20.

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. Foreign currency contracts, including forwards and options, may be used to manage foreign currency exposure. We may use interest rate swaps to manage the effect of interest rate fluctuations. We do not use derivative financial instruments for trading purposes. The majority 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 does involve 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. To minimize the concentration of credit risk, we enter into derivative transactions with a portfolio of financial institutions. Based on these factors, we consider the risk of counterparty default to be minimal.

All derivatives are recognized at fair value in our Consolidated Balance Sheets within the line items Other Assets or Accounts Payable and Accrued Expenses, 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 in accordance with the accounting standards, 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. Derivatives not designated as hedges are not speculative and are used to manage our exposure to foreign currency fluctuations but do not meet the strict hedge accounting requirements.

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 Accumulated Other Comprehensive Loss in our 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 our Consolidated Statements of Operations in which the hedged items are recorded in the same period that the underlying hedged items affect earnings.

Foreign currency hedges

We hedge the net assets of certain of our international subsidiaries (net investment hedges) using foreign currency forward contracts to offset the translation and economic exposures related to our investments in these subsidiaries. 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 our financial statements and better manages interest rate differentials between different countries. Under this method, all changes in fair value of the forward contract are reported in stockholders’ equity in the foreign currency translation component of Accumulated Other Comprehensive Loss and offsets translation adjustments on the underlying net assets of foreign subsidiaries and affiliates, which are also recorded in Accumulated Other Comprehensive Loss. Ineffectiveness, if any, is recognized in earnings.

In 2012, we entered into 11 foreign currency forward contracts that expire in April and May 2013 with an aggregate notional amount of €1.0 billion ($1.3 billion using the forward rate of 1.30) to hedge a portion of our investment in Europe at a fixed euro rate in U.S. dollars. These derivatives were designated and qualify as hedging instruments and, therefore, the changes in fair value of these derivatives were recorded in the foreign currency translation component of Accumulated Other Comprehensive Loss in our Consolidated Balance Sheets. We had $17.5 million recorded in Accounts Payable and Accrued Expenses in our Consolidated Balance Sheets relating to the fair value of these derivative contracts at December 31, 2012. Amounts included in Accumulated Other Comprehensive Loss in our Consolidated Balance Sheets at December 31, 2012, were losses of $17.5 million. None of these hedges were ineffective during the year ended December 31, 2012, therefore, there was no impact on earnings.

Interest rate hedges

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. To achieve this objective, 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 use cash flow hedges to minimize the variability in cash flows of assets, liabilities or forecasted transactions caused by fluctuations in interest rates.

We have entered into interest rate swap agreements which 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 had 32 interest rate swap contracts, which included 24 contracts denominated in euro, two contracts denominated in British pound sterling, five contracts denominated in Japanese yen and one contract denominated in U.S dollar, outstanding at December 31, 2012. During 2011, we acquired and settled an interest rate cap agreement that allowed us to receive variable-rate amounts from a counterparty if interest rates rose above the strike rate on the contract in exchange for an upfront premium. We had $28.0 million and $28.5 million accrued in Accounts Payable and Accrued Expenses in our Consolidated Balance Sheets relating to these unsettled derivative contracts at December 31, 2012 and December 31, 2011, respectively.

The effective portion of the gain or loss on the derivative is reported as a component of Accumulated Other Comprehensive Loss in our Consolidated Balance Sheets, and reclassified to Interest Expense in the Consolidated Statements of Operations over the corresponding period of the hedged item. The amounts reclassified to interest expense for the year ended December 31, 2012 was $14.7 million. The amounts reclassified to interest expense for the years ended December 31, 2011 and 2010 were not considered material. For the next twelve months from December 31, 2012, we estimate that an additional expense of $1.5 million will be reclassified into interest expense. Amounts included in Accumulated Other Comprehensive Loss in our Consolidated Balance Sheets at December 31, 2012 and 2011 were losses of $33.8 million and $51.7 million, respectively.

Losses on a derivative representing hedge ineffectiveness are recognized in Interest Expense at the time the ineffectiveness occurred. We recorded losses due to hedge ineffectiveness of $2.4 million and $1.8 million during the year ended December 31, 2012 and 2011, respectively. We did not have any losses due to hedge ineffectiveness during the year ended December 31, 2010. Also in 2012, we recorded a loss of $11.0 million in Gain (Loss) on Early Extinguishment of Debt, Net related to interest rate swaps that were considered ineffective with a notional amount of $703.8 million. These derivatives are associated with debt that was paid off in late January and early February 2013, or are expected to be transferred, in connection with the contribution to our new European co-investment venture, PELP (see Note 6 for more details of this venture). When it was probable the related forecasted transaction would not occur, the hedge was deemed ineffective and the balance in Accumulated Other Comprehensive Loss was written off.

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


	2012				2011				2010
	Foreign Currency Forwards		Interest Rate Swaps (1)		Interest Rate Swaps (1)		Interest Rate Caps		Interest Rate Swaps (1)
Notional amounts at January 1,	$	-	$	1,496.5	$	268.1	$	-	$	157.7
New contracts		1,303.8		445.4		-		-		155.0
Acquired contracts (2)		-		71.0		1,337.3		25.7		-
Matured or expired contracts		-		(698.1)		(108.9)		(25.7)		(44.6)

Notional amounts at December 31,	$	1,303.8	$	1,314.8	$	1,496.5	$	—	$	268.1

(1)

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 our interest in NAIF II. In connection with the Merger and PEPR Acquisition in 2011, we acquired various interest rate swap contracts with combined notional amounts of $1.3 billion, with various expiration dates between October 2012 and January 2014. During the third quarter of 2010, we entered into a ¥13.0 billion interest rate contract that matures in December 2014 to fix the interest rate on a variable rate TMK bond. We designated these contracts as cash flow hedges and they qualify for hedge accounting treatment.

(2)	To the extent these contracts previously qualified for hedge accounting, they were redesignated at the time of the acquisition to qualify for hedge accounting post Merger and acquisition.

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 and Non-Recurring Basis

At December 31, 2012 and December 31, 2011, other than the derivatives discussed in this note and in Note 10, we do not have any significant financial assets or financial liabilities that are measured at fair value on a recurring basis in our Consolidated Financial Statements.

Non-financial assets measured at fair value on a non-recurring basis in our Consolidated Financial Statements consist of real estate assets and investments in and advances to unconsolidated entities that were subject to impairment charges as discussed in Note 16. The table below aggregates the fair value of these assets at December 31, 2012 and 2011, respectively, by the levels in the fair value hierarchy (in thousands):


	2012								2011
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Real estate assets	$	-	$	-	$	3,677,365	$	3,677,365	$	-	$	-	$	122,088	$	122,088
Investments in and advances to other unconsolidated entities	$	-	$	-	$	-	$	-	$	-	$	-	$	26,066	$	26,066

Fair Value of Financial Instruments

At December 31, 2012 and December 31, 2011, the carrying amounts of certain of our financial instruments, including cash and cash equivalents, restricted cash, accounts and notes receivable and accounts payable and accrued expenses were representative of their fair values due to the short-term nature of these instruments.

At December 31, 2012 and 2011, the fair value of our derivative 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, 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.

At December 31, 2012 and 2011, 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 December 31, 2012 and 2011, as compared with those in effect when the debt was issued or acquired. 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 as of December 31 (in thousands):


	2012				2011
	Carrying Value		Fair Value		Carrying Value		Fair Value
Debt:
Credit Facilities	$	888,966	$	893,577	$	936,796	$	940,334
Senior notes		5,223,136		5,867,124		4,772,607		5,038,678
Exchangeable senior notes		876,884		1,007,236		1,315,448		1,431,805
Secured mortgage debt		3,625,908		3,765,556		1,725,773		1,832,931
Secured mortgage debt of consolidated entities		450,923		455,880		1,468,637		1,485,808
Other debt of consolidated entities		67,749		68,751		775,763		751,075
Other debt		657,228		660,951		387,384		389,804

Total debt	$	11,790,794	$	12,719,075	$	11,382,408	$	11,870,435