XML 28 R18.htm IDEA: XBRL DOCUMENT
v3.22.2

Financial Instruments and Fair Value Measurements | 6 Months Ended
--- | ---
Jun. 30, 2022
Fair Value Disclosures [Abstract] |
Financial Instruments and Fair Value Measurements | Financial Instruments and Fair Value Measurements Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). ASC 820, Fair Value Measurements and Disclosures, sets forth a fair value hierarchy that categorizes inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and lowest priority to unobservable inputs. Categorization within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement. •Level 1 – Unadjusted quoted prices in active markets Financial instruments are classified as Level 1 if their value is observable in an active market. Such instruments are valued by reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted price is readily available, and the price represents actual and regularly occurring market transactions. An active market is one in which transactions occur with sufficient volume and frequency to provide pricing information on an ongoing basis. •Level 2 – Valuation Technique Using Observable Inputs Financial instruments classified as Level 2 are valued using quoted prices for identical instruments in markets that are not considered to be active, or quoted prices for similar assets or liabilities in active markets, or valuation techniques in which all significant inputs are observable or can be corroborated by observable market data for substantially the entire contractual term of the financial asset or liability. •Level 3 – Valuation Technique Using Significant Unobservable Inputs Financial instruments are classified as Level 3 if their valuation incorporates significant inputs that are not based on observable market data (unobservable inputs). Such inputs are generally determined based on observable inputs of a similar nature, historical observations on the level of the inputs, or other analytical techniques. We evaluate our hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from period to period. Changes in the type of inputs may result in a reclassification for certain assets. We have not historically had changes in classifications and do not expect that changes in classifications between levels will be frequent. Financial Instruments Not Measured at Fair Value on the Consolidated Balance Sheets The fair value of short-term financial instruments such as cash and cash equivalents, accounts receivable, escrow deposits, loans receivable, accounts payable, distributions payable, line of credit payable and commercial paper borrowings, and other liabilities approximate their carrying value in the accompanying consolidated balance sheets, due to their short-term nature. The fair value of our term loan approximates carrying value due to the frequent repricing of the variable interest rate charged on the borrowing, which is based on the daily SOFR. The fair value of our financial instruments not carried at fair value are disclosed as follows (in millions):
June 30, 2022 | Carrying value |  | Estimated fair value
Mortgages payable assumed in connection with acquisitions (1) | $ | 928.9 |  | $ | 906.6 |
Notes and bonds payable (2) | $ | 13,390.3 |  | $ | 12,377.8 |
December 31, 2021 | Carrying value |  | Estimated fair value
Mortgages payable assumed in connection with acquisitions (1) | $ | 1,114.1 |  | $ | 1,154.7 |
Notes and bonds payable (2) | $ | 12,257.3 |  | $ | 13,114.5 |
(1)Excludes non-cash net premiums recorded on the mortgages payable. The unamortized balance of these net premiums was $19.2 million at June 30, 2022, and $28.7 million at December 31, 2021. Also excludes deferred financing costs of $1.0 million at June 30, 2022, and $790,000 at December 31, 2021. (2)Excludes non-cash premiums and discounts recorded on notes payable. The unamortized balance of the net premiums was $257.0 million at June 30, 2022, and $295.5 million at December 31, 2021. Also excludes deferred financing costs of $58.7 million at June 30, 2022, and $53.1 million at December 31, 2021. The estimated fair values of our mortgages payable assumed in connection with acquisitions and private senior notes payable have been calculated by discounting the future cash flows using an interest rate based upon the relevant forward interest rate curve, plus an applicable credit-adjusted spread. Because this methodology includes unobservable inputs that reflect our own internal assumptions and calculations, the measurement of estimated fair values related to our mortgages payable is categorized as level three on the three-level valuation hierarchy. The estimated fair values of our publicly-traded senior notes and bonds payable are based upon indicative market prices and recent trading activity of our senior notes and bonds payable, including the senior notes and bonds payable assumed in the debt exchange offer on November 9, 2021, in connection with our merger with VEREIT. Because this methodology includes inputs that are less observable by the public and are not necessarily reflected in active markets, the measurement of the estimated fair values related to our notes and bonds payable is categorized as level two on the three-level valuation hierarchy. Financial Instruments Measured at Fair Value on a Recurring Basis For derivative assets and liabilities, we may utilize interest rate swaps and forward-starting swaps to manage interest rate risk, and cross-currency swaps, currency exchange swaps, foreign currency forwards and foreign currency collars to manage foreign currency risk. The valuation of these instruments is 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, spot and forward rates, as well as option volatility. Derivative fair values also include credit valuation adjustments to appropriately reflect both our own 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. Although we have determined that the majority of the inputs used to value our derivatives fall within level two on the three-level valuation hierarchy, the credit valuation adjustments associated with our derivatives utilize level three inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by ourselves and our counterparties. However, at June 30, 2022, and December 31, 2021, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we determined that our derivative valuations in their entirety are classified as level two. Items Measured at Fair Value on a Non-Recurring Basis Certain financial and nonfinancial assets and liabilities are measured at fair value on a non-recurring basis and are subject to fair value adjustments only under certain circumstances, such as when an impairment write-down occurs. The following table summarizes our provisions for impairment on real estate investments during the periods indicated below (dollars in millions):
| Three months ended June 30, |  | Six months ended June 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
Carrying value prior to impairment | $ | 64.5 |  |  | $ | 45.6 |  |  | $ | 98.2 |  |  | $ | 59.2 |
Less: total provisions for impairment | (7.7) |  |  | (17.2) |  |  | (14.7) |  |  | (20.0) |
Carrying value after impairment | $ | 56.8 |  |  | $ | 28.4 |  |  | $ | 83.5 |  |  | $ | 39.2 |
Number of properties: |  |  |  |  |  |  |
Classified as held for sale | 9 |  |  | 1 |  |  | 23 |  |  | 1 |
Classified as held for investment | 3 |  |  | 5 |  |  | 3 |  |  | 6 |
Sold | 32 |  |  | 31 |  |  | 49 |  |  | 44 |
Derivative Designated as Hedging Instruments In order to hedge the foreign currency risk associated with interest payments on intercompany loans denominated in British Pound Sterling, or GBP, we initiated a hedging strategy to enter into foreign currency forward contracts to sell GBP and buy U.S. Dollars, or USD. These foreign currency forwards are designated as cash flow hedges. Forward points on the forward contracts are included in the assessment of hedge effectiveness. Amounts reported in other comprehensive income (loss) related to foreign currency derivative contracts will be reclassified to other gain and (loss) in the same period during which the hedged forecasted transactions affect earnings. In May 2019, we entered into four cross-currency swaps to exchange £130 million Sterling for $166 million maturing in May 2034, in order to hedge the foreign currency risk associated with our Sterling-denominated intercompany loan receivable from our consolidated foreign subsidiaries. These cross-currency swaps were designated as cash flow hedges on their trade date. In June 2022, following the early prepayment of our Sterling-denominated intercompany loan receivable from our consolidated foreign subsidiaries, we terminated the four cross-currency swaps used to hedge the foreign currency exposure of the intercompany loan. As the hedge relationship has been terminated and the future principal and interest associated with the prepaid intercompany loan will not occur, $20.0 million has been reclassified from AOCI to Foreign currency and derivative gain, net during the three months ended June 30, 2022. As of June 30, 2022, we had one interest rate swap in place on our $250.0 million unsecured term loan. Our objective in using derivatives is to add stability to interest expense and to manage our exposure to interest rate movements. We designated this interest rate swap as a cash flow hedge in accordance with Topic 815, Derivatives and Hedging. This interest rate swap is recorded on the consolidated balances sheets at fair value. Changes to fair value are recorded to accumulated other comprehensive income (loss), or AOCI, and subsequently reclassified into interest expense in the same periods during which the hedged transaction affects earnings. The following table summarizes the amount of unrealized gain (loss) on derivatives in other comprehensive income during the periods indicated below (in thousands):
|  | Three months ended June 30, |  | Six months ended June 30,
Derivatives in Cash Flow Hedging Relationships |  | 2022 |  | 2021 |  | 2022 |  | 2021
Currency swaps |  | $ | (6,986) |  |  | $ | 5,598 |  |  | $ | (5,091) |  |  | $ | 3,978 |
Interest rate swaps |  | 30,386 |  |  | (20,353) |  |  | 69,391 |  |  | 27,676 |
Foreign currency forwards |  | 10,054 |  |  | 3,922 |  |  | 12,844 |  |  | 3,922 |
Total unrealized gain on derivatives |  | $ | 33,454 |  |  | $ | (10,833) |  |  | $ | 77,144 |  |  | $ | 35,576 |
The following table summarizes the amount of gain (loss) on derivatives reclassified from accumulated other comprehensive income (loss) during the periods indicated below (in thousands):
|  |  |  | Three months ended June 30, |  | Six months ended June 30,
Derivatives in Cash Flow Hedging Relationships |  | Location of Gain (Loss) Recognized in Income |  | 2022 |  | 2021 |  | 2022 |  | 2021
Currency swaps |  | Foreign currency and derivative gain, net |  | $ | 21,527 |  |  | $ | (235) |  |  | $ | 27,641 |  |  | $ | (1,386) |
Interest rate swaps |  | Interest expense |  | (2,153) |  |  | (2,578) |  |  | (4,683) |  |  | (5,119) |
Net increase (decrease) to net income |  |  |  | $ | 19,374 |  |  | $ | (2,813) |  |  | $ | 22,958 |  |  | $ | (6,505) |
We expect to reclassify $2.7 million from AOCI as an increase to interest expense relating to interest rate swaps and $8.5 million from AOCI to foreign currency gain relating to foreign currency forwards within the next twelve months. Derivatives Not Designated as Hedging Instruments Based on our potential exposure to changes in foreign currency exchange rate, primarily in British Pound Sterling and, to a lesser extent, the Euro, we initiated a program in the third quarter of 2021 to enter into foreign currency collars. A foreign currency collar consists of a written call option and a purchased put option to sell the foreign currency at a range of predetermined exchange rates. A foreign currency collar guarantees that the exchange rate of the currency will not fluctuate beyond the range of the options’ strike prices. Our foreign currency collars generally have maturities of five months or less and are not designated as hedge instruments for accounting purposes. The gain or loss on these derivative contracts are recognized in 'Foreign currency and derivative gain, net' in the consolidated statements of income and comprehensive income based on the changes in fair value. In addition, we enter into foreign currency exchange swap agreements to reduce the effects of currency exchange rate fluctuations between the British Pound Sterling and Euro. These derivative contracts generally mature within one to three months and are not designated as hedge instruments for accounting purposes. As the currency exchange swap is not accounted for as a hedging instrument, the change in fair value is recorded in earnings through the caption entitled 'Foreign currency and derivative gain, net' in the consolidated statements of income and comprehensive income The following table details our foreign currency and derivative gain, net included in income (in thousands):
|  | Three months ended June 30, |  | Six months ended June 30,
|  | 2022 |  | 2021 |  | 2022 |  | 2021
Realized foreign currency and derivative gain (loss), net: |  |  |  |  |  |  |  |
Gain on the settlement of undesignated derivatives |  | $ | 79,308 |  |  | $ | — |  |  | $ | 76,628 |  |  | $ | — |
Gain (loss) on the settlement of designated derivatives reclassified from AOCI |  | 21,527 |  |  | (235) |  |  | 27,641 |  |  | (1,386) |
Gain (loss) on the settlement of transactions with third parties |  | 1,004 |  |  | (104) |  |  | 952 |  |  | (104) |
Total realized foreign currency and derivative gain (loss), net |  | $ | 101,839 |  |  | $ | (339) |  |  | $ | 105,221 |  |  | $ | (1,490) |
Unrealized foreign currency and derivative gain (loss), net: |  |  |  |  |  |  |  |
Gain on the change in fair value of undesignated derivatives |  | $ | 37,274 |  |  | $ | — |  |  | $ | 59,995 |  |  | $ | 3,724 |
Gain (loss) on remeasurement of certain assets and liabilities |  | (131,633) |  |  | 739 |  |  | (158,326) |  |  | (1,030) |
Total unrealized foreign currency and derivative gain (loss), net |  | $ | (94,359) |  |  | $ | 739 |  |  | $ | (98,331) |  |  | $ | 2,694 |
Total foreign currency and derivative gain, net |  | $ | 7,480 |  |  | $ | 400 |  |  | $ | 6,890 |  |  | $ | 1,204 |
The following table summarizes the terms and fair values of our derivative financial instruments at June 30, 2022, and December 31, 2021 (dollars in millions):
Derivative Type | Number of Instruments (1) | Accounting Classification | Notional Amount as of | Weighted Average Strike Rate (2) | Maturity Date (3) | Fair Value - asset (liability) as of
Derivatives Designated as Hedging Instruments | June 30, 2022 | December 31, 2021 |  |  | June 30, 2022 | December 31, 2021
Interest rate swap | 1 | Derivative | $ | 250.0 |  | $ | 250.0 | 2.88% | March 2024 | $ | 0.4 |  | $ | (11.9) |
Cross-currency swaps (4) | — | Derivative | — |  | 166.3 | — | — | — |  | (13.8) |
Foreign currency forwards | 36 | Derivative | 177.5 |  | 176.1 | (5) | Jul 2022 - Aug 2024 | 20.4 |  | 7.6 |
Forward-starting swaps (6) | 4 | Derivative | 300.0 |  | 300.0 | 1.86% | Nov 2032 - Jun 2033 | 31.2 |  | (3.2) |
Forward-starting swaps (6) | 2 | Hybrid Debt | 200.0 |  | 200.0 | 1.93% | Nov 2032 - Jun 2033 | 16.2 |  | (5.1) |
|  |  | $ | 927.5 |  | $ | 1,092.4 |  |  |  | $ | 68.2 |  | $ | (26.4) |
Derivatives not Designated as Hedging Instruments |  |  |  |  |  |
Currency exchange swaps (7) | 5 | Derivative | 833.2 |  | 1,639.5 | (8) | Jul 2022 - Nov 2022 | 36.9 |  | (14.7) |
Total of all Derivatives | $ | 1,760.7 |  | $ | 2,731.9 |  |  |  | $ | 105.1 |  | $ | (41.1) |
(1)This column represents the number of instruments outstanding as of June 30, 2022. (2)Weighted average strike rate is calculated using the current notional value as of June 30, 2022. (3)This column represents maturity dates for instruments outstanding as of June 30, 2022. (4)In June 2022, we terminated the four British Pound Sterling, or GBP, cross-currency swaps with notional amount of $166.3 million. (5)Weighted average forward GBP-USD exchange rate of 1.40. (6)There were five treasury rate locks entered into during February 2020 that were terminated in June 2020 and converted into six forward starting interest rate swaps through a cashless settlement. (7)Represents three GBP currency exchange swaps with notional amount of $564.9 million and two Euro, or EUR, currency exchange swaps with notional amount of $268.3 million. (8)Weighted average Forward GBP-USD exchange rate of 1.26 and Weighted Average Forward EUR-USD exchange rate of 1.11. We measure our derivatives at fair value and include the balances within other assets and accounts payable and accrued expenses on our consolidated balance sheets. We have agreements with each of our derivative counterparties containing provisions under which we could be declared in default on our derivative obligations if repayment of our indebtedness is accelerated by the lender due to our default. We utilize interest rate swaps and forward-starting swaps to manage interest rate risk and cross-currency swaps, currency exchange swaps, foreign currency forwards and foreign currency collars to manage foreign currency risk. The valuation of these instruments is 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, spot and forward rates, as well as option volatility. To comply with the provisions of ASC 820, Fair Value Measurement, we incorporate credit valuation adjustments to appropriately reflect both our own 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.

X
- Definition The entire disclosure for derivatives and fair value of assets and liabilities. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI https://asc.fasb.org/topic&trid=2155941 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI https://asc.fasb.org/topic&trid=2229140 + Details
Name: | us-gaap_DerivativesAndFairValueTextBlock
Namespace Prefix: | us-gaap_
Data Type: | dtr-types:textBlockItemType
Balance Type: | na
Period Type: | duration

X
- References No definition available. + Details
Name: | us-gaap_FairValueDisclosuresAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration