Fair Value Measurements

6 Months Ended

Jun. 17, 2011

Fair Value Measurements

12. Fair Value Measurements

We have adopted the provisions under GAAP for both recurring and non-recurring fair value measurements. Our recurring fair value measurements consist of the valuation of our derivative instruments, which may or may not be designated as accounting hedges. 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) and includes an evaluation of counterparty credit risk.

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 and the change in the fair value of the derivative instruments at June 17, 2011 (in millions).

	Balance at June 17, 2011		Fair Value at Measurement Date Using
			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:
Interest rate swap derivatives	$	9.1	$	—	$	9.1	$	—
Foreign currency forward purchase contracts		1.3		—		1.3		—
	Balance at December 31, 2010		Fair Value at Measurement Date Using
			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:
Interest rate swap derivatives	$	10.6	$	—	$	10.6	$	—
Foreign currency forward purchase contracts		6.9		—		6.9		—

Interest Rate Swap Derivatives. In connection with the acquisition of the Hilton Melbourne South Wharf, on April 29, 2011, we assumed an interest rate swap agreement with a notional amount of AUD 80 million ($86 million) related to its mortgage debt. The purpose of the interest rate swap is to hedge against changes in cash flows (interest payments) attributable to fluctuations in the Reuters BBSY. As a result, we will pay a fixed rate of 7.52% and will receive a floating rate equal to the Reuters BBSY on the notional amount through maturity. The derivative value is 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 swap. The swap did not qualify for hedge accounting at acquisition; therefore, the changes in the fair value of the derivative are recorded in gain (loss) on foreign currency transactions and derivatives on the accompanying unaudited condensed consolidated statements of operations at each balance sheet date. As of June 17, 2011, we have recorded a liability of $1.8 million related to the fair value of the swap.

On February 18, 2011, we entered into an interest rate swap agreement with a notional amount of NZD 79 million ($60 million) related to the mortgage debt on the seven properties acquired in New Zealand on February 18, 2011. We entered into the swap in order to hedge against changes in cash flows (interest payments) attributable to fluctuations in the 3-month NZD Bank Bill rate. As a result, we will pay a fixed rate of 4.75% and will receive a floating rate equal to the 3-month NZD Bank Bill rate on the notional amount through February 18, 2016. We have designated the derivative as a cash flow hedge. The derivative value is 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 swap. The change in fair value of the derivative is recorded in accumulated other comprehensive income within the equity portion of our balance sheet. As of June 17, 2011, we recorded a liability of $1.8 million related to the fair value of the swap. No portion of the cash flow derivative was ineffective during the quarter.

We have three additional interest rate swap agreements for an aggregate notional amount of $300 million. We entered into these derivative instruments in order to hedge changes in the fair value of the fixed-rate debt that occur as a result of changes in market interest rates. We have designated these derivatives as fair value hedges. The derivatives are valued based on the benchmark yield curve on the date of measurement. We also evaluate counterparty credit risk in the calculation of the fair value of the swaps. As of June 17, 2011 and December 31, 2010, we recorded an asset of $12.7 million and $10.6 million, respectively, related to the fair value of the swaps. We record the change in the fair value of the underlying debt due to change in the LIBOR rate as an addition 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 period presented, is considered the ineffective portion of the hedging relationship and is recognized in net income/loss.

Foreign Currency Forward Purchase Contracts. As of June 17, 2011, we had four foreign currency forward purchase contracts that hedge a portion of the foreign currency exposure resulting from the eventual repatriation of our net investment in the Euro JV. 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. The forward purchase contracts are valued based on the forward yield curve of the Euro to U.S. Dollar forward exchange rate on the date of measurement. The following table summarizes our foreign currency forward purchase contracts (in millions):

	Transaction Amount in Euros		Transaction Amount in Dollars		Forward Purchase Date	Fair Value at						Change in Fair Value for the period ended
Transaction Date						June 17, 2011			December 31, 2010			June 17, 2011			June 18, 2010
February 2008	€	30	$	43	August 2011	$	—		$	2.8		$	(2.8	)	$	5.5
February 2008		15		22	February 2013		1.2			2.2			(1.0	)		2.4
May 2008		15		23	May 2014		2.2			2.9			(0.7	)		2.6
July 2010		20		26	October 2014		(2.1	)		(1.0	)		(1.1	)		—
Total	€	80	$	114		$	1.3		$	6.9		$	(5.6	)	$	10.5

On July 15, 2011, we entered into an additional €25 million ($34 million) forward purchase contract to hedge a portion of the foreign currency exposure resulting from the eventual repatriation of our net investment in the European joint venture. We will sell the Euro amount and receive the U.S. dollar amount on the forward purchase date of August 18, 2015. As part of the contract, we also entered into a forward purchase contract to net-settle the existing February 2008 €30 million foreign currency purchase contract and will receive cash of $0.4 million on the settlement date of August 18, 2011. Following these transactions, we have hedged our foreign currency exposure related to €75 million ($105 million) of our net investment in the European joint venture. Additionally on July 15, 2011 we entered into a €25 million ($35 million) forward purchase contract to hedge a portion of the foreign currency exposure resulting from our investment in a mortgage note on a portfolio of hotels. We will sell the Euro amount and receive the U.S. dollar amount on the forward purchase date of October 22, 2012.

Fair Value of Other Financial Assets and Liabilities. For financial statement purposes, we did not elect the fair value measurement option for any of our other financial assets or liabilities. We have calculated the fair value of other financial assets and liabilities as detailed below. 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 the 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 carrying amount and fair value of certain financial assets and liabilities are shown below (in millions):

	June 17, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Mortgage notes receivable	$	64	$	86	$	55	$	77
Financial liabilities
Senior notes		3,340		3,467		3,093		3,200
Exchangeable Senior Debentures		1,170		1,398		1,156		1,471
Credit facility		162		162		58		58
Mortgage debt and other, net of capital leases		1,153		1,180		1,110		1,107