NOTE 9. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Derivative Financial Instruments

In the normal course of business, our operations are exposed to market risks, including the effect of changes in foreign currency exchange rates and interest rates. To manage these risks, we may enter into 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. Our derivative financial instruments are customized transactions and are not exchange-traded. Management reviews our hedging program, derivative positions and overall risk management strategy on a regular basis. We enter into only those transactions 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 disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

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

	September 30, 2017				December 31, 2016
	Asset		Liability		Asset		Liability
Net investment hedges
British pound sterling denominated	$	-	$	-	$	7,439	$	-
Canadian dollar denominated		-		7,683		1,245		-

Forwards and options (1)
British pound sterling denominated		4,932		7,158		16,985		-
Canadian dollar denominated		-		1,709		831		197
Euro denominated		-		12,144		10,933		-
Japanese yen denominated		6,671		1,100		9,246		1,071

Interest rate hedges		8,707		-		435		-

Total fair value of derivatives	$	20,310	$	29,794	$	47,114	$	1,268

(1)

As discussed below, these foreign currency options are not designated as hedges. We recognized unrealized losses of $12.3 million and $44.8 million for the three and nine months ended September 30, 2017, respectively, from the change in value of our outstanding foreign currency options within Foreign Currency and Derivative Losses, Net in the Consolidated Statements of Income. We recognized unrealized gains of $3.1 million and losses of $10.4 million for the three and nine months ended September 30, 2016, respectively, from the change in value of our outstanding foreign currency options.

Foreign Currency

We primarily manage our foreign currency exposure by borrowing in the currencies in which we invest. We may issue 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 of the translation from the fluctuations in exchange rates, we may designate this debt as a nonderivative 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. To the extent we have an effective hedging relationship, we report all changes in fair value of the hedged portion of the nonderivative financial instruments and net investment hedges in equity in the foreign currency translation component of Accumulated Other Comprehensive Loss (“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. The changes in fair value of the portion of the nonderivative financial instruments that are not designated as hedges are recorded in Foreign Currency and Derivative Losses, Net in the Consolidated Statements of Income. We recognize ineffectiveness, if any, in earnings at the time the ineffectiveness occurred.

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. These are not designated as hedges as they do not meet hedge accounting requirements. Changes in the fair value of non-hedge designated derivatives are recorded in Foreign Currency and Derivative Losses, Net.

The following tables summarize the activity in our foreign currency contracts for the nine months ended September 30 (in millions, except for weighted average forward rates and number of active contracts):

2017
	Foreign Currency Contracts
Local Currency	Net Investment Hedges						Forwards and Options
	CAD			GBP			CAD			EUR			GBP			JPY
Notional amounts at January 1	$	133		£	31		$	50		€	174		£	48		¥	15,500
New contracts		133			100			24			56			107			4,000
Matured, expired or settled contracts		(133	)		(131	)		(22	)		(72	)		(48	)		(5,400	)
Notional amounts at September 30	$	133		£	-		$	52		€	158		£	107		¥	14,100

	Foreign Currency Contracts
U.S. Dollar	Net Investment Hedges						Forwards and Options
Notional amounts at January 1	$	100		$	46		$	38		$	197		$	78		$	144
New contracts		99			127			19			63			137			38
Matured, expired or settled contracts		(100	)		(173	)		(17	)		(81	)		(75	)		(49	)
Notional amounts at September 30	$	99		$	-		$	40		$	179		$	140		$	133

Weighted average forward rate at September 30		1.34			-			1.30			1.13			1.31			106.11
Active contracts at September 30		2			-			18			23			19			29

2016
	Foreign Currency Contracts
Local Currency	Net Investment Hedges								Forwards and Options
	CAD		GBP			JPY			EUR			GBP			JPY			Other
Notional amounts at January 1	$	-	£	238		¥	-		€	275		£	97		¥	12,840
New contracts		133		60			11,189			321			-			15,460
Matured, expired or settled contracts		-		(60	)		(11,189	)		(440	)		(36	)		(10,940	)
Notional amounts at September 30	$	133	£	238		¥	-		€	156		£	61		¥	17,360

	Foreign Currency Contracts
U.S. Dollar	Net Investment Hedges								Forwards and Options (1)
Notional amounts at January 1	$	-	$	386		$	-		$	310		$	148		$	109		$	50
New contracts		100		85			99			359			-			147			15
Matured, expired or settled contracts		-		(100	)		(99	)		(492	)		(55	)		(95	)		(21	)
Notional amounts at September 30	$	100	$	371		$	-		$	177		$	93		$	161		$	44

(1)

During the nine months ended September 30, 2017, and 2016, we exercised 33 and 41 forward and option contracts, respectively. We realized gains of $1.6 million and $10.5 million for the three and nine months ended September 30, 2017, respectively, and losses of $3.1 million and $1.2 million for the three and nine months ended September 30, 2016, respectively, in Foreign Currency and Derivative Losses, Net.

Interest Rate

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 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 and reclassify it to Interest Expense over the corresponding period of the hedged item. We recognize any hedge ineffectiveness in Interest Expense at the time the ineffectiveness occurred. During the nine months ended September 30, 2017, and 2016, we had no losses due to hedge ineffectiveness.

At September 30, 2017, and December 31, 2016, we had three interest rate swaps outstanding with a notional amount of $271.2 million. We did not enter into or settle any interest rate swaps during the nine months ended September 30, 2017. During the nine months ended September 30, 2016, we did not enter into any interest rate swap contracts, and we settled ¥105.9 billion ($924.6 million) of our interest rate swaps outstanding.

Other Comprehensive Income

The change in Other Comprehensive Income in the Consolidated Statements of Comprehensive Income during the periods presented is due to the translation into U.S. dollars of the financial statements of our consolidated subsidiaries whose functional currency is not the U.S. dollar. We recorded gains of $147.6 million and $474.1 million for the three and nine months ended September 30, 2017, respectively, and losses of $40.8 million and $22.0 million for the three and nine months ended September 30, 2016, respectively. The gains and losses recognized in Other Comprehensive Income during these periods were offset by net losses on the translation of our derivative and nonderivative net investment hedges detailed below. This includes the change in fair value for the effective portion of our derivative and nonderivative instruments that have been designated as hedges.

The following table presents the gains and (losses) associated with the change in fair value for the effective portion of our derivative and nonderivative hedging instruments included in Other Comprehensive Income (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Derivative net investment hedges (1)	$	(3,623	)	$	11,546		$	(13,114	)	$	40,966
Interest rate and cash flow hedges (2)		5,553			3,110			10,382			(10,714	)
Our share of derivatives from unconsolidated co-investment ventures		538			1,586			5,075			(6,408	)
Total derivative instruments		2,468			16,242			2,343			23,844
Nonderivative net investment hedges (3) (4)		(139,885	)		(19,019	)		(414,077	)		(88,792	)
Total derivative and nonderivative hedging instruments	$	(137,417	)	$	(2,777	)	$	(411,734	)	$	(64,948	)

(1)	We received $2.5 million and $16.8 million for the nine months ended September 30, 2017, and 2016, respectively, upon the settlement of net investment hedges. We did not settle any new investment hedges during the three months ended September 30, 2017, and 2016.

(2)

The amounts reclassified to interest expense for the three and nine months ended September 30, 2017, were $1.3 million and $4.2 million, respectively. The amounts reclassified to interest expense for the three and nine months ended September 30, 2016, were $2.0 million and $4.1 million, respectively. For the next 12 months from September 30, 2017, we estimate an additional expense of $3.5 million will be reclassified to Interest Expense.

(3)

At September 30, 2017, and December 31, 2016, we had €3.0 billion ($3.6 billion) and €3.2 billion ($3.4 billion) of debt, net of accrued interest, respectively, designated as nonderivative financial instrument hedges of our net investment in international subsidiaries. We recognized unrealized losses of $3.8 million and $15.1 million in Foreign Currency and Derivative Losses, Net on the unhedged portion of our debt for the three and nine months ended September 30, 2017. We did not recognize any gains or losses for the three months ended September 30, 2016.

(4)

In June 2017, we issued £500.0 million ($645.3 million) of debt, as discussed in Note 5, and £322.8 million ($415.0 million) of the debt was designated as a nonderivative financial instrument hedge of our net investment in international subsidiaries at September 30, 2017. We recognized unrealized losses of $4.2 million in Foreign Currency and Derivative Losses, Net on the unhedged portion of our debt for the three and nine months ended September 30, 2017.

Fair Value Measurements

There have been no significant changes in our policy from what was disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Fair Value Measurements on a Recurring Basis

At September 30, 2017, and December 31, 2016, other than the derivatives discussed previously, we did not have any significant financial assets or financial liabilities that were measured at fair value on a recurring basis in the Consolidated Financial Statements. All of our derivatives held at September 30, 2017, and December 31, 2016, were classified as Level 2 of the fair value hierarchy.

Fair Value Measurements on Nonrecurring Basis

No assets met the criteria to be measured at fair value on a nonrecurring basis at September 30, 2017, or December 31, 2016.

Fair Value of Financial Instruments

At September 30, 2017, and December 31, 2016, the 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 because of the short-term nature of these instruments.

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 or borrowing spreads that were available to us at September 30, 2017, and December 31, 2016, as compared with those in effect when the debt was issued or assumed. 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, 2017				December 31, 2016
	Carrying Value		Fair Value		Carrying Value		Fair Value
Credit Facilities	$	-	$	-	$	35,023	$	35,061
Senior notes		6,874,108		7,390,221		6,417,492		6,935,485
Term loans and unsecured other		1,634,682		1,653,113		1,499,001		1,510,661
Secured mortgages		812,371		874,491		979,585		1,055,020
Secured mortgages of consolidated entities		399,904		399,515		1,677,193		1,683,489
Total debt	$	9,721,065	$	10,317,340	$	10,608,294	$	11,219,716