NOTE 16. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Derivative Financial Instruments

In the normal course of business, our operations are exposed to 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.

See Note 2 for additional information about our derivative financial instrument policy.

The following table presents the fair value and classification of our derivative instruments at December 31 (in thousands):

	2016				2015
	Asset		Liability		Asset		Liability
Net investment hedges
Canadian dollar denominated	$	1,245	$	-	$	-	$	-
Pound sterling denominated		7,439		-		33,471		-

Forwards and options
Euro denominated (1)		10,933		-		11,711		84
Pound sterling denominated (1)		16,985		-		4,241		745
Yen denominated (1)		9,246		1,071		832		717
Other (1)		831		197		3,324		88

Interest rate hedges		435		-		-		12,095

Total fair value of derivatives	$	47,114	$	1,268	$	53,579	$	13,729

(1)	As discussed in Note 2, these foreign currency contracts are not designated as hedges, with the exception of cash flow hedges denominated in pesos, which matured in 2016.

Foreign Currency

The following tables summarize the activity in our foreign currency contracts for the years ended December 31 (in millions, except for weighted average forward rates and number of active contracts):

2016	Foreign Currency Contracts
	Net Investment Hedges								Forwards and Options
Local Currency	CAD		GBP			JPY			EUR			GBP			JPY			Other
Notional amounts at January 1	$	-	£	238		¥	-		€	275		£	97		¥	12,840
New contracts		133		90			11,189			369			-			15,460
Matured, expired or settled contracts		-		(297	)		(11,189	)		(470	)		(49	)		(12,800	)
Notional amounts at December 31	$	133	£	31		¥	-		€	174		£	48		¥	15,500

	Foreign Currency Contracts
U.S. Dollar	Net Investment Hedges								Forwards and Options (1)
Notional amounts at January 1	$	-	$	386		$	-		$	310		$	148		$	109		$	50
New contracts		100		131			99			413			-			146			15
Matured, expired or settled contracts		-		(471	)		(99	)		(526	)		(70	)		(111	)		(27	)
Notional amounts at December 31	$	100	$	46		$	-		$	197		$	78		$	144		$	38

Weighted average forward rate at December 31		1.33		1.51			-			1.13			1.54			107.68
Active contracts at December 31		2		2			-			24			8			30			16

2015	Foreign Currency Contracts
	Net Investment Hedges												Forwards and Options
Local Currency	CAD			EUR			GBP			JPY			EUR			GBP			JPY			Other
Notional amounts at January 1	$	-		€	300		£	238		¥	24,136		€	284		£	-		¥	-
New contracts		394			-			118			43,373			333			199			18,740
Matured, expired or settled contracts		(394	)		(300	)		(118	)		(67,509	)		(342	)		(102	)		(5,900	)
Notional amounts at December 31	$	-		€	-		£	238		¥	-		€	275		£	97		¥	12,840

	Foreign Currency Contracts
U.S. Dollar	Net Investment Hedges												Forwards and Options (1)
Notional amounts at January 1	$	-		$	400		$	400		$	250		$	354		$	-		$	-		$	-
New contracts		298			-			186			353			375			300			159			71
Matured, expired or settled contracts		(298	)		(400	)		(200	)		(603	)		(419	)		(152	)		(50	)		(21	)
Notional amounts at December 31	$	-		$	-		$	386		$	-		$	310		$	148		$	109		$	50

2014	Foreign Currency Contracts
	Net Investment Hedges								Forwards and Options
Local Currency	EUR			GBP		JPY			EUR
Notional amounts at January 1	€	600		£	-	¥	24,136		€	-
New contracts		1,746			238		79,010			365
Matured, expired or settled contracts		(2,046	)		-		(79,010	)		(81	)
Notional amounts at December 31	€	300		£	238	¥	24,136		€	284

	Foreign Currency Contracts
U.S. Dollar	Net Investment Hedges								Forwards and Options (1)
Notional amounts at January 1	$	800		$	-	$	250		$	-
New contracts		2,354			400		769			464
Matured, expired or settled contracts		(2,754	)		-		(769	)		(110	)
Notional amounts at December 31	$	400		$	400	$	250		$	354

(1)	During 2016, 2015 and 2014, we exercised 49, 32 and 3 option contracts and realized gains of $3.0 million, $14.6 million and $1.1 million, respectively, in Foreign Currency and Derivative Gains (Losses), Net.

We recognized unrealized gains of $19.1 million, $22.1 million and $7.7 million in Foreign Currency and Derivative Gains (Losses), Net from the change in value of our outstanding foreign currency option contracts for the years ended December 31, 2016, 2015 and 2014, respectively.

We had no ineffectiveness on our foreign currency derivative contracts during 2016, 2015 or 2014.

Interest Rate

The following table summarizes the activity in our interest rate swaps for the years ended December 31 (in millions):

	2016 (1)			2015			2014
Notional amounts at January 1	$	1,196		$	398		$	71
New contracts		-			1,158			398
Matured, expired or settled contracts		(925	)		(360	)		(71	)
Notional amounts at December 31	$	271		$	1,196		$	398

(1)	We had three interest rate swaps hedges outstanding at December 31, 2016.

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 yen 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 the Consolidated Statements of Income when the hedges no longer qualified for hedge accounting.

In August 2016, we entered into the Yen Term Loan and repaid our 2014, 2015 and 2016 yen term loans. At that time, we settled the outstanding contracts related to the previously outstanding term loans for $26.3 million. The fair value of the contracts that qualified for hedge accounting at the date of repayment was recorded to AOCI and will be amortized to Interest Expense over the life of the original term loans. We had $13.7 million remaining in AOCI at December 31, 2016. The change in fair value on the unhedged portion of the contracts was recorded in the Consolidated Statements of Income. During the year ended December 31, 2016, we recorded a loss of $9.9 million, respectively, in Foreign Currency and Derivative Gains (Losses), Net. See Note 9 for further discussion of the Yen Term Loan.

During 2015, we entered into two contracts with a notional amount of $526.3 million (¥65.0 billion) to effectively fix the interest rate on the 2015 yen term loan (see above for discussion on the settlement of these contracts) and three contracts with a notional amount of CAD $371.9 million ($271.2 million) to effectively fix the interest rate on the Canadian term loan. In the third quarter of 2015, we entered into two contracts with a notional amount of $360.0 million to effectively fix the interest rate at the three month LIBOR rate of 2.3% on expected future debt issuances. These contracts were settled in the fourth quarter of 2015 when we entered into $750.0 million of senior notes. We recorded a loss of $11.0 million associated with these derivatives that will be amortized to Interest Expense, in accordance with our policy.

During 2014, we entered into two contracts with a notional amount of $398.3 million (¥40.9 billion) to effectively fix the interest rate on the 2014 yen term loan. See above for discussion on the settlement of these contracts.

See Note 9 for more information on our term loans.

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 on consolidation of the financial statements into U.S. dollars of our consolidated subsidiaries whose functional currency is not the U.S. dollar for which we recorded losses of $304.0 million, $594.0 million and $614.8 million for the years ended December 31, 2016, 2015 and 2014, 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 for the years ended December 31 (in thousands):

	2016			2015			2014
Derivative net investment hedges (1)	$	55,460		$	63,934		$	122,164
Interest rate and cash flow hedges (2)		(551	)		(21,714	)		(804	)
Our share of derivatives from unconsolidated co-investment ventures		(798	)		4,257			(5,694	)
Total derivative instruments		54,111			46,477			115,666
Nonderivative net investment hedges (3)		112,591			321,148			321,196
Total derivative and nonderivative hedging instruments	$	166,702		$	367,625		$	436,862

(1)	We received $79.8 million, $128.2 million and $13.0 million for the years ended December 31, 2016, 2015 and 2014, respectively, on the settlement of net investment hedges.

(2)	The amount reclassified to interest expense was $5.5 million for 2016 and for 2015 and 2014 the amounts were not considered significant. For the next 12 months from December 31, 2016, we estimate an additional expense of $5.4 million will be reclassified to Interest Expense.

(3)

At December 31, 2016, 2015 and 2014, we had €3.2 billion ($3.4 billion), €3.2 billion ($3.5 billion) and €2.5 million ($3.0 billion) of debt, net of accrued interest, respectively, designated as nonderivative financial instrument hedges of our net investment in international subsidiaries. We had €97.6 million ($118.5 million) of debt that was not designated as a nonderivative financial instrument hedge at December 31, 2014. We recognized unrealized gains of $10.0 million and $7.7 million in Foreign Currency and Derivative Gains (Losses), Net on the unhedged portion of our debt for the years ended December 31, 2015 and 2014, respectively. There were no unrealized gains or losses recognized for the year ended December 31, 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. See Note 2 for more information on our fair value measurements policy.

Fair Value Measurements on a Recurring Basis

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

Fair Value of Financial Instruments

At December 31, 2016 and 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 December 31, 2016 and 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 at December 31 (in thousands):

	2016				2015
	Carrying Value		Fair Value		Carrying Value		Fair Value
Credit Facilities	$	35,023	$	35,061	$	-	$	-
Senior notes		6,417,492		6,935,485		6,516,392		6,801,118
Term loans and unsecured other		1,499,001		1,510,661		2,115,457		2,128,270
Secured mortgages		979,585		1,055,020		1,172,473		1,262,778
Secured mortgages of consolidated entities		1,677,193		1,683,489		1,822,509		1,825,361
Total debt	$	10,608,294	$	11,219,716	$	11,626,831	$	12,017,527