18.

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. We do not use derivative financial instruments for trading or speculative purposes. All 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 involves 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; thereby significantly reducing the actual loss that would be incurred should a counterparty fail to perform its contractual obligations. To mitigate pre-settlement risk, minimum credit standards become more stringent as the duration of the derivative financial instrument increases. Based on these factors, we consider the risk of counterparty default to be minimal.

We recognize all derivatives at fair value in the Consolidated Balance Sheets within the line items Other Assets or Other Liabilities, as applicable. We do not net our derivative position by counterparty for purposes of balance sheet presentation and disclosure. Derivatives can be designated as fair value hedges, cash flow hedges or hedges of net investments in foreign operations. 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.

For derivatives that will be accounted for as hedging instruments, at inception of the transaction, we formally designate and document 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. The ineffective portion of a derivative financial instrument’s change in fair value, if any, is immediately recognized in earnings. We also use derivatives that are not designated as hedges (and may not meet the hedge accounting requirements) to manage our exposure to foreign currency fluctuations.

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 in AOCI in the Consolidated Balance Sheets. 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 cash flow hedges, we reclassify changes in the fair value of derivatives into the applicable line item in the Consolidated Statements of Operations in which the hedged items are recorded in the same period that the underlying hedged items affect earnings.

Our co-investment ventures may also enter into derivative contracts. As we act as the manager of these ventures, these ventures primarily follow the same hedging strategy and risk mitigation that we use. For our consolidated co-investment ventures, the accounting treatment is as described in this footnote. For our unconsolidated co-investment ventures, we record our proportionate share of any earnings impact in Earnings from Unconsolidated Entities, Net in the Consolidated Statements of Operations. In addition, for derivatives in our unconsolidated ventures that have been designated and qualify as hedging instruments, we record our proportionate share of the effective gain or loss as a component of AOCI in the Consolidated Balance Sheets. In both circumstances, we record the offsetting amount as Investments in and Advances to Unconsolidated Entities in the Consolidated Balance Sheets.

Foreign Currency

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 exchange rates, we may designate the debt as a non-derivative financial instrument hedge. We also hedge our investments in 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 and our non-derivative financial instrument 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, we report all changes in fair value of the non-derivative financial instrument and net investment hedges in equity in the foreign currency translation component of AOCI in the Consolidated Balance Sheets. These amounts offset the translation adjustments on the underlying net assets of our foreign investments, which we also record in AOCI. We recognize ineffectiveness, if any, in earnings at the time the ineffectiveness occurred. We did not record any ineffectiveness on our foreign currency derivative contracts during the three years ended December 31, 2014.

We may use foreign currency option contracts, including puts, calls and collars to mitigate foreign currency exchange rate risk associated with the translation of our projected net operating income of our international subsidiaries, principally in Europe and Japan. The put option contracts provide us with the option to exchange euros or yen for U.S. dollars at a fixed exchange rate if the euro or yen were to depreciate against the U.S. dollar, such that, if the euro or yen 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. Call option contracts would create an obligation to exchange euro or yen for U.S. dollars at a fixed exchange rate if the euro or yen were to appreciate against the U.S. dollar, such that, if the euro or yen 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. A collar contract combines the put and call options into one contract with 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. 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.

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 primarily accomplish this by issuing fixed rate debt with staggering maturities. We may enter into interest rate swap agreements, which allow us to borrow on a fixed rate basis for longer-term debt issuances, or interest rate cap agreements, which allow us to minimize the impact of increases in interest rates. 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 issuances or to fix the interest rate on variable rate debt issuances. The maximum length of time that we hedge our exposure to future cash flows is typically less than 10 years.

We have entered 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 our agreements without the exchange of the underlying notional amount.

We report the effective portion of the gain or loss on the derivative as a component of AOCI in the Consolidated Balance Sheets, and reclassify it to Interest Expense in the Consolidated Statements of Operations over the corresponding period of the hedged item. To the extent the hedged debt is paid off early, we recognize the amounts in AOCI as Gains (Losses) on Early Extinguishment of Debt, Net in the Consolidated Statements of Operations.

We recognize losses on a derivative representing hedge ineffectiveness in Interest Expense at the time the ineffectiveness occurred. Losses due to hedge ineffectiveness were not considered material during the three years ended December 31, 2014. In 2012, we recorded a loss of $11.0 million in Gain (Loss) on Early Extinguishment of Debt, Net related to interest rate swaps with a notional amount of $703.8 million that were considered ineffective. These derivatives were associated with debt that was paid off or transferred in the first quarter of 2013, in connection with the contribution to our new European co-investment venture, PELP (see Note 4 for more details of this venture). When it was probable the related forecasted transaction would not occur, we deemed the hedge ineffective and wrote-off the balance in AOCI.

The following table summarizes the activity in our derivative instruments for the years ended December 31 as follows (in millions):


2014
	Foreign Currency Contracts																Interest Rate Swaps (2)
	Net Investment Contracts												Euro Option Contracts (1)				Interest Rate Swaps (2)
Notional amounts at January 1	€	600	$	800	£	-	$	-	¥	24,136	$	250	€	-	$	-	$	71
New contracts		1,746		2,354		238		400		79,010		769		365		464		398
Matured or expired contracts		(2,046)		(2,754)		-		-		(79,010)		(769)		(81)		(110)		(71)

Notional amounts at December 31	€	300	$	400	£	238	$	400	¥	24,136	$	250	€	284	$	354	$	398

Weighted Average Forward Rate at December 31				1.33				1.68				96.54				1.25
Active contracts at December 31				4				3				3				8		2


2013
	Foreign Currency Contracts								Interest Rate Swaps (3)
	Net Investment 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)		-		-		(1,244)

Notional amounts at December 31	€	600	$	800	¥	24,136	$	250	$	71


2012
	Foreign Currency Contracts				Interest Rate Swaps (4)
	Net Investment Contracts				Interest Rate Swaps (4)
Notional amounts at January 1	€	-	$	-	$	1,497
New contracts		1,000		1,304		445
Acquired contracts		-		-		71
Matured or expired contracts		-		-		(698)

Notional amounts at December 31	€	1,000	$	1,304	$	1,315

(1)	During 2014, we exercised three foreign currency option contracts, and recognized a net gain of approximately $1.1 million.

(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 9 for more information on the Yen Term Loan.

(3)

During 2013, we settled 13 contracts with a notional value of $333.5 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 contributions of properties to NPR.

(4)

In 2012, we entered into four interest rate swap contracts with combined notional amounts of $445.4 million, with various expiration dates between 2017 and 2019. In addition, we acquired one interest rate swap contract with a notional amount of $71.0 million in connection with the acquisition of a controlling interest in one of our unconsolidated co-investment ventures.

The following table presents the fair value of our derivative instruments (in thousands):


	December 31, 2014						December 31, 2013
	Asset		Liability		AOCI		Asset		Liability		AOCI
Net investment hedges - euro denominated	$	22,891	$	-	$	37,295	$	137	$	30,302	$	(21,705)
Net investment hedges - yen denominated		46,934		-		56,169		20,104		-		22,102
Net investment hedges - pounds sterling denominated		29,097		-		29,097		-		-		-
Foreign currency options - euro denominated (1)		7,742		-		-		-		-		-
Interest rate swap hedges (2)		-		1,395		(1,395)		-		5,638		(591)
Our share of derivatives from unconsolidated co-investment ventures (3)		-		-		(19,545)		-		-		(13,851)

Total fair value of derivatives	$	106,664	$	1,395	$	101,621	$	20,241	$	35,940	$	(14,045)

(1)

As discussed above, the foreign currency options are not designated as hedges. We recognized gains of $7.7 million in Foreign Currency and Derivative Losses and Related Amortization, Net in the Consolidated Statements of Operations from the change in value of our outstanding foreign currency option contracts for the year ended December 31, 2014.

(2)	In connection with the contributions to NPR, we reclassified a loss related to interest rate swaps of $7.8 million during the first quarter of 2013 from AOCI in the Consolidated Balance Sheets to Losses on Early Extinguishment of Debt, Net in the Consolidated Statements of Operations.

(3)	Items indicated by ‘- - ‘ are not applicable

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 for which we recorded losses of $614.8 million, $237.6 million and $61.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. It also includes 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):


	2014		2013		2012
Derivative net investment hedges (1)	$	122,164	$	17,847	$	(17,450)
Interest rate swap hedges (2)		(804)		(69)		6,651
Our share of derivatives from unconsolidated co-investment ventures		(5,694)		19,659		11,335

Total gain (loss) on derivative instruments		115,666		37,437		536
Non-derivative net investment hedges (3)		321,196		(14,910)		-

Total gain on derivative and non-derivative instruments	$	436,862	$	22,527	$	536

(1)	This includes gains of $6.3 million and $4.3 million for the years ended December 31, 2014 and 2013, respectively, upon the settlement of net investment hedges.

(2)

The amounts reclassified to interest expense for the years ended December 31, 2014 and 2013 were not considered significant. The amount reclassified to interest expense for the year ended December 31, 2012, was $14.7 million. We do not expect the amounts reclassified to interest expense for the next 12 months to be significant.

(3)

As discussed in Note 9, we issued €1.8 billion ($2.4 billion) of debt in 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. At December 31, 2014 and 2013, we had €2.5 billion ($3.0 billion) and €700 million ($1.0 billion) of debt, net of accrued interest, respectively, designated as non-derivative financial instrument hedges of our net investment in international subsidiaries. We had €97.6 million ($118.5 million) of debt that was not designated as a non-derivative financial instrument hedge at December 31, 2014. We recognized unrealized gains of $7.5 million in Foreign Currency and Derivative Gains (Losses) and Related Amortization, Net in the Consolidated Statements of Operations on the unhedged portion or our debt in 2014.

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 December 31, 2014 and 2013, other than the derivatives discussed above and in Note 9, we did not have any significant financial assets or financial liabilities that are measured at fair value on a recurring basis in the Consolidated Financial Statements. We determined the fair value of our derivative instruments 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. We determined the fair values of our interest rate swaps using the market standard methodology of netting the discounted future fixed cash receipts or payments and the discounted expected variable cash payments. We based the variable cash payments on an expectation of future interest rates, or forward curves, derived from observable market interest rate curves. We based the fair values of our net investment hedges 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 at December 31, 2014 and 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 this criteria at December 31, 2014 or 2013.

Fair Value of Financial Instruments

At December 31, 2014 and 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 December 31, 2014 and 2013, we estimated the fair value of our senior notes and exchangeable senior notes 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 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 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 December 31, 2014 and 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 at December 31 (in thousands):


	2014				2013
	Carrying Value		Fair Value		Carrying Value		Fair Value
Credit Facilities	$	-	$	-	$	725,483	$	725,679
Senior notes		6,076,920		6,593,657		5,357,933		5,698,864
Exchangeable senior notes		456,766		511,931		438,481		514,381
Secured mortgage debt		1,050,591		1,173,488		1,696,597		1,840,829
Secured mortgage debt of consolidated entities		1,207,106		1,209,271		239,992		246,324
Term loans and other debt		588,816		591,810		552,730		560,714

Total debt	$	9,380,199	$	10,080,157	$	9,011,216	$	9,586,791