NOTE 11. 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 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, 2015.

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

	June 30, 2016				December 31, 2015
	Asset		Liability		Asset		Liability
Net investment hedges – Canadian dollar denominated	$	-	$	2,633	$	-	$	-
Net investment hedges – pound sterling denominated		49,850		-		33,471		-
Cash flow hedge foreign currency options – peso denominated		-		135		-		88
Foreign currency options – Canadian dollar denominated (1)		584		766		3,324		-
Foreign currency options – euro denominated (1)		2,761		2,198		11,711		84
Foreign currency options – pound sterling denominated (1)		14,644		-		4,241		745
Foreign currency options – yen denominated (1)		857		17,578		832		717
Interest rate hedges		-		40,746		-		12,095
Total fair value of derivatives	$	68,696	$	64,056	$	53,579	$	13,729

(1)

As discussed below, these foreign currency options are not designated as hedges.

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 directly in earnings within the line item Foreign Currency and Derivative Gains (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 directly in earnings within the line item Foreign Currency and Derivative Gains (Losses), Net. We recognized unrealized gains of $3.3 million and losses of $13.5 million from the change in value of our outstanding foreign currency options for the three and six months ended June 30, 2016. We recognized unrealized losses of $10.6 million and gains of $9.5 million for the three and six months ended June 30, 2015. We may also use foreign currency forwards designed as cash flow hedges to mitigate foreign currency exchange rate risk associated with payments in a currency that is not the functional currency of our foreign subsidiaries. To the extent we have an effective hedging relationship; we report all changes in fair value of the hedged portion of the foreign currency forwards cash flow hedges 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 and six months ended June 30, 2016, and 2015.

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

2016
	Foreign Currency Contracts
Local Currency	Net Investment Forward Contracts								Forward and Option Contracts
	GBP			JPY			CAD		EUR (1)			GBP (1) (2)			JPY (1)			Other (1)
Notional amounts at January 1	£	238		¥	-		$	-	€	275		£	97		¥	12,840
New contracts		60			11,189			133		171			-			11,460
Matured or expired contracts		(60	)		(11,189	)		-		(75	)		(24	)		(3,120	)
Notional amounts at June 30	£	238		¥	-		$	133	€	371		£	73		¥	21,180

	Foreign Currency Contracts
U.S. Dollar	Net Investment Forward Contracts								Forward and Option Contracts
Notional amounts at January 1	$	386		$	-		$	-	$	310		$	148		$	109		$	50
New contracts		85			99			100		192			-			108			15
Matured or expired contracts		(100	)		(99	)		-		(85	)		(36	)		(27	)		(15	)
Notional amounts at June 30	$	371		$	-		$	100	$	417		$	112		$	190		$	50

Weighted average forward rate at June 30		1.56			-			1.33		1.13			1.53			112.00			-
Active contracts at June 30		3			-			2		25			12			33			20

2015
	Foreign Currency Contracts
Local Currency	Net Investment Forward Contracts									Forward and Option Contracts (1)
	EUR			GBP			JPY			EUR			GBP			JPY			CAD
Notional amounts at January 1	€	300		£	238		¥	24,136		€	284		£	-		¥	-		$	-
New contracts		-			118			43,373			198			126			12,740			49
Matured or expired contracts		(300	)		(118	)		(67,509	)		(254	)		(53	)		(2,800	)		(7	)
Notional amounts at June 30	€	-		£	238		¥	-		€	228		£	73		¥	9,940		$	42

	Foreign Currency Contracts
U.S. Dollar	Net Investment Forward Contracts									Forward and Option Contracts (1)
Notional amounts at January 1	$	400		$	400		$	250		$	354		$	-		$	-		$	-
New contracts		-			186			353			224			188			109			40
Matured or expired contracts		(400	)		(200	)		(603	)		(311	)		(79	)		(24	)		(6	)
Notional amounts at June 30	$	-		$	386		$	-		$	267		$	109		$	85		$	34

(1)

During the six months ended June 30, 2016, and 2015, we exercised 15 and 13 option contracts, respectively. We realized gains of $0.2 million and $1.9 million for the three and six months ended June 30, 2016, respectively, and gains of $4.0 million and $6.2 million for the three and six months ended June 30, 2015, respectively, in Foreign Currency and Derivative Gains (Losses), Net.

(2)	Included in our British pounds sterling denominated option contracts is one forward contract to sell British pounds sterling and buy euros. This forward has a notional amount of £6.0 million (€8.0 million) and was reported in this table using an exchange rate of $1.45 U.S. dollars to the euro.

Interest Rate

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 may also 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 losses on a derivative representing hedge ineffectiveness in Interest Expense at the time the ineffectiveness occurred. During the three and six months ended June 30, 2016, and 2015, we had no significant losses due to hedge ineffectiveness.

At June 30, 2016, and December 31, 2015, we had seven interest rate swaps outstanding with a notional amount of $1.4 billion. We did not enter into or settle any interest rate swaps during the six months ended June 30, 2016. During the six months ended June 30, 2015, we entered into two contracts to effectively fix the interest rate on a term loan denominated in yen.

In January 2016, the Bank of Japan introduced negative interest rates. As a result, our two Japanese yen denominated interest rate hedges related to the 2015 Japan term loan no longer qualified for hedge accounting due to a zero percent floor mismatch in the hedging relationship. These interest rate hedges were designated as cash flow hedges at December 31, 2015, and the change in fair value was recorded in Other Comprehensive Income. We began recording the change in fair value of these interest rate hedges to our statement of income when the hedges no longer qualified for hedge accounting. During the three and six months ended June 30, 2016, we recorded a loss of $4.7 million and $11.4 million, respectively, in Foreign Currency and Derivative Gains (Losses), Net.

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 of the financial statements into U.S. dollars of our consolidated subsidiaries whose functional currency is not the U.S. dollar. We recorded losses of $136.0 million and gains of $18.8 million for the three and six months ended June 30, 2016, respectively, and gains of $215.5 million and losses of $306.9 million for the three and six months ended June 30, 2015, respectively. It also 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						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
Derivative net investment hedges (1)	$	21,512		$	(28,984	)	$	29,420		$	34,194
Interest rate hedges (2)		(2,672	)		(2,341	)		(13,790	)		(759	)
Cash flow hedges		(31	)		-			(34	)		-
Our share of derivatives from unconsolidated co-investment ventures		(3,223	)		1,879			(7,994	)		4,106
Total derivative instruments		15,586			(29,446	)		7,602			37,541
Nonderivative net investment hedges (3)		91,416			(111,537	)		(69,773	)		223,403
Total derivative and nonderivative hedging instruments	$	107,002		$	(140,983	)	$	(62,171	)	$	260,944

(1)

We received $15.9 million and $16.8 million for the three and six months ended June 30, 2016, respectively, upon the settlement of net investment hedges. We received $120.1 million and $121.5 million for the three and six months ended June 30, 2015, respectively, upon the settlement of net investment hedges.

(2)

The amounts reclassified to interest expense for the three and six months ended June 30, 2016, were $1.1 million and $2.1 million, respectively. The amounts reclassified to interest expense for the three and six months ended June 30, 2015, were not considered significant. For the next 12 months from June 30, 2016, we estimate an additional expense for $6.3 million will be reclassified to Interest Expense.

(3)

At June 30, 2016, and December 31, 2015, we had €3.2 billion ($3.5 billion) of debt, net of accrued interest, for both periods, designated as nonderivative financial instrument hedges of our net investment in international subsidiaries. We recognized unrealized losses of $5.4 million and unrealized gains of $10.0 million in Foreign Currency and Derivative Gains (Losses), Net on the unhedged portion of our debt for the three and six months ended June 30, 2015, respectively. There were no unrealized gains or losses recognized for the three and six months ended June 30, 2016.

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 on disposition. 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, 2015.

Fair Value Measurements on a Recurring Basis

At June 30, 2016, and December 31, 2015, 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 June 30, 2016, and December 31, 2015, 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 June 30, 2016, or December 31, 2015.

Fair Value of Financial Instruments

At June 30, 2016, and December 31, 2015, 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 June 30, 2016, and December 31, 2015, as compared with those in effect when the debt was issued or assumed, 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 (in thousands):

	June 30, 2016				December 31, 2015
	Carrying Value		Fair Value		Carrying Value		Fair Value
Credit Facilities	$	-	$	-	$	-	$	-
Senior notes		6,603,070		7,234,087		6,516,392		6,801,118
Term loans and other		1,844,717		1,877,264		2,115,457		2,128,270
Secured mortgages		901,071		996,779		1,172,473		1,262,778
Secured mortgages of consolidated entities		1,790,557		1,804,180		1,822,509		1,825,361
Total debt	$	11,139,415	$	11,912,310	$	11,626,831	$	12,017,527