments in currencies other than its functional currency, the USD. The Company uses foreign currency derivatives including cross currency swaps to hedge its exposure to changes in foreign exchange rates on certain of its foreign investments. Cross currency swaps involve fixing the applicable exchange rate for delivery of a specified amount of foreign currency on specified dates. For derivatives designated as net investment hedges, the effective portion of changes in the fair value of the derivatives are reported in Accumulated Other Comprehensive Income (outside of earnings) as part of the cumulative translation adjustment. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts are reclassified out of accumulated other comprehensive income into earnings when the hedged net investment is either sold or substantially liquidated. As of September 30, 2018 and December 31, 2017, the Company had the following outstanding foreign currency derivatives that were designated as net investment hedges used to hedge its net investments in foreign operations:
|  | September 30, 2018 |  | December 31, 2017
Derivatives |  | Number of Instruments |  | Notional Amount |  | Number of Instruments |  | Notional Amount
|  |  |  | (In thousands) |  |  |  | (In thousands)
Cross currency swaps (EUR-USD) |  | — |  | $ | — |  |  | 3 |  | $ | 43,222 |
Cross currency swaps (GBP-USD) |  | 1 |  | 64,007 |  |  | 1 |  | 66,282 |
Foreign currency forwards (EUR-USD) |  | — |  | — |  |  | 1 |  | 12,099 |
Total |  | 1 |  | $ | 64,007 |  |  | 5 |  | $ | 121,603 |
Foreign Denominated Debt Designated as Net Investment Hedges Effective May 17, 2015, all foreign currency draws under the Prior Credit Facility were designated as net investment hedges. As such, the effective portion of changes in value due to currency fluctuations are reported in accumulated other comprehensive income (loss) (outside of earnings) as part of the cumulative translation adjustment. The undesignated portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts are reclassified out of accumulated other comprehensive income (loss) into earnings when the hedged net investment is either sold or substantially liquidated, or if the Company should no longer possess a controlling interest. As of September 30, 2018, total foreign currency advances under the Credit Facility were approximately $373.0 million, which reflects advances of £40 million ($52.1 million based upon an exchange rate of £1.00 to $1.30, as of September 30, 2018) and advances of €276.5 million ($320.8 million based upon an exchange rate of €1.00 to $1.16, as of September 30, 2018). The Company designates its net investment hedge position on the first day of each quarterly period. The table below presents the currency draws designated as net investment hedges and the related net investments in real estate designated in foreign currency.
|  | July 1, 2018
(In thousands) |  | GBP |  | EUR
Currency draws (1) |  | £ | 40,000 |  |  | € | 276,481 |
Net Investments in Real Estate Denominated in Foreign Currency (2) |  | £ | 92,213 |  |  | € | 349,881 |
(1) $52.1 million and $320.8 million, respectively, based on the aforementioned exchange rates as of September 30, 2018. (2) $120.1 million and $406.0 million, respectively, based on the aforementioned exchange rates as of September 30, 2018. The Company records adjustments to earnings for currency impacts related to undesignated excess positions, if any. There were no undesignated excess positions as of July 1, 2018. The Company recorded gains of $0.1 million and losses of $3.8 million for the three and nine months ended September 30, 2017, respectively, due to currency changes on the undesignated excess, as of July 1, 2017, of the foreign currency advances over the related net investments. Additionally, in connection with the July 24, 2017 refinancing of the Prior Credit Facility, the Company terminated a cross currency swap with a notional amount of £49.1 million for a payment of $10.6 million. This swap was designated as a net investment hedge on the Company's EUR investments. The termination payment amount will remain in AOCI until the hedge item is liquidated. Non-designated Derivatives The Company is exposed to fluctuations in the exchange rates of its functional currency, the USD, against the GBP and the EUR. The Company uses foreign currency derivatives, including options, currency forward and cross currency swap agreements, to manage its exposure to fluctuations in GBP-USD and EUR-USD exchange rates. While these derivatives are hedging the fluctuations in foreign currencies, they do not meet the strict hedge accounting requirements to be classified as hedging instruments. Changes in the fair value of derivatives not designated as hedges under qualifying hedging relationships are recorded directly in net income (loss). The Company recorded gains of $1.4 million and $4.8 million on the non-designated hedges for the three and nine months ended September 30, 2018, respectively. The Company recorded losses of $2.0 million and $5.4 million on the non-designated hedges for the three and nine months ended September 30, 2017, respectively. As of September 30, 2018 and December 31, 2017, the Company had the following outstanding derivatives that were not designated as hedges under qualifying hedging relationships.
|  | September 30, 2018 |  | December 31, 2017
Derivatives |  | Number of Instruments |  | Notional Amount |  | Number of Instruments |  | Notional Amount
|  |  |  | (In thousands) |  |  |  | (In thousands)
Foreign currency forwards (GBP-USD) |  | 46 |  | $ | 43,500 |  |  | 24 |  | $ | 32,116 |
Foreign currency forwards (EUR-USD) |  | 41 |  | 42,428 |  |  | 22 |  | 35,712 |
Interest rate swaps (EUR) |  | 5 |  | 140,573 |  |  | 6 |  | 414,093 |
Options (GBP-USD) |  | — |  | — |  |  | 1 |  | 675 |
Options (EUR-USD) |  | 1 |  | 2,500 |  |  | 5 |  | 9,250 |
Total |  | 93 |  | $ | 229,001 |  |  | 58 |  | $ | 491,846 |
Offsetting Derivatives The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of September 30, 2018 and December 31, 2017. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the accompanying consolidated balance sheets.
|  |  |  |  |  |  |  |  |  | Gross Amounts Not Offset on the Balance Sheet |  |
(In thousands) |  | Gross Amounts of Recognized Assets |  | Gross Amounts of Recognized (Liabilities) |  | Gross Amounts Offset on the Balance Sheet |  | Net Amounts of Assets (Liabilities) presented on the Balance Sheet |  | Financial Instruments |  | Cash Collateral Received (Posted) |  | Net Amount
September 30, 2018 |  | $ | 10,442 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,442 |  |  | $ | (55 | ) |  | $ | — |  |  | $ | 10,387 |
September 30, 2018 |  | $ | — |  |  | $ | (3,071 | ) |  | $ | — |  |  | $ | (3,071 | ) |  | $ | 55 |  |  | $ | — |  |  | $ | (3,016 | )
December 31, 2017 |  | $ | 2,176 |  |  | $ | (15,791 | ) |  | $ | — |  |  | $ | (13,615 | ) |  | $ | — |  |  | $ | — |  |  | $ | (13,615 | )
In addition to the above derivative arrangements, the Company also uses non-derivative financial instruments to hedge its exposure to foreign currency exchange rate fluctuations as part of its risk management program, including foreign denominated debt issued and outstanding with third parties to protect the value of its net investments in foreign subsidiaries against exchange rate fluctuations. The Company has drawn, and expects to continue to draw, foreign currency advances under the Prior Credit Facility and the Credit Facility to fund certain investments in the respective local currency which creates a natural hedge against the original equity invested in the real estate investments, removing the need for the final cross currency swaps (see Note 4 — Mortgage Notes Payable, Net). Credit-risk-related Contingent Features The Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. As of September 30, 2018, the fair value of derivatives in a net liability position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $3.5 million. As of September 30, 2018, the Company had not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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