12.

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, such as foreign currency contracts to manage foreign currency exposure, and interest rate swaps to manage the effect of interest rate fluctuations. The majority of our derivative financial instruments are customized derivative transactions and are not exchange-traded. We only enter into transactions that we believe will be highly effective at offsetting the underlying risk. There have been no significant changes in our policy or strategy from what was previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Foreign Currency

We may use foreign currency option contracts, including puts, calls and collars to mitigate foreign currency exchange rate risk associated with the projected net operating income of our international subsidiaries, primarily in Europe. Foreign currency collars mitigate foreign currency exchange rate risk associated with the projected net operating income of our international subsidiaries. This strategy includes the purchase of a foreign currency put option, combined with the sale of a foreign currency call option such that there is no cash outlay at execution. The put option contracts provide us with the option to exchange euros for U.S. dollars at a fixed exchange rate if the euro were to depreciate against the U.S. dollar, such that, if the euro were to depreciate against the U.S. dollar to predetermined levels as set by the contracts, we could exercise our options and mitigate our foreign currency exchange losses. The call option would create an obligation to exchange euros for U.S. dollars at a fixed exchange rate if the euro were to appreciate against the U.S. dollar, such that, if the euro were to appreciate against the U.S. dollar to predetermined levels as set by the contracts we would be obligated to pay out under the contract and offset our foreign currency exchange gains. This strategy effectively locks in a range around the rate at which net operating earnings of our international subsidiaries will be translated into U.S. dollars.

Foreign currency option contracts are not designated as hedges as they do not meet hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings within the line item Foreign Currency and Derivative Gains (Losses) and Related Amortization, Net in the Consolidated Statements of Operations.

We hedge the net assets of certain international subsidiaries using foreign currency derivative contracts (net investment hedges) to offset the translation and economic exposures related to our investments in these subsidiaries by locking in a forward exchange rate at the inception of the hedge. We measure the effectiveness of our net investment hedges by using the changes in forward exchange rates because this method reflects our risk management strategies, the economics of those strategies in the financial statements and better manages interest rate differentials between different countries. Under this method, all changes in fair value of the forward currency derivative contracts designated as net investment hedges are reported in equity in the foreign currency translation component ofAccumulated Other Comprehensive Income (Loss) in the Consolidated Balance Sheets (“AOCI”) and offsets translation adjustments on the underlying net assets of our foreign investments, which are also recorded in AOCI. Ineffectiveness, if any, is recognized in earnings at the time the ineffectiveness occurred.

We primarily manage our foreign currency exposure by borrowing in the currencies in which we invest. In certain circumstances, we may also borrow debt in a currency that is not the same functional currency of the borrowing entity to offset the translation and economic exposures related to our net investment in international subsidiaries. To mitigate the impact to our earnings from the fluctuations in the exchange rate, we may designate the debt as a non-derivative financial instrument hedge. We measure our effectiveness in the same manner as our net investment hedges described above. As a result, the change in the value of this debt upon translation is recorded in the foreign currency translation component of AOCI to offset the foreign currency fluctuations related to the net investment in our subsidiaries with the same functional currency as the debt.

Interest Rate

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. We may enter into interest rate swap agreements that allow us to receive variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreement. The effective portion of the gain or loss on the derivative is reported as a component of AOCI in the Consolidated Balance Sheets, and reclassified to Interest Expense in the Consolidated Statements of Operations over the corresponding period of the hedged item. Ineffectiveness, if any, is recognized in Interest Expense at the time the ineffectiveness occurred.

Summary of Activity

The following table summarizes the activity in our derivative instruments (in millions):


2014
	Foreign Currency Contracts																						Interest Rate Swaps (2)
	Euro Forward Contracts						GBP Forward Contracts				Yen Forward Contracts						Euro Option Contracts (1)						Interest Rate Swaps (2)
Notional amounts at January 1	€	600		$	800		£	—	$	—	¥	24,136		$	250		€	—		$	—		$	71
New contracts		1,446			1,979			238		400		79,010			769			141			187			373
Matured or expired contracts		(1,446	)		(1,979	)		—		—		(79,010	)		(769	)		(66	)		(90	)		—

Notional amounts at September 30	€	600		$	800		£	238	$	400	¥	24,136		$	250		€	75		$	97		$	444

Weighted Average Forward Rate at September 30					1.33					1.68					96.54						1.30
Active contracts at September 30					7					3					3						5			3


2013
	Foreign Currency Contracts										Interest Rate Swaps (3)
	Euro Forward Contracts						Yen Forward Contracts				Interest Rate Swaps (3)
Notional amounts at January 1	€	1,000		$	1,304		¥	—	$	—	$	1,315
New contracts		600			800			24,136		250		—
Matured or expired contracts		(1,000	)		(1,304	)		—		—		(1,230	)

Notional amounts at September 30	€	600		$	800		¥	24,136	$	250	$	85

(1)	During the three and nine months ended September 30, 2014, we exercised one and two put options, respectively, and recognized a net gain of approximately $1.0 million and $1.1 million, respectively. We had five foreign currency collars outstanding at September 30, 2014.

(2)	During the third quarter of 2014, we entered into two contracts with a total notional amount of ¥40.9 billion to effectively fix the interest rate on the Yen Term Loan. See Note 6 for more information on our Yen Term Loan.

(3)

During the nine months ended September 30, 2013, we settled 12 contracts with a notional value of $319.9 million, and contributed 13 contracts with a notional value of $383.9 million related to the transfer of assets to the newly formed PELP co-investment venture. We also settled five contracts in Japan with a notional value of $526.4 million in connection with the contribution of properties to NPR.

As discussed in Note 6, we issued €1.2 billion ($1.6 billion) of debt during the nine months ended September 30, 2014. This debt was issued by the Operating Partnership, which is a U.S. dollar functional entity, and designated as a non-derivative financial instrument hedge. As of September 30, 2014 and December 31, 2013, we had €1.9 billion ($2.4 billion) and €700 million ($1.0 billion) of debt, respectively, designated as non-derivative financial instrument hedges on our net investment in international subsidiaries. Amounts included in AOCI in the Consolidated Balance Sheets for our non-derivative financial instrument hedges at September 30, 2014 and December 31, 2013, were gains of $214.6 million and losses of $14.9 million, respectively.

All derivatives are recognized at fair value in the Consolidated Balance Sheets and are within the line items Other Assets or Accounts Payable and Accrued Expenses, as applicable. As discussed above, changes in the fair value of derivatives that are designated and qualify as cash flow hedges and hedges of net investments in foreign operations are recorded as accumulated gains (losses) in AOCI in the Consolidated Balance Sheets. The following table presents the fair value of our derivative instruments (in thousands):


	September 30, 2014							December 31, 2013
	Asset		Liability		AOCI			Asset		Liability		AOCI
Net investment hedges - euro denominated	$	16,441	$	—	$	18,565		$	137	$	30,302	$	(21,705	)
Net investment hedges - yen denominated		28,184		—		36,385			20,104		—		22,102
Net investment hedges - pounds sterling denominated		15,840		—		15,840			—		—		—
Foreign currency options - euro denominated (1)		1,082		—		—			—		—		—
Interest rate swap hedges		—		4,723		(820	)		—		5,638		(591	)
Our share of derivatives from un consolidated co-investment ventures (2)		- -		- -		(21,406	)		- -		- -		(13,851	)

Total fair value of derivatives	$	61,547	$	4,723	$	48,564		$	20,241	$	35,940	$	(14,045	)

(1)

As discussed above, the foreign currency options are not designated as hedges. We recognized gains of $1.1 million in Foreign Currency and Derivative Gains and (Losses) and Related Amortization, Net in the Consolidated Statements of Operations from the change in value of our outstanding foreign currency collars for the three and nine months ended September 30, 2014.

(2)	Items indicated by ‘- -’ are not applicable

During the three and nine months ended September 30, 2014, we did not record any ineffectiveness on our derivative contracts. During the three and nine months ended September 30, 2013, we had no significant hedge ineffectiveness. In addition, the effective portion of the gain or loss on the interest rate swaps reclassified to interest expense was not considered significant for all periods presented, and is not expected to be significant for the next 12 months.

The change in Other Comprehensive Income (Loss) in the Consolidated Statements of Comprehensive Income (Loss) during the periods presented is due to the translation upon consolidation of the financial statements into U.S. dollars of our consolidated subsidiaries whose functional currency is not the U.S. dollar and the change in fair value for the effective portion of our derivative and non-derivative instruments. The following table presents the gains and losses associated with the change in fair value for the effective portion of our derivative and non-derivative instruments included in Other Comprehensive Income (Loss) (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Derivative net investment hedges (1)	$	93,502		$	(23,801	)	$	70,393		$	10,395
Interest rate swap hedges		(39	)		(821	)		(229	)		71
Our share of derivatives from unconsolidated co-investment ventures		(4,474	)		3,584			(7,555	)		21,768

Total gain (loss) on derivative instruments		88,989			(21,038	)		62,609			32,234
Non-derivative net investment hedges		204,250			—			214,570			—

Total gain (loss) on derivative and non-derivative instruments	$	293,239		$	(21,038	)	$	277,179		$	32,234

(1)	This includes gains of $5.9 million and losses of $5.5 million for the three and nine months ended September 30, 2014, respectively, and a gain of $4.3 million for the nine months ended September 30, 2013, upon the settlement of net investment hedges.

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 Basis

At September 30, 2014 and December 31, 2013, other than the derivatives discussed above and in Note 6, we do not have any significant financial assets or financial liabilities that are measured at fair value on a recurring basis in the Consolidated Financial Statements. The fair value of our derivative instruments were determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The fair values of our interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts or payments and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates, or forward curves, derived from observable market interest rate curves. The fair values of our net investment hedges are based upon the change in the spot rate at the end of the period as compared to the strike price at inception.

We incorporate credit valuation adjustments to appropriately reflect both our nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

We have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy. Although the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, all of our derivatives held as of September 30, 2014 and December 31, 2013, were classified as Level 2 of the fair value hierarchy.

Fair Value Measurements on Non-Recurring Basis

Assets measured at fair value on a non-recurring basis in the Consolidated Financial Statements consist of real estate assets and investments in and advances to unconsolidated entities that were subject to impairment charges. There were no assets that met these criteria at September 30, 2014 or December 31, 2013.

Fair Value of Financial Instruments

At September 30, 2014 and December 31, 2013, our carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash, accounts and notes receivable, accounts payable and accrued expenses were representative of their fair values due to the short-term nature of these instruments.

At September 30, 2014 and December 31, 2013, 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 assessment bonds 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 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 September 30, 2014 and December 31, 2013, as compared with those in effect when the debt was issued or acquired, including reduced borrowing spreads due to our improved credit ratings. 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):


	September 30, 2014				December 31, 2013
	Carrying Value		Fair Value		Carrying Value		Fair Value
Credit Facilities	$	741,610		741,610	$	725,483	$	725,679
Senior notes		5,443,138		5,885,585		5,357,933		5,698,864
Exchangeable senior notes		451,999		485,077		438,481		514,381
Secured mortgage debt		1,141,772		1,272,061		1,696,597		1,840,829
Secured mortgage debt of consolidated entities		26,064		26,678		239,992		246,324
Term loans and other debt		1,018,369		1,020,895		552,730		560,714

Total debt	$	8,822,952	$	9,431,906	$	9,011,216	$	9,586,791