XML 54 R17.htm IDEA: XBRL DOCUMENT v2.4.0.6
Fair Value Measurements
9 Months Ended
Sep. 07, 2012
Fair Value Measurements
10. Fair Value Measurements

Our recurring fair value measurements consist of the valuation of our derivative instruments, the majority of which are designated as accounting hedges. As of September 7, 2012, there were no non-recurring fair value measurements. As of December 31, 2011, non-recurring fair value measurements consisted of the impairment of two of our hotel properties, one of which was sold in 2011 and the other in 2012.

In evaluating the fair value of both financial and non-financial assets and liabilities, GAAP outlines a valuation framework and creates a fair value hierarchy that distinguishes between market assumptions based on market data (observable inputs) and a reporting entity’s own assumptions about market data (unobservable inputs). Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability at the measurement date in an orderly transaction (an exit price). Assets and liabilities are measured using inputs from three levels of the fair value hierarchy. The three levels are as follows:

Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date. An active market is defined as a market in which transactions occur with sufficient frequency and volume to provide pricing on an ongoing basis.

Level 2 — Inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means.

Level 3 — Unobservable inputs reflect our assumptions about the pricing of an asset or liability when observable inputs are not available.

The following tables detail the fair value of our financial assets and liabilities that are required to be measured at fair value on a recurring basis, as well as non-recurring fair value measurements (there were none as of the end of the third quarter), at September 7, 2012 and December 31, 2011, respectively (in millions):

 

           Fair Value at Measurement Date Using  
     Balance at
September  7,
2012
    Quoted Prices
in  Active
Markets for
Identical  Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Fair Value Measurements on a Recurring Basis:

         

Assets

         

Interest rate swap derivatives (a)

   $ 9.1      $ —         $ 9.1      $ —     

Forward currency sale contracts (a)

     11.9        —           11.9        —     

Liabilities

         

Interest rate swap derivatives (a)

     (6.1     —           (6.1     —     
          

 

Fair Value at Measurement Date Using

 
     Balance at
December  31,
2011
    Quoted Prices
in  Active
Markets for
Identical  Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Fair Value Measurements on a Recurring Basis:

         

Assets

         

Interest rate swap derivatives (a)

   $ 10.9      $ —         $ 10.9      $ —     

Forward currency sale contract (a)

     10.8        —           10.8        —     

Liabilities

         

Interest rate swap derivatives (a)

     (4.2     —           (4.2     —     

Fair Value Measurements on a Non-recurring Basis:

         

Impaired hotel properties held and used (b)

   $ 5      $ —         $ 5      $ —     

Impaired hotel properties sold (b)

     —          —           6        —     

 

(a) These derivative contracts have been designated as hedging instruments.
(b) The fair value measurements are as of the measurement date of the impairment and may not reflect the book value as of December 31, 2011.

Derivatives and Hedging

Interest rate swap derivatives designated as cash flow hedges. We have designated our floating-to-fixed interest rate swap derivatives as cash flow hedges. The derivatives are valued based on the prevailing market yield curve on the date of measurement. We also evaluate counterparty credit risk when we calculate the fair value of the swaps. Changes in the fair value of the derivatives are recorded to other comprehensive income (loss). The hedges were fully effective as of September 7, 2012.

As of September 7, 2012, we had two interest rate swap agreements designated as cash flow hedges. We recorded the change in fair value to other comprehensive income (loss) of $0.3 million and $(0.5) million for the quarters ended September 7, 2012 and September 9, 2011, respectively, and $(1.9) million and $(3.8) million for the year-to-date ended September 7, 2012 and September 9, 2011, respectively.

Interest rate swap derivatives designated as fair value hedges. We have designated our fixed-to-floating interest rate swap derivatives as fair value hedges. We enter into these derivative instruments to hedge changes in the fair value of fixed-rate debt that occur as a result of changes in market interest rates. The derivatives are valued based on the prevailing market yield curve on the date of measurement. We also evaluate counterparty credit risk in the calculation of the fair value of the swaps. The changes in the fair value of the derivatives are offset largely by corresponding changes in the fair value of the underlying debt due to changes in the 3-month LIBOR rate, which change is recorded as an adjustment to the carrying amount of the debt. Any difference between the change in the fair value of the swap and the change in the fair value in the underlying debt, which was not significant for the periods presented, is considered the ineffective portion of the hedging relationship and is recognized in net income (loss).

We have three fixed-to-floating interest rate swap agreements for an aggregate notional principal amount totaling $300 million related to The Ritz-Carlton, Naples and Newport Beach Marriott Hotel & Spa mortgage loan in the amount of $300 million. During the quarters ended September 7, 2012 and September 9, 2011, the fair value of the swaps decreased $0.6 million and increased $1.1 million, respectively. During the year-to-date ended September 7, 2012 and September 9, 2011, the fair value of the swaps decreased $1.8 million and increased $3.2 million, respectively.

Foreign Currency Forward Sale Contracts. As of September 7, 2012, we had six foreign currency forward sale contracts that hedge a portion of the foreign currency exposure resulting from the eventual repatriation of our net investments in foreign operations. These derivatives are considered a hedge of the foreign currency exposure of a net investment in a foreign operation with changes in fair value recorded to accumulated other comprehensive income (loss). The forward sale contracts are valued based on the forward yield curve of the foreign currency to U.S. dollar exchange rate on the date of measurement. We evaluate counter-party credit risk when we calculate the fair value of these derivatives. The following table summarizes our foreign currency sale contracts (in millions):

 

     Total
Transaction
Amount
     Total
Transaction
     Forward    Fair Value at      Change in Fair  Value
for the year-to-date ended
 

Transaction Date Range

   in Foreign
Currency
     Amount in
U.S. Dollars
    

Purchase
Date Range

   September 7,
2012
     December 31,
2011
     September 7,
2012
    September 9,
2011
 

February 2008-July 2011

   100       $ 140      

October 2012-

August 2015

   $ 11.2       $ 8.8       $ 2.4      $ (2.9

July 2011

   NZ$ 30       $ 25       August 2013    $ 0.7       $ 1.9       $ (1.2   $ 1.2   

Subsequent to quarter end, on September 13, 2012, we entered into an additional €30 million ($39 million) forward purchase contract to hedge a portion of the foreign currency exposure resulting from the eventual repatriation of our net investment in the Euro JV. We will sell the Euro amount and receive the U.S. dollar amount on the forward purchase date of September 17, 2015.

 

Other Assets and Liabilities

Fair Value of Other Financial Assets and Liabilities. We did not elect the fair value measurement option for any of our financial assets or liabilities. Notes receivable and other financial assets are valued based on expected future cash flows, discounted at risk-adjusted rates, and are adjusted to reflect the effects of foreign currency translation. Valuations for secured debt and the credit facility are determined based on expected future payments, discounted at risk-adjusted rates. Senior Notes and the Exchangeable Senior Debentures are valued based on quoted market prices. The fair values of financial instruments not included in this table are estimated to be equal to their carrying amounts. The fair values of certain financial assets and liabilities and other financial instruments are shown below (in millions):

 

     September 7, 2012      December 31, 2011  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Financial assets

           

Mortgage notes receivable (Level 2)

   $ 70       $ 79       $ 65       $ 76   

Financial liabilities

           

Senior notes (Level 1)

     3,138         3,395         3,641         3,772   

Exchangeable Senior Debentures (Level 1)

     528         737         902         1,076   

Credit facility (Level 2)

     749         753         117         117   

Mortgage debt and other, net of capital leases (Level 2)

     1,079         1,094         1,091         1,114