Financial Instruments and Fair Value Measurements

12 Months Ended

Dec. 31, 2022

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 fair value of our $250 million 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):


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


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 $12.4 million at December 31, 2022, and $28.7 million at December 31, 2021. Also excludes deferred financing costs of $0.8 million at December 31, 2022, and $0.8 million at December 31, 2021.

(2)Excludes non-cash premiums and discounts recorded on notes payable. The unamortized balance of the net premiums was $224.6 million at December 31, 2022, and $295.5 million at December 31, 2021. Also excludes deferred financing costs of $60.7 million at December 31, 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. 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 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 December 31, 2022, and 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.

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.

The impairments for the years ended December 31, 2022 and 2021 primarily relate to properties sold, in the process of being sold, or vacant.

We identify the impact of the COVID-19 pandemic as an impairment triggering event for properties occupied by certain clients experiencing difficulties meeting their lease obligations to us. After considering the impacts of the COVID-19 pandemic on the key assumptions noted above, we determined that the carrying values of 38 properties classified as held for investment for the year ended December 31, 2020 were not recoverable. As a result, we recorded provisions for impairment of $105.0 million for the year ended December 31, 2020 on the applicable properties impacted by the COVID-19 pandemic.

The following table summarizes our provisions for impairment on real estate investments during the periods indicated below (dollars in millions):


	Years ended December 31,
		2022		2021		2020
Carrying value prior to impairment		$	140.9	$	169.2	$	260.8
Less: total provisions for impairment		(25.9)		(39.0)		(147.2)
Carrying value after impairment		$	115.0	$	130.2	$	113.6

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 Euros, we have a hedging strategy to enter into foreign currency forward contracts to sell GBP, USD, and Euro and buy Euro, 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 (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 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 was terminated and the future principal and interest associated with the prepaid intercompany loan did not occur, a $20.0 million gain was reclassified from AOCI to 'Foreign currency and derivative (loss) gain, net' during the three months ended June 30, 2022.

In October 2022, we entered into six cross-currency swaps to exchange €612 million for $600 million maturing in October 2032, in order to hedge the foreign currency risk associated with our Euro-denominated intercompany loans receivable from our consolidated foreign subsidiaries. We designated three of the six cross-currency swaps, exchanging €326 million for $320 million, as fair value hedges of foreign denominated intercompany loans receivable (the "hedged assets"). The hedged assets are eliminated in consolidation, but remeasurement gains and losses pertaining to the hedged assets impact earnings as part of 'Foreign currency and derivative (loss) gain, net'. For these hedges, we have elected to exclude the change in fair value of the cross-currency swaps related to both time value and cross currency basis spread from the assessment of hedge effectiveness (the "excluded component"). Changes in the fair value of the cross-currency swaps attributable to changes in the spot rates on the final notional exchanges and changes in the value of the hedged assets due to changes in the spot rates are recorded in 'Foreign currency and derivative (loss) gain, net'. Changes in the fair value of the cross-currency swaps attributable to the excluded components are recorded to Other comprehensive income and will be recognized in Foreign currency and derivative (loss) gain, net on a systematic and rational basis, as net cash settlements and interest accruals on the respective cross currency swaps occur, over the remaining life of the hedging instruments.

In February 2020, we entered into five forward starting treasury rate locks with notional amounts totaling $500.0 million. The treasury rate locks were entered into to hedge our exposure to the changes in the 10-year US treasury rates in anticipation of potential future debt offerings during the first half of 2020. The treasury rate locks were designated as cash flow hedges, with any changes in fair value recorded in AOCI. Upon the initial issuance of the 2031 Notes in May 2020, we amortized the AOCI balance over the term of the 2031 Notes. In June 2020, all five treasury rate locks were terminated and we entered into six forward starting interest rate swaps with notional amounts totaling $500.0 million in a cashless settlement of the terminated treasury rate locks. The forward starting swaps were entered into to hedge our exposure to the changes in the 3-month USD-LIBOR swap rate in anticipation of potential future debt offerings through a current estimated range ending in 2023. The forward starting swaps are designated as cash flow hedges, with any changes in fair value recorded in AOCI. Upon issuance of the 2031 Notes during July 2020, the AOCI balance associated with four of the forward starting swaps with a notional amount of $350.0 million we amortized over the term of the notes. However, we elected not to terminate the four forward starting interest rate swaps, and redesignated the swaps in a new hedging relationship for a future debt issuance to hedge our exposure to the changes in the 10-year US treasury rates in anticipation of potential future debt offerings between May 2020 and December 2023. Upon the December 2020 issuance of $325.0 million of 0.750% notes due March 2026 and $400.0 million of 1.800% notes due March 2033, the AOCI balance associated with six of the forward starting swaps with a notional amount of $500.0 million began amortizing over the term. The AOCI balance being amortized represents the change in fair value on four swaps with a notional amount of $350.0 million from the July issuance of the 2031 notes through the December note issuances and the change in fair value from the two remaining forward starting swaps with a notional amount of $150.0 million from their June 2020 inception through the December note issuances. The notional amounts of the six swaps were first applied to the $400.0 million of 1.800% notes due March 2033, with the remaining $100.0 million of notional applied to the $325.0 million of 0.750% notes due March 2026. In connection with our October 2022 offering of $750 million of 5.625% unsecured notes, due October 13, 2032, we terminated the six forward starting interest rate swaps. Upon the issuance of the October 2022 offering, the change in fair value on the six forward starting interest rate swaps with notional amounts totaling $500.0 million is being amortized through the AOCI balance through the term of the notes.

As of December 31, 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. This interest

rate swap, which was converted to a SOFR benchmark from LIBOR during June 2022, continues to be accounted for as a cash flow hedge.

The following table summarizes the amount of unrecognized gain (loss) on derivatives in other comprehensive income during the periods indicated below (in thousands):


	Years ended December 31,
Derivatives in Cash Flow Hedging Relationships		2022		2021		2020
Currency swaps		$	(5,091)	$	8,232	$	(2,169)
Interest rate swaps		98,310		34,659		(32,757)
Foreign currency forwards		8,540		7,557		—
Total derivatives in cash flow hedging relationships		$	101,759	$	50,448	$	(34,926)

Derivatives in Fair Value Hedging Relationships
Currency swaps		(4,705)		—		—
Total unrealized gain (loss) on derivatives		$	97,054	$	50,448	$	(34,926)

The following table summarizes the amount of gain (loss) on derivatives reclassified from AOCI (in thousands):


		Years ended December 31,
Derivatives in Cash Flow Hedging Relationships	Location of Gain (Loss) Recognized in Income		2022		2021		2020
Currency swaps	Foreign currency and derivative gain (loss), net		$	30,814	$	3,541	$	(3,617)
Interest rate swaps	Interest expense		(4,487)		(10,343)		(11,434)
Foreign Currency Forwards	Foreign currency and derivative gain, net		2,139		—		—
Total derivatives in cash flow hedging relationships			$	28,466	$	(6,802)	$	(15,051)

Derivatives in Fair Value Hedging Relationships
Currency swaps	Foreign currency and derivative loss, net		(29,708)		—		—
Net decrease to net income			$	(1,242)	$	(6,802)	$	(15,051)

We expect to reclassify $11.9 million from AOCI as a decrease to interest expense relating to interest rate swaps and $9.8 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 U.S. dollar, our reporting currency, and British Pound Sterling and Euro. 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 (loss) gain, 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):


	Years ended December 31,
		2022		2021		2020
Realized foreign currency and derivative gain (loss), net:
Gain (loss) on the settlement of undesignated derivatives		$	204,392	$	24,392	$	(6,344)
Gain (loss) on the settlement of designated derivatives reclassified from AOCI		3,245		3,541		(3,617)
Loss on the settlement of transactions with third parties		(553)		(134)		(36)
Total realized foreign currency and derivative gain (loss), net		$	207,084	$	27,799	$	(9,997)

Unrealized foreign currency and derivative gain (loss), net:
Gain (loss) on the change in fair value of undesignated derivatives		$	29,316	$	(14,714)	$	(8,205)
Gain (loss) on remeasurement of certain assets and liabilities		(249,711)		(12,375)		22,787
Total unrealized foreign currency and derivative gain (loss), net		$	(220,395)	$	(27,089)	$	14,582
Total foreign currency and derivative gains (losses), net		$	(13,311)	$	710	$	4,585

The following table summarizes the terms and fair values of our derivative financial instruments at December 31, 2022 and 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			December 31, 2022		December 31, 2021				December 31, 2022		December 31, 2021

Interest rate swap	1	Derivative	$	250.0	$	250.0	2.88%	March 2024	$	5.6	$	(11.9)
Cross-currency swaps (4)	3	Derivative	320.0		166.3		(5)	October 2032	(33.3)		(13.8)
Foreign currency forwards	30	Derivative	185.5		176.1		(6)	Jan 2023 - Aug 2024	16.1		7.6
Forward-starting swaps (7)	–	Derivative	–		300.0		–%		–		(3.2)
Forward-starting swaps (7)	–	Hybrid Debt	–		200.0		–%		–		(5.1)
			$	755.5	$	1,092.4			$	(11.6)	$	(26.4)
Derivatives not Designated as Hedging Instruments
Currency exchange swaps (8)	4	Derivative	$	2,427.7	$	1,639.5	(9)	January 2023	$	58.8	$	(14.7)
Cross-Currency Swaps (4)	3	Derivative	280.0		–		(5)	October 2032	(29.5)		—

Total of all Derivatives			$	3,463.2	$	2,731.9			$	17.7	$	(41.1)

(1)This column represents the number of instruments outstanding as of December 31, 2022.

(2)Weighted average strike rate is calculated using the notional value as of December 31, 2022.

(3)This column represents maturity dates for instruments outstanding as of December 31, 2022.

(4)In June 2022, we terminated four British Pound Sterling, or GBP, cross-currency swaps with a notional amount of $166.3 million. In October 2022, we entered into six cross-currency swaps to exchange €612 million for $600 million maturing in October 2032.

(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 1.34.

(7)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. These forward starting interest rate swaps were terminated in connection with a senior unsecured note issuance in October 2022.

(8)Represents one GBP currency exchange swap with a notional amount of $836.4 million and three Euro ("EUR"), currency exchange swaps with an associated notional amount of $1.6 billion.

(9)Weighted Average Forward EUR-GBP exchange rate of 0.86 and Weighted Average Forward EUR-USD exchange rate of 1.05.

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.