NOTE 9. 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. We enter into derivative financial instruments to offset these underlying market risks. 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 year ended December 31, 2017.

The following table presents the fair value of our derivative financial instruments recognized within the line items Other Assets and Other Liabilities on the Consolidated Balance Sheet (in thousands):

	June 30, 2018				December 31, 2017
	Asset		Liability		Asset		Liability
Undesignated derivatives
Foreign currency contracts
Forwards
British pound sterling	$	142	$	4,017	$	2,440	$	8,103
Canadian dollar		1,469		253		-		1,698
Euro		3,619		6,380		2		14,234
Japanese yen		3,992		1,235		6,474		931
Mexican peso		373		-		-		-

Designated derivatives
Foreign currency contracts
Net investment hedges
Canadian dollar		1,871		-		-		7,263
Euro		-		280		-		-

Interest rate swaps
Cash flow hedges
Canadian dollar		-		-		10,223		-
Euro		-		555		-		-
Total fair value of derivatives	$	11,466	$	12,720	$	19,139	$	32,229

Undesignated Derivative Financial Instruments

Foreign Currency Contracts

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

	2018																		2017
	CAD			CNY			EUR			GBP			JPY			MXN			CAD			EUR			GBP			JPY
Notional amounts at January 1	$	56		$	-		$	233		$	132		$	153		$	-		$	38		$	197		$	78		$	144
New contracts		13			80			54			-			28			10			-			63			137			38
Matured, expired or settled contracts		(14	)		(80	)		(55	)		(36	)		(36	)		(10	)		(12	)		(56	)		(46	)		(31	)
Notional amounts at June 30	$	55		$	-		$	232		$	96		$	145		$	-		$	26		$	204		$	169		$	151

Weighted average forward rate at June 30		1.28			-			1.20			1.30			105.53			-			1.32			1.13			1.33			106.51
Active contracts at June 30		24			-			29			16			32			-			12			26			22			32

During the six months ended June 30, 2018 and 2017, we exercised 31 and 22 forward contracts, respectively. We recognized realized losses of $1.1 million and $7.9 million for the three and six months ended June 30, 2018, respectively, and gains of $3.6 million and $8.9 million for the three and six months ended June 30, 2017, respectively, from contracts that matured, expired or settled in Foreign Currency and Derivative Gain (Losses), Net in the Consolidated Statements of Income.

We recognized unrealized gains of $30.1 million and $17.2 million for the three and six months ended June 30, 2018, respectively, and unrealized losses of $18.8 million and $32.5 million for the three and six months ended June 30, 2017, respectively, from the change in value of our outstanding foreign currency contracts within Foreign Currency and Derivative Gains (Losses), Net in the Consolidated Statements of Income.

Designated Derivative Financial Instruments

Foreign Currency Contracts

The following table summarizes the activity of our foreign currency contracts designated as net investment hedges for the six months ended June 30 (in millions, except for weighted average forward rates and number of active contracts):

	2018					2017
	CAD			EUR		CAD			GBP
Notional amounts at January 1	$	99		$	-	$	100		$	46
New contracts		100			35		99			127
Matured, expired or settled contracts		(99	)		-		(100	)		(173	)
Notional amounts at June 30	$	100		$	35	$	99		$	-

Weighted average forward rate at June 30		1.28			1.16		1.34			-
Active contracts at June 30		2			1		2			-

Interest Rate Swaps

The following table summarizes the activity of our interest rate swaps designated as cash flow hedges for the six months ended June 30 (in millions):

	2018								2017
	CAD			EUR		USD			CAD
Notional amounts at January 1	$	271		$	-	$	-		$	271
New contracts (1)		-			500		300			-
Matured, expired or settled contracts (2)		(271	)		-		(300	)		-
Notional amounts at June 30	$	-		$	500	$	-		$	271

(1)	During the six months ended June 30, 2018, we entered into two interest rate swap contracts with an aggregated notional amount of €400.0 million ($499.7 million) to effectively fix the interest rate on our senior notes bearing a floating rate of Euribor plus 0.25% issued in January 2018.

(2)

During the six months ended June 30, 2018, we repaid CAD 201.4 million ($158.9 million) on our 2015 Canadian Term Loan, leaving CAD 170.5 million ($128.7 million at June 30, 2018) outstanding. At that time, we settled the interest rate swap contracts related to the 2015 Canadian Term Loan as we determined at that time it was no longer probable that we would continue to have the future cash flows as originally hedged. As a result, the $12.5 million gain in Accumulated Other Comprehensive Income (Loss) “AOCI/L” at the time of settlement was reclassified to Interest Expense during the first quarter of 2018.

During the six months ended June 30, 2018 and 2017, we had no losses due to hedge ineffectiveness.

Designated Nonderivative Financial Instruments

The following table summarizes our debt, net of accrued interest, designated as a nonderivative financial instrument to hedge our net investment in international subsidiaries (in millions):

	June 30, 2018		December 31, 2017
British pound sterling	$	267	$	436
Euro	$	3,550	$	3,620

We recognized unrealized gains of $64.6 million and $40.3 million in Foreign Currency and Derivative Losses, Net on the unhedged portion of our debt, net of accrued interest, for the three and six months ended June 30, 2018, respectively. We recognized unrealized losses of $7.2 million and $11.3 million for the three and six months ended June 30, 2017, respectively.

Other Comprehensive Income (Loss)

The change in Other Comprehensive Income (Loss) in the Consolidated Statements of Comprehensive Income during the periods presented is due to the translation into U.S. dollars on consolidation of the financial statements of our consolidated subsidiaries whose functional currency is not the U.S. dollar. The change in fair value of the effective portion of our derivative financial instruments that have been designated as net investment hedges and cash flow hedges and the translation of our nonderivative financial instruments as discussed above are also included in Other Comprehensive Income (Loss).

The following table presents these changes in Other Comprehensive Income (Loss) (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Net investment hedges	$	1,740		$	7,197		$	4,833		$	9,491
Nonderivative financial instruments		223,739			(229,666	)		113,862			(274,192	)
Cumulative translation adjustment		(373,292	)		225,631			(261,738	)		307,530
Total foreign currency translation gains (losses), net	$	(147,813	)	$	3,162		$	(143,043	)	$	42,829

Cash flow hedges (1)	$	963		$	4,559		$	(8,322	)	$	4,988
Our share of derivatives from unconsolidated co-investment ventures		1,168			2,176			4,166			4,378
Total unrealized gains (losses) on derivative contracts, net	$	2,131		$	6,735		$	(4,156	)	$	9,366
Total change in other comprehensive income (loss)	$	(145,682	)	$	9,897		$	(147,199	)	$	52,195

(1)	We estimate an additional expense of $4.2 million will be reclassified to Interest Expense over the next 12 months from June 30, 2018, due to the amortization of previously settled derivatives designated as cash flow hedges.

Fair Value Measurements

There have been no significant changes in our policy from what was disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.

Fair Value Measurements on a Recurring Basis

At June 30, 2018, and December 31, 2017, 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, 2018, and December 31, 2017, were classified as Level 2 of the fair value hierarchy.

Fair Value Measurements on Nonrecurring Basis

Acquired properties and assets we expect to sell or contribute met the criteria to be measured on a nonrecurring basis at fair value and the lower of their carrying amount or their estimated fair value less the costs to sell, respectively, at June 30, 2018 and December 31, 2017. At June 30, 2018 and December 31, 2017, we estimate the fair value of our properties using Level 2 or Level 3 inputs from the fair value hierarchy. See more information on our acquired properties and assets held for sale or contribution in Notes 2 and 4, respectively.

Fair Value of Financial Instruments

At June 30, 2018, and December 31, 2017, the carrying amounts of certain financial instruments, including cash and cash equivalents, accounts and notes receivable, accounts payable and accrued expenses were representative of their fair values.

The differences in the fair value of our debt from the carrying value in the table below were the result of differences in interest rates or borrowing spreads that were available to us at June 30, 2018 and December 31, 2017, 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 issuances of secured mortgages 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, 2018				December 31, 2017
	Carrying Value		Fair Value		Carrying Value		Fair Value
Credit Facilities	$	11,658	$	11,660	$	317,392	$	317,496
Senior notes		7,102,381		7,447,585		6,067,277		6,537,100
Term loans and unsecured other		1,415,661		1,431,793		2,060,491		2,075,002
Secured mortgages		897,424		937,205		967,471		1,026,197
Total	$	9,427,124	$	9,828,243	$	9,412,631	$	9,955,795