filings.toolsItem 7A. Quantitative and Qualitative Disclosures About Market Risk
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We use derivative financial instruments in the normal course of business to mitigate interest rate and foreign currency risk. We do not use derivative financial instruments for speculative or trading purposes. Derivatives are recorded on the consolidated balance sheets at their fair value (see Note 24 to the Consolidated Financial Statements).
To illustrate the effect of movements in the interest rate and foreign currency markets, we performed a market sensitivity analysis on our hedging instruments. We applied various basis point spreads to the underlying interest rate curves and foreign currency exchange rates of the derivative portfolio in order to determine the instruments’ change in fair value. Assuming a one percentage point change in the underlying interest rate curve and foreign currency exchange rates, the estimated change in fair value of each of the underlying derivative instruments would not exceed $4 million. See Note 24 to the Consolidated Financial Statements for additional analysis details.
Interest Rate Risk
At December 31, 2014, we are exposed to market risks related to fluctuations in interest rates primarily on variable rate investments, which have been predominately hedged through interest rate swap contracts.
Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt and assets unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of our fixed rate instruments. Conversely, changes in interest rates on variable rate debt and investments would change our future earnings and cash flows, but not significantly affect the fair value of those instruments. Assuming a one percentage point increase in the interest rate related to the variable-rate investments and variable-rate debt, and assuming no other changes in the outstanding balance as of December 31, 2014, our annual interest expense would increase by approximately $9 million, or $0.02 per common share on a diluted basis.
Foreign Currency Exchange Rate Risk
At December 31, 2014, our exposure to foreign currencies primarily relates to U.K. investments in leased real estate, loan investments, senior unsecured notes and the related GBP denominated cash flows from such investments. Our foreign currency exposure is partially mitigated through the use of GBP denominated borrowings and foreign currency swap contracts.
Market Risk
We have investments in marketable debt securities classified as held-to-maturity because we have the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are recorded at amortized cost and adjusted for the amortization of premiums and discounts through maturity. We consider a variety of factors in evaluating an other-than-temporary decline in value, such as: the length of time and the extent to which the market value has been less than our
current adjusted carrying value; the issuer’s financial condition, capital strength and near-term prospects; any recent events specific to that issuer and economic conditions of its industry; and our investment horizon in relationship to an anticipated near-term recovery in the market value, if any. At December 31, 2014, the fair value and carrying value of marketable debt securities were $252 million and $231 million, respectively.
The principal amount and the average interest rates for our loans receivable and debt categorized by maturity dates is presented in the table below. The fair value for our senior unsecured notes payable is based on prevailing market prices. The fair value estimates for loans receivable and mortgage debt payable are based on discounting future cash flows utilizing current rates for loans and debt of the same type and remaining maturity.
The table below summarizes the carrying amounts and fair values of our financial instruments exposed to interest rate risk (dollars in thousands):
| Maturity | ||||||||||||||||||||||||
| 2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | Total | Fair Value | |||||||||||||||||
| Assets: | ||||||||||||||||||||||||
| Loans receivable (USD) | $ | 17,470 | (1) | $ | 79,251 | $ | 237,796 | $ | 18,715 | $ | 553,729 | $ | — | $ | 906,961 | $ | 898,522 | |||||||
| Weighted average interest rate | 14.00 | % | 8.50 | % | 12.29 | % | 8.00 | % | 7.50 | % | — | % | 8.98 | % | ||||||||||
| Debt securities held to maturity (USD) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 17,370 | $ | 17,370 | $ | 17,370 | ||||||||
| Weighted average interest rate | — | % | — | % | — | % | — | % | — | % | 4.43 | % | 4.43 | % | ||||||||||
| Debt securities held to maturity (GBP)(3) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 214,072 | $ | 214,072 | $ | 234,755 | ||||||||
| Weighted average interest rate | — | % | — | % | — | % | — | % | — | % | 12.25 | % | 12.25 | % | ||||||||||
| Liabilities(2): | ||||||||||||||||||||||||
| Variable rate debt: | ||||||||||||||||||||||||
| Line of credit (USD)(4) | $ | — | $ | — | $ | — | $ | 285,000 | $ | — | $ | — | $ | 285,000 | $ | 285,000 | ||||||||
| Weighted average interest rate | — | % | — | % | — | % | 1.37 | % | — | % | — | % | 1.37 | % | ||||||||||
| Line of credit (GBP)(5) | $ | — | $ | — | $ | — | $ | 553,516 | $ | — | $ | — | $ | 553,516 | $ | 553,516 | ||||||||
| Weighted average interest rate | — | % | — | % | — | % | 1.71 | % | — | % | — | % | 1.71 | % | ||||||||||
| Term loan (GBP)(3) | $ | — | $ | 213,610 | $ | — | $ | — | $ | — | $ | — | $ | 213,610 | $ | 213,610 | ||||||||
| Weighted average interest rate | — | % | 1.70 | % | — | % | — | % | — | % | — | % | 1.70 | % | ||||||||||
| Mortgage debt payable (USD) | $ | 8,500 | $ | 25,789 | $ | — | $ | — | $ | — | $ | 45,610 | $ | 79,899 | $ | 72,210 | ||||||||
| Weighted average interest rate | 0.38 | % | 1.67 | % | — | % | — | % | — | % | 0.06 | % | 0.61 | % | ||||||||||
| Fixed rate debt: | ||||||||||||||||||||||||
| Senior unsecured notes payable (USD) | $ | 400,000 | $ | 900,000 | $ | 750,000 | $ | 600,000 | $ | 450,000 | $ | 4,550,000 | $ | 7,650,000 | $ | 8,187,458 | ||||||||
| Weighted average interest rate | 6.57 | % | 5.10 | % | 6.02 | % | 6.82 | % | 3.96 | % | 4.45 | % | 4.95 | % | ||||||||||
| Mortgage debt payable (USD) | $ | 12,489 | $ | 256,102 | $ | 606,492 | $ | 4,971 | $ | — | $ | 26,613 | $ | 906,667 | $ | 935,594 | ||||||||
| Weighted average interest rate | 5.79 | % | 6.54 | % | 5.69 | % | 5.90 | % | — | % | 5.87 | % | 5.94 | % | ||||||||||
| Interest rate derivatives assets | ||||||||||||||||||||||||
| (liabilities): | ||||||||||||||||||||||||
| Variable rate mortgage debt: | ||||||||||||||||||||||||
| Variable to fixed (USD) | $ | — | $ | (1,724) | $ | — | $ | — | $ | — | $ | (5,939) | $ | (7,663) | $ | (7,663) | ||||||||
| Weighted average pay rate | — | % | 5.95 | % | — | % | — | % | — | % | 3.82 | % | 4.30 | % | ||||||||||
| Weighted average receive rate | — | % | 2.49 | % | — | % | — | % | — | % | 1.86 | % | 2.00 | % | ||||||||||
| Variable rate 2012 Term Loan: | ||||||||||||||||||||||||
| Variable to fixed (GBP) | $ | — | $ | 178 | $ | — | $ | — | $ | — | $ | — | $ | 178 | $ | 178 | ||||||||
| Weighted average pay rate | — | % | 1.81 | % | — | % | — | % | — | % | — | % | 1.81 | % | ||||||||||
| Weighted average receive rate | — | % | 1.89 | % | — | % | — | % | — | % | — | % | 1.89 | % |
| (1) | Effective January 1, 2011, a senior secured loan to Delphis was placed on non-accrual status. For additional information regarding the senior secured loan to Delphis, see Note 7 to the Consolidated Financial Statements. |
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| (2) | Excludes $97 million of other debt that represents life care bonds and demand notes that have no scheduled maturities. |
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| (3) | Represents approximately £137 million translated into U.S. dollars. |
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| (4) | In January 2015, we repaid the outstanding amount under the line of credit (USD) in full with cash on hand and a portion of the proceeds from the 2015 senior unsecured notes issuance. |
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| (5) | Represents approximately £355 million translated into U.S. dollars. In January 2015, we repaid all but £135 million outstanding under the line of credit (GBP) with proceeds from the 2015 Term Loan. |
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