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Financial Instruments and Fair Value Measurements | 12 Months Ended
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Dec. 31, 2011
Financial Instruments and Fair Value Measurements [Abstract] |
Financial Instruments and Fair Value Measurements |
20. | Financial Instruments and Fair Value Measurements
Derivative Financial Instruments In the normal course of business, our operations are exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates. To manage these risks, we may enter into various derivative contracts. Foreign currency contracts, including forwards and options, may be used to manage foreign currency exposure. We may use interest rate swaps to manage the effect of interest rate fluctuations. We do not use derivative financial instruments for trading purposes. The majority of our derivative financial instruments are customized derivative transactions and are not exchange-traded. Management reviews our hedging program, derivative positions, and overall risk management strategy on a regular basis. We only enter into transactions that we believe will be highly effective at offsetting the underlying risk. Our use of derivatives does involve the risk that counterparties may default on a derivative contract. We establish exposure limits for each counterparty to minimize this risk and provide counterparty diversification. Substantially all of our derivative exposures are with counterparties that have long-term credit ratings of single-A or better. We enter into master agreements with counterparties that generally allow for netting of certain exposures; therefore, the actual loss we would recognize if all counterparties failed to perform as contracted would be significantly lower. To mitigate pre-settlement risk, minimum credit standards become more stringent as the duration of the derivative financial instrument increases. To minimize the concentration of credit risk, we enter into derivative transactions with a portfolio of financial institutions. Based on these factors, we consider the risk of counterparty default to be minimal. All derivatives are recognized at fair value in our Consolidated Balance Sheets within the line items Other Assets or Accounts Payable and Accrued Expenses, as applicable. We do not net our derivative position by counterparty for purposes of balance sheet presentation and disclosure. The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on whether the derivatives are designated as, and qualify as, hedging instruments. Derivatives can be designated as fair value hedges, cash flow hedges or hedges of net investments in foreign operations. Changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recorded in Accumulated Other Comprehensive Income (Loss) in our Consolidated Balance Sheets. We reclassify changes in the fair value of derivatives into the applicable line item in our Consolidated Statements of Operations in which the hedged items are recorded in the same period that the underlying hedged items affect earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures hedged, fluctuations in the value of the derivative instruments will generally be offset by changes in the fair values or cash flows of the underlying exposures being hedged. The changes in fair values of derivatives that were not designated and/or did not qualify as hedging instruments are immediately recognized in earnings. For derivatives that will be accounted for as hedging instruments in accordance with the accounting standards, we formally designate and document, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. In addition, we formally assess both at inception and at least quarterly thereafter, whether the derivatives used in hedging transactions are effective at offsetting changes in either the fair values or cash flows of the related underlying exposures. Any ineffective portion of a derivative financial instrument’s change in fair value is immediately recognized in earnings. Derivatives not designated as hedges are not speculative and are used to manage our exposure to foreign currency fluctuations but do not meet the strict hedge accounting requirements. Our interest rate risk management strategy is to limit the impact of future interest rate changes on earnings and cash flows as well as to stabilize interest expense and manage our exposure to interest rate movements. To achieve this objective, we have entered into interest rate swap agreements, which allow us to borrow on a fixed rate basis for longer-term debt issuances. The maximum length of time that we hedge our exposure to future cash flows is typically less than 10 years. We use cash flow hedges to minimize the variability in cash flows of assets of liabilities or forecasted transactions caused by fluctuations in interest rates. We also have entered into interest rate swap agreements which allow us to receive variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of our agreements without the exchange of the underlying notional amount. We entered into and settled an interest rate cap agreement which allows us to receive variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an upfront premium, during the year ended December 31, 2011. We had 39 interest rate swap contracts, including 33 contracts denominated in euro, three contracts denominated in British pound sterling and three contracts denominated in Japanese yen, outstanding at December 31, 2011. In connection with the Merger and the PEPR Acquisition, we acquired interest rate swap contracts and an interest rate cap contract with combined notional amounts of $1.3 billion and $25.7 million, respectively, to fix the variable rate on certain indebtedness. As of December 31, 2011, the interest rate cap contract was settled. We had $35.9 million and $1.4 million accrued in Accounts Payable and Accrued Expenses in our Consolidated Balance Sheets relating to these unsettled derivative contracts at December 31, 2011 and December 31, 2010, respectively. We recorded $1.8 million for ineffectiveness during the year ended December 31, 2011. We did not have ineffectiveness during the years ended December 31, 2010 and 2009. The amount reclassified to interest expense for the three years ended December 31, 2011 is not considered material. Amounts included in Accumulated Other Comprehensive Income (Loss) in our Consolidated Balance Sheets at December 31, 2011, and 2010 were accumulated losses of $51.7 million and $43.6 million, respectively. We generally do not designate foreign currency forwards as hedges. We may use foreign currency forward contracts to manage the foreign currency fluctuations of intercompany loans not deemed to be a long-term investment and certain transactions denominated in a currency other than the entity’s functional currency. These contracts are marked-to-market through earnings, as they are not designated as hedges. The gains or losses resulting from these derivative instruments are included in Foreign Currency Exchange Gains (Losses), Net in our Consolidated Statements of Operations. For contracts associated with intercompany loans, the impact on earnings is generally offset by the remeasurement gains and losses recognized on the related intercompany loans. We had no outstanding foreign currency forwards at December 31, 2011, 2010 or 2009. We typically designate our interest rate swap and interest rate cap agreements as cash flow hedges as these derivative instruments may be used to manage the interest rate risk on potential future debt issuance or to fix the interest rate on a variable rate debt issuance. The effective portion of the gain or loss on the derivative is reported as a component of Accumulated Other Comprehensive Income (Loss) in our Consolidated Balance Sheets, and reclassified to Interest Expense in the Consolidated Statements of Operations over the corresponding period of the hedged item. For the next twelve months from December 31, 2011, we estimate that an additional $8.6 million will be reclassified as interest expense. Losses on a derivative representing hedge ineffectiveness are recognized in Interest Expense at the time the ineffectiveness occurred. The following table summarizes the activity in our derivative instruments for the years ended December 31, 2011, 2010 and 2009 (in millions):
|  | 2011 |  |  | 2010 |  |  | 2009 |
|  | Foreign Currency Forwards(1) |  |  | Interest Rate Swaps(2) |  |  | Interest Rate Caps |  |  | Foreign Currency Forwards(1) |  |  | Interest Rate Swaps(2) |  |  | Foreign Currency Forwards(1) |  |  | Interest Rate Swaps(2) |
Notional amounts at January 1, |  | $ | - |  |  | $ | 268.1 |  |  | $ | - |  |  | $ | - |  |  | $ | 157.7 |  |  | $ | - |  |  | $ | - |
New contracts |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 155.0 |  |  |  | 351.7 |  |  |  | 157.7 |
Acquired contracts (3) |  |  | - |  |  |  | 1,337.3 |  |  |  | 25.7 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Matured or expired contracts |  |  | - |  |  |  | (108.9) |  |  |  | (25.7) |  |  |  | - |  |  |  | (44.6) |  |  |  | (351.7) |  |  |  | - |
Notional amounts at December 31, |  | $ | - |  |  | $ | 1,496.5 |  |  | $ | - |  |  | $ | - |  |  | $ | 268.1 |  |  | $ | - |  |  | $ | 157.7 |
(1) | During 2009, we entered into and settled forward contracts to buy yen to manage the foreign currency fluctuations related to the sale of our investments in the Japan co-investment ventures and recognized losses of $5.7 million in Foreign Currency Exchange Gains, Net in our Consolidated Statements of Operations.
(2) | During 2011, 2010 and 2009, we acquired, or entered into, multiple contracts with total notional amounts of $1.3 billion, $155.0 million and $157.7 million, respectively, associated with debt issuances.
| In connection with the Merger and PEPR Acquisition in 2011, we acquired various interest rate swap contracts with combined notional amounts of $1.4 billion, with various expiration dates between October 2012 and January 2014. During the third quarter of 2010, we entered into a ¥13.0 billion interest rate contract that matures in December 2014 to fix the interest rate on a variable rate TMK bond. During 2009, we entered into two interest rate swap contracts to fix the interest rate on two variable rate TMK bonds, a ¥4.3 billion interest rate swap contract that was settled in the first quarter of 2010 and a ¥10.0 billion interest rate swap contract that matures in December 2012. We designated these contracts as cash flow hedges and they qualify for hedge accounting treatment. At December 31, 2011 and 2010, we had $35.9 million and $1.4 million, respectively, accrued in Accounts Payable and Accrued Expenses in our Consolidated Balance Sheets relating to the unsettled derivative contracts.
(3) | To the extent these contracts previously qualified for hedge accounting, they were redesignated at the time of the Merger or PEPR Acquisition to qualify for hedge accounting post merger and acquisition.
Fair Value Measurements We have estimated the fair value of our financial instruments using available market information and valuation methodologies we believe to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of amounts that we would realize upon disposition. Fair Value Measurements on a Recurring and Non-recurring Basis At December 31, 2011 and December 31, 2010, other than the derivatives discussed above and in Note 9, we do not have any significant financial assets or financial liabilities that are measured at fair value on a recurring basis in our consolidated financial statements. Non-financial assets measured at fair value on a non-recurring basis in our consolidated financial statements consist of real estate assets and investments in and advances to unconsolidated investees that were subject to impairment charges as discussed in Note 16. These investments relate to investments in co-investment ventures, predominantly in the U.S., whose carrying value exceeded its fair value. The table below aggregates the fair value of these assets at December 31, 2011 by the levels in the fair value hierarchy (in thousands):
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Real estate assets |  | $ | - |  |  | $ | - |  |  | $ | 100,034 |  |  | $ | 100,034 |
Investments in and advances to other unconsolidated investees |  | $ | - |  |  | $ | - |  |  | $ | 26,066 |  |  | $ | 26,066 |
Fair Value of Financial Instruments At December 31, 2011 and December 31, 2010, the carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts and notes receivable and accounts payable and accrued expenses were representative of their fair values due to the short-term nature of these instruments and the recent acquisition of these items. At December 31, 2011 and December 31, 2010, the fair value of our senior notes and exchangeable senior notes, has been estimated based upon quoted market prices for the same (Level 1) or similar (Level 2) issues when current quoted market prices are available, the fair value of our Credit Facilities has been estimated by discounting the future cash flows using rates and borrowing spreads currently available to us (Level 3), and the fair value of our secured mortgage debt and other debt that do not have current quoted market prices available has been estimated by discounting the future cash flows using rates currently available to us for debt with similar terms and maturities (Level 3). The fair value of our derivative financial instruments is determined through widely accepted valuation techniques, such as a discounted cash flow analysis on the expected cash flows and a Black Scholes option pricing model (Level 2). The differences in the fair value of our debt from the carrying value in the table below are the result of differences in interest rates and/or borrowing spreads that were available to us at December 31, 2011 and December 31, 2010, as compared with those in effect when the debt was issued or acquired. The senior notes and many of the issues of secured mortgage debt contain pre-payment penalties or yield maintenance provisions that could make the cost of refinancing the debt at lower rates exceed the benefit that would be derived from doing so. The following table reflects the carrying amounts and estimated fair values of our debt (in thousands):
|  | December 31, |
|  | 2011 |  |  | 2010 |
|  | Carrying Value |  |  | Fair Value |  |  | Carrying Value |  |  | Fair Value |
Credit Facilities |  | $ | 936,796 |  |  | $ | 940,334 |  |  | $ | 520,141 |  |  | $ | 526,684 |
Senior notes |  |  | 4,772,607 |  |  |  | 5,038,678 |  |  |  | 3,195,724 |  |  |  | 3,403,353 |
Exchangeable senior notes |  |  | 1,315,448 |  |  |  | 1,431,805 |  |  |  | 1,521,568 |  |  |  | 1,591,976 |
Secured mortgage debt |  |  | 1,725,773 |  |  |  | 1,861,261 |  |  |  | 1,249,729 |  |  |  | 1,320,084 |
Secured mortgage debt of consolidated investee |  |  | 1,468,637 |  |  |  | 1,486,040 |  |  |  | - |  |  |  | - |
Other debt of consolidated investees |  |  | 775,763 |  |  |  | 751,075 |  |  |  | - |  |  |  | - |
Other debt |  |  | 387,384 |  |  |  | 389,804 |  |  |  | 18,867 |  |  |  | 17,995 |
Total debt |  | $ | 11,382,408 |  |  | $ | 11,898,997 |  |  | $ | 6,506,029 |  |  | $ | 6,860,092 |

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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