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 March 31, 2019 and December 31, 2018:



(In thousands)	Balance Sheet Location	March 31, 2019			December 31, 2018
Derivatives designated as hedging instruments:
Interest rate "pay-fixed" swaps (USD)	Derivative assets, at fair value	$	1,752		$	3,258
Interest rate "pay-fixed" swaps (GBP)	Derivative liabilities, at fair value	(3,621		)	(1,157		)
Interest rate "pay-fixed" swaps (EUR)	Derivative liabilities, at fair value	(1,209		)	(1,443		)
Total		$	(3,078	)	$	658
Derivatives not designated as hedging instruments:
Foreign currency forwards (GBP-USD)	Derivative assets, at fair value	$	1,990		$	3,247
Foreign currency forwards (EUR-USD)	Derivative assets, at fair value	3,112			2,225
Interest rate swaps (EUR)	Derivative liabilities, at fair value	(1,078		)	(1,286		)
Total		$	4,024		$	4,186

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.

Effective January 1, 2019, all of the changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income (loss) and are subsequently reclassified into earnings in the period that the hedged forecasted transaction impacts earnings. Prior to January 1, 2019, the ineffective portion of the change in fair value of the derivatives was recognized directly in earnings. During the three months ended March 31, 2019, such derivatives were used to hedge the variable cash flows associated with variable-rate debt.

Additionally, during the three months ended March 31, 2019 and 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 $26,600 and $23,030 for the three months ended March 31, 2019 and 2018, respectively. 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 12 months, the Company estimates that an additional $1.8 million will be reclassified from other comprehensive income as an increase to interest expense.

As of March 31, 2019 and December 31, 2018, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:



	March 31, 2019			December 31, 2018
Derivatives	Number of Instruments	Notional Amount		Number of Instruments	Notional Amount
		(In thousands)			(In thousands)
Interest rate "pay-fixed" swaps (GBP)	48	$	239,792	48	$	234,312
Interest rate "pay-fixed" swaps (EUR)	12	198,232		13	212,255
Interest rate "pay-fixed" swaps (USD)	3	150,000		3	150,000
Total	63	$	588,024	64	$	596,567

In connection with a multi-property loan which refinanced all of the Company's mortgage notes payable secured by its properties located in Finland during the first quarter of 2019, the Company terminated five interest rate swaps with an aggregate notional amount of €57.4 million for a payment of approximately $0.8 million. Following these termination, $0.7 million was recorded in AOCI and is being recorded as an adjustment to interest expense over the term of the original EUR hedges and respective borrowings. Of the amount recorded in AOCI following these terminations, $0.1 million was recorded as an increase to interest expense for the three months ended March 31, 2019 and approximately $0.6 million remained in AOCI as of March 31, 2019.

In connection with a multi-property loan which refinanced all of the Company's mortgage notes payable denominated in GBP, the Company terminated 15 interest rate swaps with an aggregate notional amount of £208.8 million and one floor with a notional amount of £28.1 million. Following these terminations, the amount relating to GBP borrowings still outstanding of approximately $1.2 million was recorded in AOCI and is being recorded as an adjustment to interest expense over the term of the original GBP hedges and respective borrowings. Of the amount recorded in AOCI following these terminations, $0.2 million was recorded as an increase to interest expense for the three months ended March 31, 2019 and approximately $0.5 million remained in AOCI as of March 31, 2019.

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 months ended March 31, 2019 and 2018.



	Three Months Ended March 31,
(In thousands)	2019			2018
Amount of loss recognized in accumulated other comprehensive income (loss) from derivatives (effective portion)	$	(4,954	)	$	(551	)
Amount of loss reclassified from accumulated other comprehensive income (loss) into income as interest expense (effective portion)	$	(556	)	$	(1,311	)
Total interest expense recorded in the consolidated statement of operations	$	15,162		$	12,975

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. Through the third quarter of 2018, the Company used 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.

Effective January 1, 2019, for derivatives designated as net investment hedges, all of the changes in the fair value of the derivatives are reported in AOCI (outside of earnings) as part of the cumulative translation adjustment. Prior to January 1, 2019, the ineffective portion of the change in fair value of the derivatives, if any, was recognized directly in earnings. Amounts are reclassified out of AOCI into earnings when the hedged net investment is either sold or substantially liquidated.

As of March 31, 2019 and December 31, 2018 the Company did not have foreign currency derivatives that were designated as net investment hedges used to hedge its net investments in foreign operation.

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 economically 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 a gain of $0.3 million and a loss of $2.9 million on the non-designated hedges for the three months ended March 31, 2019 and 2018, respectively.

As of March 31, 2019 and December 31, 2018, the Company had the following outstanding derivatives that were not designated as hedges under qualifying hedging relationships.



	March 31, 2019			December 31, 2018
Derivatives	Number of Instruments	Notional Amount		Number of Instruments	Notional Amount
		(In thousands)			(In thousands)
Foreign currency forwards (GBP-USD)	45	$	38,000	50	$	43,000
Foreign currency forwards (EUR-USD)	34	34,250		38	39,500
Interest rate swaps (EUR)	5	135,896		5	138,625
Total	84	$	208,146	93	$	221,125

Offsetting Derivatives

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of March 31, 2019 and December 31, 2018. 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 presented on the Balance Sheet		Financial Instruments		Cash Collateral Received (Posted)		Net Amount
March 31, 2019	$	6,854	$	(5,908	)	$	—	$	946	$	—	$	—	$	946
December 31, 2018	$	8,730	$	(3,886	)	$	—	$	4,844	$	—	$	—	$	4,844

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 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 March 31, 2019, 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 $6.7 million. As of March 31, 2019, 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.