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Financial Instruments and Fair Value Measurements | 3 Months Ended
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Mar. 31, 2023
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. A. 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 aggregate fair value of our term loans 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):
March 31, 2023 | Carrying value |  | Estimated fair value
Mortgages payable assumed in connection with acquisitions (1) | $ | 842.1 |  | $ | 820.0 |
Notes and bonds payable (2) | $ | 15,296.7 |  | $ | 13,833.5 |
December 31, 2022 | Carrying value |  | Estimated fair value
Mortgages payable assumed in connection with acquisitions (1) | $ | 842.3 |  | $ | 810.4 |
Notes and bonds payable (2) | $ | 14,114.2 |  | $ | 12,522.8 |
(1)Excludes non-cash net premiums recorded on the mortgages payable. The unamortized balance of these net premiums was $9.2 million at March 31, 2023, and $12.4 million at December 31, 2022. Also excludes deferred financing costs of $0.7 million at March 31, 2023, and $0.8 million at December 31, 2022. (2)Excludes non-cash premiums and discounts recorded on notes payable. The unamortized balance of the net premiums was $200.0 million at March 31, 2023, and $224.6 million at December 31, 2022. Also excludes deferred financing costs of $66.3 million and basis adjustment on interest rate swaps designated as fair value hedges of $0.4 million at March 31, 2023, and $60.7 million of deferred financing costs at December 31, 2022. 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. 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. B. Financial Instruments Measured at Fair Value on a Recurring Basis For derivative assets and liabilities, we may utilize interest rate swaps, interest rate swaptions, and forward-starting swaps to manage interest rate risk, and cross-currency swaps, currency exchange swaps, and foreign currency forwards 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 March 31, 2023, and December 31, 2022, 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. C. Items Measured at Fair Value on a Non-Recurring Basis Impairment of Real Estate Investments 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. Depending on impairment triggering events during the applicable period, impairments are typically recorded for properties sold, in the process of being sold, vacant, in bankruptcy, or experiencing difficulties with collection of rent. The following table summarizes our provisions for impairment on real estate investments during the periods indicated below (dollars in millions):
|  |  | Three months ended March 31,
|  |  |  |  | 2023 |  | 2022 |  |
Carrying value prior to impairment |  |  |  |  | $ | 35.6 |  |  | $ | 44.8 |  |  |
Less: total provisions for impairment |  |  |  |  | (13.2) |  |  | (7.0) |  |  |
Carrying value after impairment |  |  |  |  | $ | 22.4 |  |  | $ | 37.8 |  |  |
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 ("GBP") and Euro ("EUR"), we have a hedging strategy to enter into foreign currency forward contracts to sell GBP, USD, and EUR and buy EUR, USD, and GBP. 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 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. To add stability to interest expense and to manage our exposure to interest rate movements associated with our 2023 term loans, we executed six one-year variable-to-fixed interest rate swaps maturing January 2024. We designated these interest rate swaps as cash flow hedges in accordance with Topic 815, Derivatives and Hedging. The interest rate swaps are recorded on the consolidated balances sheets at fair value. Changes to fair value are recorded to accumulated other comprehensive income, or AOCI, and subsequently reclassified into interest expense in the same periods during which the hedged transaction affects earnings. In January 2023, we issued $500.0 million of 5.05% senior unsecured notes due January 13, 2026, which are callable at par on January 13, 2024. In conjunction with the pricing of the 2026 notes, we executed two three-year, fixed-to-variable interest rate swaps totaling $500.0 million, which are subject to the counterparties' right to terminate the swaps at any time following the 2026 notes par call date. We designated these interest rate swaps as fair value hedges in accordance with Topic 815, Derivatives and Hedging. These interest rate swaps are recorded on the consolidated balances sheets at fair value, with changes in fair value recognized in earnings. The carrying value of the hedged item on the balance sheet is adjusted through earnings by the equal and offsetting amount of the change in fair value of the swaps. For the three months ended March 31, 2023, such adjustments decreased the carrying value of notes payable by $0.4 million. Interest accruals on the swaps are recorded as adjustments to interest expense on the hedged item. In March 2023, we entered into six interest rate swaption agreements to mitigate the impact of fluctuating interest rates, structured as a swaption corridor, in anticipation of issuing USD denominated bonds. Interest rate swaption corridors are a combination of two swaption positions, whereby we purchase a payer swaption, which is an option that allows us to enter into a swap where we will pay the fixed rate and receive the floating rate of the swap, and sell a swaption, which is an option that provides the counterparty with the right to enter into a swap where we will receive the fixed rate and pay the floating rate of the swap. For the swaption corridor entered into during March 2023, the combination of purchasing the payer swaption and selling the swaption resulted in a premium being paid of $7.6 million. We designated the swaptions as qualifying hedging instruments and accounted for these derivatives as cash flow hedges. Changes in fair value of the swaptions have been recorded in AOCI. The following table summarizes the amount of unrecognized gain (loss) on derivatives in other comprehensive income (in thousands):
|  |  |  | Three months ended March 31,
Derivatives in Cash Flow Hedging Relationships |  |  |  |  |  | 2023 |  | 2022 |  |
Currency swaps |  |  |  |  |  | $ | — |  |  | $ | 1,895 |  |  |
Interest rate swaps |  |  |  |  |  | (1,720) |  |  | 39,005 |  |  |
Foreign currency forwards |  |  |  |  |  | (5,113) |  |  | 2,790 |  |  |
Interest rate swaption |  |  |  |  |  | (1,287) |  |  | — |  |  |
Total derivatives in cash flow hedging relationships |  |  |  |  |  | $ | (8,120) |  |  | $ | 43,690 |  |  |
Derivatives in Fair Value Hedging Relationships |  |  |  |  |  |  |  |  |  |
Currency swaps |  |  |  |  |  | $ | 5,958 |  |  | $ | — |  |  |
Total derivatives in fair value hedging relationships |  |  |  |  |  | $ | 5,958 |  |  | $ | — |  |  |
Total unrealized (loss) gain on derivatives |  |  |  |  |  | $ | (2,162) |  |  | $ | 43,690 |  |  |
The following table summarizes the amount of gain (loss) on derivatives reclassified from AOCI (in thousands):
|  |  |  |  |  | Three months ended March 31,
Derivatives in Cash Flow Hedging Relationships |  | Location of Gain (Loss) Recognized in Income |  |  |  |  |  | 2023 |  | 2022 |  |
Currency swaps |  | Foreign currency and derivative gain (loss), net |  |  |  |  |  | $ | — |  |  | $ | 6,114 |  |  |
Interest rate swaps |  | Interest expense |  |  |  |  |  | 1,480 |  |  | (2,530) |  |  |
Foreign currency forwards |  | Foreign currency and derivative gain (loss), net |  |  |  |  |  | 1,431 |  |  | — |  |  |
Total derivatives in cash flow hedging relationships |  |  |  |  |  |  |  | $ | 2,911 |  |  | $ | 3,584 |  |  |
Derivatives in Fair Value Hedging Relationships |  |  |  |  |  |  |  |  |  |  |  |
Currency swaps |  | Foreign currency and derivative gain (loss), net |  |  |  |  |  | $ | 294 |  |  | $ | — |  |  |
Total derivatives in fair value hedging relationships |  |  |  |  |  |  |  | $ | 294 |  |  | $ | — |  |  |
Net increase to net income |  |  |  |  |  |  |  | $ | 3,205 |  |  | $ | 3,584 |  |  |
We expect to reclassify $12.8 million from AOCI as a decrease to interest expense relating to interest rate swaps and $7.9 million from AOCI to foreign currency gain relating to foreign currency forwards within the next twelve months. Derivatives Not Designated as Hedging Instruments We enter into foreign currency exchange swap agreements to reduce the effects of currency exchange rate fluctuations between the USD, our reporting currency, and GBP and EUR. These derivative contracts generally mature within one year 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 (loss), net' in the consolidated statements of income and comprehensive income. The following table details our foreign currency and derivative gains (losses), net included in income (in thousands):
|  |  |  | Three months ended March 31,
|  |  |  |  |  | 2023 |  | 2022 |  |
Realized foreign currency and derivative gain (loss), net: |  |  |  |  |  |  |  |  |  |
Loss on the settlement of undesignated derivatives |  |  |  |  |  | $ | (345) |  |  | $ | (2,681) |  |  |
Gain on the settlement of designated derivatives reclassified from AOCI |  |  |  |  |  | 1,725 |  |  | 6,114 |  |  |
Gain (loss) on the settlement of transactions with third parties |  |  |  |  |  | 1,326 |  |  | (52) |  |  |
Total realized foreign currency and derivative gain, net |  |  |  |  |  | $ | 2,706 |  |  | $ | 3,381 |  |  |
Unrealized foreign currency and derivative gain (loss), net: |  |  |  |  |  |  |  |  |  |
(Loss) gain on the change in fair value of undesignated derivatives |  |  |  |  |  | $ | (782) |  |  | $ | 22,720 |  |  |
Gain (loss) on remeasurement of certain assets and liabilities |  |  |  |  |  | 8,398 |  |  | (26,691) |  |  |
Total unrealized foreign currency and derivative gain (loss), net |  |  |  |  |  | $ | 7,616 |  |  | $ | (3,971) |  |  |
Total foreign currency and derivative gains (losses), net |  |  |  |  |  | $ | 10,322 |  |  | $ | (590) |  |  |
The following table summarizes the terms and fair values of our derivative financial instruments at March 31, 2023 and December 31, 2022 (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 | March 31, 2023 | December 31, 2022 |  |  | March 31, 2023 | December 31, 2022
Interest rate swaps | 9 | Derivative | $ | 1,630.0 |  | $ | 250.0 | 4.26% | Jan 2024 - Jan 2026 | $ | 5.3 |  | $ | 5.6 |
Interest rate swaptions | 6 | Derivative | 1,000.0 |  | — |  | (4) | Feb 2034 | 6.3 |  | — |
Cross-currency swaps | 3 | Derivative | 320.0 |  | 320.0 | (5) | Oct 2032 | (33.1) |  | (33.3) |
Foreign currency forwards | 24 | Derivative | 155.9 |  | 185.5 | (6) | Apr 2023 - Aug 2024 | 11.0 |  | 16.1 |
|  |  | $ | 3,105.9 |  | $ | 755.5 |  |  |  | $ | (10.5) |  | $ | (11.6) |
Derivatives not Designated as Hedging Instruments |  |  |  |  |  |
Currency exchange swaps (7) | 2 | Derivative | $ | 475.9 |  | $ | 2,427.7 | (8) | April 2023 | $ | (1.1) |  | $ | 58.8 |
Cross-currency swaps | 3 | Derivative | 280.0 |  | 280.0 | (5) | Oct 2032 | (29.3) |  | (29.5) |
|  |  | $ | 755.9 |  | $ | 2,707.7 |  |  |  | $ | (30.4) |  | $ | 29.3 |
Total of all Derivatives | $ | 3,861.8 |  | $ | 3,463.2 |  |  |  | $ | (40.9) |  | $ | 17.7 |
(1)This column represents the number of instruments outstanding as of March 31, 2023. (2)Weighted average strike rate is calculated using the notional value as of March 31, 2023. (3)This column represents maturity dates for instruments outstanding as of March 31, 2023. (4)Represent purchase swaptions with a strike rate of 3.75% and a sold swaption with a strike rate of 4.25%. (5)USD fixed rate of 5.625% and EUR weighted average fixed rate of 4.697%. (6)Weighted average forward GBP-USD exchange rate of 1.35. (7)Represent one GBP currency exchange swap with a notional amount of $61.6 million and one EUR currency exchange swap with an associated notional amount of $414.3 million as of March 31, 2023. (8)Weighted average EUR-USD exchange rate of 1.09 and GBP-USD exchange rate of 1.23. We measure our derivatives at fair value and include the balances within other assets and accounts payable as well as 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.

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