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Financial Instruments and Fair Value Measurements

9 Months Ended

Sep. 30, 2021

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 disclosure for assets and liabilities measured at fair value requires allocation to a three-level valuation hierarchy. This valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Categorization within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

We believe that the carrying values reflected in our consolidated balance sheets reasonably approximate the fair values for cash and cash equivalents, accounts receivable, escrow deposits, loans receivable, line of credit payable and commercial paper borrowings, term loan and all other liabilities, due to their short-term nature or interest rates and terms that are consistent with market, except for our mortgages payable assumed in connection with acquisitions and our senior notes and bonds payable, which are disclosed as follows (dollars in millions):


September 30, 2021	Carrying value		Estimated fair value
Mortgages payable assumed in connection with acquisitions (1)	$	285.6	$	297.9
Notes and bonds payable (2)	$	8,353.0	$	9,000.5


December 31, 2020	Carrying value		Estimated fair value
Mortgages payable assumed in connection with acquisitions (1)	$	299.6	$	309.4
Notes and bonds payable (2)	$	8,302.4	$	9,324.0

(1)Excludes non-cash net premiums recorded on the mortgages payable. The unamortized balance of these net premiums was $933,000 at September 30, 2021, and $1.7 million at December 31, 2020. Also excludes deferred financing costs of $865,000 at September 30, 2021 and $973,000 at December 31, 2020.

(2)Excludes non-cash original issuance premiums and discounts recorded on notes payable. The unamortized balance of the net original issuance premiums was approximately $7.2 million at September 30, 2021, and $14.6 million at December 31, 2020. Also excludes deferred financing costs of $51.0 million at September 30, 2021 and $49.2 million at December 31, 2020.

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.

Foreign Currency Forward Contracts 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, during the second quarter of 2021, 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. We did not enter into any new derivative contracts designated as hedging instruments during the three months ended September 30, 2021.

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 have maturities of five months or less and are not designated as hedge instruments for accounting purposes. The gains or loss on these derivative contracts are recognized in other income or expense based on the changes in fair value.

In addition, we enter into 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 gains, net' in the consolidated statements of income and comprehensive income.

The net gain from derivatives not designated in hedging relationships for the three and nine months ended September 30, 2021 totaled $24.6 million and $2.9 million, respectively, and resulted from foreign currency collars and short term currency exchange swaps. The net gain from derivatives not designated in hedging relationships for the three and nine months ended September 30, 2020 totaled $9.5 million and resulted from a short term currency exchange swap.

The following table summarizes the terms and fair values of our derivative financial instruments at September 30, 2021 and December 31, 2020 (dollars in millions):


Derivative Type (1)	Number of Instruments (2)	Accounting Classification	Hedge Designation	Notional Amount				Weighted Average Strike Rate (3)	Maturity Date (4)	Fair Value - asset (liability)
				September 30,		December 31,				September 30,		December 31,
				2021		2020				2021		2020
Interest rate swap	1	Derivative	Cash flow	$	250.0	$	250.0	3.04%	03/2024	$	(16.1)	$	(22.6)
Cross-currency swaps (5)	4	Derivative	Cash flow	166.4		166.4		(6)	05/2034	(10.4)		(21.4)
Currency exchange swaps (5)	2	Derivative	N/A	1,179.3		625.0		(7)	10/2021	16.4		(8.2)
Forward-starting swaps (8)	4	Derivative	Cash flow	300.0		300.0		1.86%	11/2032 - 06/2033	(0.8)		(16.5)
Forward-starting swaps (8)	2	Hybrid debt	Cash flow	200.0		200.0		1.93%	11/2032 - 06/2033	(3.8)		(12.8)
Foreign currency collars (9)	4	Derivative	N/A	100.0		—		1.39	10/2021 - 12/2021	(0.1)		—
Foreign currency forwards	35	Derivative	Cash flow	184.3		—		(10)	10/2021 - 08/2024	8.5		—
				$	2,380.0	$	1,541.4			$	(6.3)	$	(81.5)

(1)There have been no changes to hedging arrangements in-place at December 31, 2020. All hedges remained effective through September 30, 2021. For full discussion of the hedging arrangements, please refer to note 2 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020.

(2)This column represents the number of instruments outstanding as of September 30, 2021.

(3)Weighted average strike rate is calculated using the current notional value as of September 30, 2021.

(4)This column represents maturity dates for instruments outstanding as of September 30, 2021.

(5)Represents five British Pound Sterling, or GBP currency instruments with notional amount of $1,173.1 million and one Euro, or EUR currency instrument with notional amount of $172.6 million.

(6)GBP fixed rates initially at 4.82% and escalating to 10.96%, and USD weighted average fixed rate at 9.78%.

(7) Forward GBP-USD exchange rate of 1.37 and Forward EUR-USD exchange rate of 1.18.

(8) 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. For full discussion of the hedging arrangements for these six forward starting swaps, please refer to Note 2 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020.

(9) Represents GBP-USD foreign currency collars.

(10) Weighted average forward GBP-USD exchange rate of 1.41.

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.

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 September 30, 2021 and December 31, 2020, 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 on the three-level valuation hierarchy.

Unrealized gains and losses in accumulated other comprehensive income, or AOCI, are reclassified to interest expense in the case of interest rate swaps and to foreign currency gains and losses, net in the case of cross-currency swaps, when the related hedged items are recognized. During the three and nine months ended September 30, 2021, we reclassified $2.6 million and $7.7 million, respectively, from AOCI as an increase to interest expense and $4.7 million and $3.3 million gain for cross-currency swaps into foreign exchange losses. During the three and nine months ended September 30, 2020, we reclassified $3.0 million and $8.3 million, respectively, from AOCI as an increase to interest expense and a $6.3 million loss and a $5.9 million gain, respectively, for cross-currency swaps into foreign exchange gains.

We expect to reclassify $10.3 million from AOCI as an increase to interest expense and $3.2 million from AOCI to foreign currency gain related to cash flow hedges within the next twelve months.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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