Fair Value Measurements

12 Months Ended

Dec. 31, 2012

Fair Value Measurements

12. Fair Value Measurements

Overview

Our recurring fair value measurements consist of the valuation of our derivative instruments, the majority of which are designated as accounting hedges. Non-recurring fair value measurements during 2012 and 2011 consisted of the impairment of three of our hotel properties, two of which have been sold.

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”). The requirements are intended to increase the consistency and comparability of fair value measurements and related disclosures. 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 table details 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 that we completed during 2012 and 2011 due to the impairment of non-financial assets (in millions):

				Fair Value at Measurement Date Using
	Balance at December 31, 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 (1)	$	7.4		$	—	$	7.4		$	—
Forward currency sale contracts (1)		4.8			—		4.8			—
Liabilities
Interest rate swap derivatives (1)		(6.5	)		—		(6.5	)		—
Fair Value Measurements on a Non-recurring Basis:
Impaired hotel properties held and used (2)		34			—		—			34

				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 (1)	$	10.9		$	—	$	10.9		$	—
Forward currency sale contracts (1)		10.8			—		10.8			—
Liabilities
Interest rate swap derivatives (1)		(4.2	)		—		(4.2	)		—
Fair Value Measurements on a Non- recurring Basis:
Impaired hotel properties held and used (2)	$	5		$	—	$	5		$	—
Impaired hotel properties sold (2)		—			—		6			—

(1) These derivative contracts have been designated as hedging instruments.

(2) The fair value measurements are as of the measurement date of the impairment and may not reflect the book value as of December 31, 2012 and 2011, respectively.

Impairment

During 2012, we recorded an impairment loss of $60 million related to The Westin Mission Hills Resort & Spa. We evaluated the recoverability of the hotel’s carrying value assuming that it was more likely than not that the hotel will be sold before the end of its estimated useful life. Using an estimated undiscounted net cash flow, we concluded that the carrying value of the hotel was not fully recoverable. We estimated the fair value of the hotel using a discounted cash flow analysis, with an estimated stabilized growth rate of 3%, a discounted cash flow term of 10 years, a capitalization rate of 11%, and a discount rate of 12%. The discount and capitalization rates used for the fair value of the property reflect its heightened risk profile and are not indicative of our portfolio as a whole.

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 purpose of the interest rate swaps is to hedge against changes in cash flows (interest payments) attributable to fluctuations in variable rate debt. 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) on the accompanying balance sheets. The hedges were fully effective as of December 31, 2012. The following table summarizes our interest rate swap derivatives designed as cash flow hedges (in millions):

	Total									Change in Fair Value Gain(Loss)
	Notional		Maturity		Swapped					Year ended December 31,
Transaction Date	Amount		Date		Index		All-in Rate			2012			2011
November 2011 (1)	A$	62		November 2016		Reuters BBSY		6.7	%	$	(1.7	)	$	(0.3	)
February 2011 (2)	NZ$	79		February 2016	NZ$	Bank Bill		7.15	%	$	0.3		$	(2.7	)

(1) The swap was entered into in connection with the $85 million mortgage loan on the Hilton Melbourne South Wharf.

(2) The swap was entered into in connection with the $87 million mortgage loan on seven properties in New Zealand.

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 largely offset 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 amount totaling $300 million. During 2012 and 2011, the fair value of the swaps decreased $3.5 million and increased $0.3 million, respectively. As a result, we will pay a floating interest rate equal to the 3-month LIBOR plus a spread which ranges from 2.7% to 3.2%, as opposed to the fixed rate of 5.531%, on the notional amount of $300 million through March 1, 2014.

Foreign Investment Hedging Instruments. We have six foreign currency forward sale contracts that hedge a portion of the foreign currency exposure resulting from the eventual repatriation of our net investment in foreign operations. These derivatives are considered hedges of the foreign currency exposure of a net investment in a foreign operation and are marked-to-market with changes in fair value recorded to accumulated other comprehensive income (loss) within the equity portion of our balance sheet. The forward sale contracts are valued based on the forward yield curve of the foreign currency to U.S. dollar forward exchange rate on the date of measurement. We also evaluate counterparty credit risk when we calculate the fair value of the derivatives. The following table summarizes our foreign currency sale contracts (in millions):

	Total
	Transaction		Total
	Amount		Transaction		Forward	Change in Fair Value
Transaction	in Foreign		Amount		Purchase	Year ended December 31,
Date Range	Currency		in Dollars		Date Range	2012			2011
February 2008- September 2012	€	105	$	145	February 2013-September 2015	$	(1.8	)	$	1.9
July 2011	NZ$	30	$	25	August 2013	$	(1.9	)	$	1.9

In addition to the forward sale contracts, we have designated a portion of the foreign currency draws on our credit facility as hedges of net investments in foreign operations. As a result, currency translation adjustments in the designated credit facility draws are recorded to accumulated other comprehensive income (loss) within the equity portion of our balance sheet, which adjustments offset a portion of the translation adjustment related to our foreign investments. The following table summarizes the draws on our credit facility that are designated as hedges of net investments in international operations:

	Balance		Balance		Gain (Loss)
	Outstanding		Outstanding in		Year ended December 31,
Currency	US$		Foreign Currency		2012			2011
Canadian dollars (1)	$	22	C$	22	$	—		$	—
Australian dollars	$	7	A$	7	$	0.2		$	—
Euros	$	29	€	22	$	(2.0	)	$	—

(1) We have drawn an additional $86 million on the credit facility in Canadian dollars that has not been designated as a hedging instrument.

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 other financial assets or liabilities. Notes receivable and other financial assets are valued based on the 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 our credit facility are determined based on the 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 value of certain financial assets and liabilities and other financial instruments are shown below (in millions):

	As of December 31,
	2012				2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Mortgage notes (Level 2)	$	—	$	—	$	65	$	76
Financial liabilities
Senior notes (Level 1)		3,038		3,296		3,641		3,772
Exchangeable Senior Debentures (Level 1)		531		725		902		1,076
Credit facility (Level 2)		763		763		117		117
Mortgage debt and other, net of capital leases (Level 2)		1,078		1,094		1,091		1,114