XML 90 R19.htm IDEA: XBRL DOCUMENT v2.4.0.6
Risk Management and Derivatives
 12 Months Ended
Dec. 31, 2012
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Risk Management and Derivatives
Risk Management and Derivatives
Risk management
In the normal course of its on-going business operations, the Company encounters economic risk. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different points in time and potentially at different bases, than its interest-earning assets. Credit risk is the risk of default on the Company's lending investments or leases that result from a borrower's or tenant's inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of loans and other lending investments due to changes in interest rates or other market factors, including the rate of prepayments of principal and the value of the collateral underlying loans, the valuation of real estate assets by the Company as well as changes in foreign currency exchange rates.
Risk concentrations—As of December 31, 2012, the Company's total investment portfolio was comprised of the following property/collateral types ($ in thousands)(1):

Property/Collateral Types
 
Real Estate Finance
 
Net Lease
Assets
 
Operating Properties
 
Land
 
Total
 
% of
Total
Land
 
$
297,039

 
$
—

 
$
—

 
$
970,593

 
$
1,267,632

 
22.3
%
Office
 
124,058

 
301,304

 
258,977

 
—

 
684,339

 
12.0
%
Condominium
 
237,534

 
—

 
385,229

 
—

 
622,763

 
11.0
%
Industrial / R&D
 
94,617

 
472,149

 
55,439

 
—

 
622,205

 
10.9
%
Retail
 
293,651

 
50,529

 
184,000

 
—

 
528,180

 
9.3
%
Entertainment / Leisure
 
98,423

 
414,849

 
14

 
—

 
513,286

 
9.0
%
Hotel
 
298,293

 
91,746

 
84,375

 
—

 
474,414

 
8.3
%
Mixed Use / Mixed Collateral
 
237,989

 
—

 
179,337

 
—

 
417,326

 
7.3
%
Other Property Types
 
181,481

 
9,424

 
24,541

 
—

 
215,446

 
3.7
%
Strategic Investments
 
—

 
—

 
—

 
—

 
351,225

 
6.2
%
Total
 
$
1,863,085

 
$
1,340,001

 
$
1,171,912

 
$
970,593

 
$
5,696,816

 
100.0
%

Explanatory Note:
_______________________________________________________________________________

(1)
Based on the carrying value of the Company's total investment portfolio gross of general loan loss reserves.
As of December 31, 2012, the Company's total investment portfolio had the following characteristics by geographical region ($ in thousands)(1):
Geographic Region
 
Real Estate Finance
 
Net Lease
Assets
 
Operating Properties
 
Land
 
Total
 
% of
Total
West
 
$
340,457

 
$
340,896

 
$
237,496

 
$
367,470

 
$
1,286,319

 
22.6
%
Northeast
 
421,660

 
317,003

 
175,894

 
180,744

 
1,095,301

 
19.2
%
Southeast
 
308,559

 
201,535

 
251,410

 
89,035

 
850,539

 
14.9
%
Southwest
 
197,478

 
182,329

 
209,424

 
120,293

 
709,524

 
12.5
%
Mid-Atlantic
 
43,866

 
104,205

 
217,379

 
180,290

 
545,740

 
9.6
%
International(2)
 
308,210

 
—

 
—

 
—

 
308,210

 
5.4
%
Central
 
159,460

 
68,434

 
61,938

 
9,500

 
299,332

 
5.2
%
Northwest
 
83,236

 
56,409

 
18,371

 
23,261

 
181,277

 
3.2
%
Various
 
159

 
69,190

 
—

 
—

 
69,349

 
1.2
%
Strategic Investments(2)
 
—

 
—

 
—

 
—

 
351,225

 
6.2
%
Total
 
$
1,863,085

 
$
1,340,001

 
$
1,171,912

 
$
970,593

 
$
5,696,816

 
100.0
%

Explanatory Notes:
_______________________________________________________________________________

(1)
Based on the carrying value of the Company's total investment portfolio gross of general loan loss reserves.
(2)
Strategic investments includes $36.6 million of international assets. Additionally, international and strategic investments include $228.7 million of European assets, including $117.6 million in Germany and $111.1 million in the United Kingdom.
Concentrations of credit risks arise when a number of borrowers or tenants related to the Company's investments are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company monitors various segments of its portfolio to assess potential concentrations of credit risks. Management believes the current portfolio is reasonably well diversified and does not contain any significant concentration of credit risks.
Substantially all of the Company's real estate as well as assets collateralizing its loans receivable are located in the United States, with California 15.5% representing the only significant concentration (greater than 10.0%) as of December 31, 2012. The Company's portfolio contains significant concentrations in the following asset types as of December 31, 2012: land 22.3%, office 12.0%, condominium 11.0% and industrial/R&D 10.9%.
The Company underwrites the credit of prospective borrowers and tenants and often requires them to provide some form of credit support such as corporate guarantees, letters of credit and/or cash security deposits. Although the Company's loans and real estate assets are geographically diverse and the borrowers and tenants operate in a variety of industries, to the extent the Company has a significant concentration of interest or operating lease revenues from any single borrower or tenant, the inability of that borrower or tenant to make its payment could have an adverse effect on the Company. As of December 31, 2012, the Company's five largest borrowers or tenants collectively accounted for approximately $88.2 million of the Company's aggregate annualized interest and operating lease revenue, of which no single customer accounts for more than 7.2%.
Derivatives
The Company's use of derivative financial instruments is primarily limited to the utilization of interest rate hedges and foreign exchange hedges. The principal objective of such hedges is to minimize the risks and/or costs associated with the Company's operating and financial structure and to manage its exposure to foreign exchange rates. Derivatives not designated as hedges are not speculative and are used to manage the Company's exposure to interest rate movements, foreign exchange rate movements, and other identified risks, but may not meet the strict hedge accounting requirements.

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 December 31, 2012 and 2011 ($ in thousands):

 
Derivative Assets as of December 31,
 
Derivative Liabilities as of December 31,
 
2012
 
2011
 
2012
 
2011
Derivative
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Foreign exchange contracts
N/A
 
$
—

 
N/A
 
$
—

 
Other Liabilities
 
$
2,855

 
Other Liabilities
 
$
1,342

Cash flow interest rate swap
N/A
 
—

 
N/A
 
—

 
Other Liabilities
 
580

 
Other Liabilities
 
1,031

Total
 
 
$
—

 
 
 
$
—

 
 
 
$
3,435

 
 
 
$
2,373



The tables below present the effect of the Company's derivative financial instruments on the Consolidated Statements of Operations for the years ended December 31, 2012 and 2011 ($ in thousands):

Derivatives Designated in Hedging Relationships
 
Location of Gain (Loss)
Recognized in
Income on Derivative
 
Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Earnings (Effective Portion)
 
Amount of Gain (Loss) Recognized in Earnings (Ineffective Portion)
For Year Ended December 31, 2012
 
 
 
 

 
 

 
 
Cash flow interest rate swap
 
Interest Expense
 
$
(968
)
 
$
(44
)
 
N/A
For the Year Ended December 31, 2011
 
 
 
 

 
 

 
 
Cash flow interest rate swap
 
Interest Expense
 
$
(1,553
)
 
$
(180
)
 
N/A

 
 
 
 
Amount of Gain or (Loss)
Recognized in Income on Derivative
 
 
Location of Gain or
(Loss) Recognized in
Income on Derivative
 
For the Years Ended December 31,
Derivatives not Designated in Hedging Relationships
 
2012
 
2011
 
2010
Foreign Exchange Contracts
 
Other Expense
 
$
(8,920
)
 
$
17,406

 
$
(1,010
)


The Company utilizes foreign exchange derivatives to limit its exposure to changes in exchange rates on certain assets denominated in foreign currencies. The Company marks its foreign investments to market each quarter based on current exchange rates and records the gain or loss through “Other expense” on its Consolidated Statements of Operations for loan investments or “Accumulated comprehensive income,” on its Consolidated Balance Sheets for net investments in foreign subsidiaries. Gains or losses on the related foreign exchange derivatives are recorded in “Other Expense,” as noted in the table above, and offset the marks taken on the assets. During the years ended December 31, 2012, 2011 and 2010, the Company recorded net losses related to foreign investments of $0.7 million, $2.3 million and $0.1 million, in its Consolidated Statements of Operations.  

The following table presents the Company's foreign currency derivatives outstanding as of December 31, 2012 ($ in thousands):

Derivative Type
 
Notional
Amount
 
Notional
(USD Equivalent)
 
Maturity
Sells EUR/Buys USD Forward
 
€
109,000

 
$
143,925

 
January 2013
Sells GBP/Buys USD Forward
 
£
52,850

 
$
85,856

 
January 2013
Sells CAD/Buys USD Forward
 
C$
50,700

 
$
51,065

 
January 2013


Qualifying Cash Flow Hedges—In October 2012, the Company entered into an interest rate swap to convert its variable rate debt to fixed rate on a new $28.0 million secured term loan maturing in 2019. The following table presents the Company's interest rate swap outstanding as of year ended December 31, 2012 ($ in thousands).

Derivative Type
 
Notional
Amount
 
Variable Rate
 
Fixed Rate
 
Maturity
Interest Rate Swap
 
$
28,000

 
LIBOR + 2.00%
 
3.75%
 
November 2019

During the year ended December 31, 2012, the Company terminated its previously outstanding interest rate swaps in conjunction with the early repayment of its secured term loans (see also Note 8).

Over the next 12 months, the Company expects that $3.2 million of expense and $0.6 million of income related to terminated cash flow hedges, will be reclassified from "Accumulated other comprehensive income (loss)" into earnings.

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.

In connection with its foreign currency derivatives, as of December 31, 2012 and December 31, 2011, the Company has posted collateral of $9.6 million, which is included in "Restricted cash" on the Company's Consolidated Balance Sheets.