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Risk Management and Derivatives
 12 Months Ended
Dec. 31, 2013
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—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.
Substantially all of the Company's real estate as well as assets collateralizing its loans receivable are located in the United States. As of December 31, 2013, the only state with a concentration greater than 10.0% was California with 15.1%. As of December 31, 2013, the Company's portfolio contains concentrations in the following asset types: land 21.6%, office 15.2%, industrial/R&D 13.5% and entertainment/leisure 10.7%.
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, 2013, the Company's five largest borrowers or tenants collectively accounted for approximately $99.8 million of the Company's aggregate annualized interest and operating lease revenue, of which no single customer accounts for more than 8%.
Derivatives
The Company's use of derivative financial instruments is primarily limited to the utilization of interest rate swaps, interest rate caps and foreign exchange contracts. The principal objective of such financial instruments is to minimize the risks and/or costs associated with the Company's operating and financial structure and to manage its exposure to interest rates and foreign exchange rates. Derivatives not designated as hedges are not speculative and are used to manage the Company's exposure to interest rate movements, foreign exchange rate movements, and other identified risks, but may not meet the strict hedge accounting requirements.
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of December 31, 2013 and 2012 ($ in thousands):
 
Derivative Assets as of December 31,
 
Derivative Liabilities as of December 31,
 
2013
 
2012
 
2013
 
2012
Derivative
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Foreign exchange contracts
Other Assets
 
$
1,418

 
N/A
 
$
—

 
Other Liabilities
 
$
1,653

 
Other Liabilities
 
$
2,855

Interest rate swap
Other Assets
 
650

 
N/A
 
—

 
N/A
 
—

 
Other Liabilities
 
580

Interest rate cap
Other Assets
 
9,107

 
N/A
 
—

 
N/A
 
—

 
N/A
 
—

Total
 
 
$
11,175

 
 
 
$
—

 
 
 
$
1,653

 
 
 
$
3,435

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, 2013 and 2012 ($ in thousands):
Derivatives Designated in Hedging Relationships
 
Location of Gain (Loss)
Recognized in Income
 
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 the Year Ended December 31, 2013
 
 
 
 

 
 

 
 
Interest rate cap
 
Interest Expense
 
$
(1,517
)
 
$
—

 
N/A
Interest rate swap
 
Interest Expense
 
$
869

 
$
310

 
N/A
Foreign exchange contracts
 
Other Expense
 
$
393

 
$
—

 
N/A
For the Year Ended December 31, 2012
 
 
 
  

 
  

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

 
  

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

Foreign exchange contracts—The Company is exposed to fluctuations in foreign exchange rates on investments it holds in foreign entities. The Company uses foreign exchange contracts to hedge its exposure to changes in foreign exchange rates on its foreign investments. Foreign exchange contracts involve fixing the USD to the respective foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date. The foreign exchange contracts are typically cash settled in US dollars for their fair value at or close to their settlement date.
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 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. In June 2013, the Company entered into a foreign exchange contract to hedge its exposure in a subsidiary whose functional currency is INR.  As of December 31, 2013, the Company had the following outstanding foreign currency derivatives that were used to hedge its net investments in foreign operations that were designated ($ in thousands):
Derivative Type
 
Notional
Amount
 
Notional
(USD Equivalent)
 
Maturity
Sells INR/Buys USD Forward
 
₨
456,000

 
$
7,379

 
January 2014

For derivatives not designated as net investment hedges, the changes in the fair value of the derivatives are reported in the Consolidated Statements of Operations within other expense. As of December 31, 2013, the Company had the following outstanding foreign currency derivatives that were used to hedge its net investments in foreign operations that were not designated ($ in thousands):
Derivative Type
 
Notional
Amount
 
Notional
(USD Equivalent)
 
Maturity
Sells EUR/Buys USD Forward
 
€
80,500

 
$
110,696

 
January 2014
Sells GBP/Buys USD Forward
 
£
3,800

 
$
6,295

 
January 2014
Sells CAD/Buys USD Forward
 
C$
41,500

 
$
39,036

 
January 2014

 
 
 
 
Amount of Gain or (Loss)
Recognized in Income
 
 
Location of Gain or
(Loss) Recognized in
Income
 
For the Years Ended December 31,
Derivatives not Designated in Hedging Relationships
 
2013
 
2012
 
2011
Foreign Exchange Contracts
 
Other Expense
 
$
880

 
$
(8,920
)
 
$
17,406


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 other comprehensive income (loss),” on its Consolidated Balance Sheets for net investments in foreign subsidiaries. During the years ended December 31, 2013, 2012 and 2011, the Company recorded net losses related to foreign investments of $2.0 million, $0.7 million and $2.3 million, in its Consolidated Statements of Operations.  
Qualifying cash flow hedges—In August 2013, the Company entered into an interest rate cap agreement to reduce exposure to expected increases in future interest rates and the resulting payments associated with variable interest rate debt. In October 2012, the Company entered into an interest rate swap to convert its variable rate debt to fixed rate on a $28.0 million secured term loan maturing in 2019. The following table presents the Company's qualifying cash flow hedges outstanding as of year ended December 31, 2013 ($ in thousands).
Derivative Type
 
Notional
Amount
 
Variable Rate
 
Fixed Rate
 
Effective Date
 
Maturity
Interest Rate Cap
 
$
500,000

 
LIBOR
 
1.00%
 
July 2014
 
July 2017
Interest Rate Swap
 
$
27,958

 
LIBOR + 2.00%
 
3.47%
 
October 2012
 
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 $0.4 million will be reclassified to interest expense from cash flow hedges and $0.4 million will be reclassified to income related to terminated cash flow hedges 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, 2013 and December 31, 2012, the Company has posted collateral of $7.2 million and $9.6 million, respectively, which is included in "Restricted cash" on the Company's Consolidated Balance Sheets.