10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________  
FORM 10-Q
_________________________________________________________ 
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended June 30, 2015
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from                to              
 
Commission File Number: 033-84580 
_________________________________________________________ 
RECKSON OPERATING PARTNERSHIP, L.P.
(Exact name of registrant as specified in its charter)
_________________________________________________________  
Delaware
11-3233647
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
420 Lexington Avenue, New York, New York 10170
(Address of principal executive offices) (Zip Code)

(212) 594-2700
(Registrant’s telephone number, including area code)
 _________________________________________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES ý     NO o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ý    NO o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
 
 
Non-accelerated filer x
Smaller Reporting Company o
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o  NO ý
 
As of August 13, 2015, no common units of limited partnership interest of the Registrant were held by non-affiliates of the Registrant. There is no established trading market for such units.
 




Reckson Operating Partnership, L.P.
TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 


1

Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
Reckson Operating Partnership, L.P.
Consolidated Balance Sheets
(unaudited, in thousands)
 
June 30, 2015
 
December 31, 2014
 
 
 
(as adjusted)
Assets
 
 
 
Commercial real estate properties, at cost:
 
 
 
Land and land interests
$
1,741,350

 
$
1,776,457

Building and improvements
4,272,732

 
4,353,081

Building leasehold and improvements
1,073,678

 
1,073,678

 
7,087,760

 
7,203,216

Less: accumulated depreciation
(1,192,531
)
 
(1,123,412
)
 
5,895,229

 
6,079,804

Assets held for sale
138,421

 

Cash and cash equivalents
40,050

 
34,641

Restricted cash
37,554

 
38,844

Tenant and other receivables, net of allowance of $5,592 and $5,820 in 2015 and 2014, respectively
31,299

 
25,712

Deferred rents receivable, net of allowance of $14,716 and $17,745 in 2015 and 2014, respectively
208,115

 
199,045

Preferred equity and other investments, net of discounts and deferred origination fees of $425 and $244 in 2015 and 2014, respectively
209,129

 
173,194

Deferred costs, net of accumulated amortization of $81,814 and $77,557 in 2015 and 2014, respectively
134,367

 
123,918

Other assets
89,642

 
105,951

Total assets
$
6,783,806

 
$
6,781,109

Liabilities
 
 
 
Mortgages payable
$
500,000

 
$
620,000

Revolving credit facility
705,000

 
385,000

Term loan and senior unsecured notes
1,788,049

 
1,788,001

Accrued interest payable and other liabilities
27,745

 
27,061

Accounts payable and accrued expenses
54,061

 
66,478

Deferred revenue
110,854

 
130,661

Deferred land leases payable
1,387

 
1,215

Security deposits
36,855

 
36,195

Liabilities related to assets held for sale
5,770

 

Total liabilities
3,229,721

 
3,054,611

Commitments and contingencies

 

Capital
 
 
 
General partner capital
3,196,070

 
3,381,383

Limited partner capital

 

Accumulated other comprehensive loss
(2,702
)
 
(3,106
)
Total ROP partner's capital
3,193,368

 
3,378,277

Noncontrolling interests in other partnerships
360,717

 
348,221

Total capital
3,554,085

 
3,726,498

Total liabilities and capital
$
6,783,806

 
$
6,781,109



The accompanying notes are an integral part of these financial statements.

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Table of Contents

Reckson Operating Partnership, L.P.
Consolidated Statements of Operations
(unaudited, in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
(as adjusted)
 
 
 
(as adjusted)
Revenues
 
 
 
 
 
 
 
Rental revenue, net
$
153,082

 
$
142,440

 
$
302,477

 
$
283,438

Escalation and reimbursement
23,279

 
21,540

 
46,210

 
42,684

Investment income
4,268

 
8,777

 
7,871

 
18,052

Other income
12,263

 
638

 
12,922

 
1,249

Total revenues
192,892

 
173,395

 
369,480

 
345,423

Expenses
 
 
 
 
 
 
 
Operating expenses, including $2,093 and $3,925 in 2015 and $1,984 and $3,457 in 2014 of related party expenses
38,444

 
36,889

 
80,823

 
75,386

Real estate taxes
35,180

 
32,569

 
69,704

 
63,570

Ground rent
5,184

 
5,235

 
10,470

 
10,470

Interest expense, net of interest income
27,649

 
31,625

 
55,378

 
63,425

Amortization of deferred financing costs
1,280

 
1,614

 
3,227

 
3,169

Depreciation and amortization
50,241

 
49,949

 
99,669

 
99,791

Transaction related costs
23

 
117

 
39

 
988

Marketing, general and administrative
160

 
90

 
256

 
166

Total expenses
158,161

 
158,088

 
319,566

 
316,965

Income from continuing operations before equity in net income from unconsolidated joint ventures and loss on early extinguishment of debt
34,731

 
15,307

 
49,914

 
28,458

Equity in net income from unconsolidated joint ventures
853

 
1,094

 
1,702

 
1,094

Loss on early extinguishment of debt

 
(519
)
 
(49
)
 
(519
)
Income from continuing operations
35,584

 
15,882

 
51,567

 
29,033

Net income from discontinued operations

 
1,348

 

 
2,054

Gain on sale of discontinued operations

 
117,829

 

 
117,829

Net income
35,584

 
135,059

 
51,567

 
148,916

Net income attributable to noncontrolling interests in other partnerships
(6,378
)
 
(801
)
 
(6,930
)
 
(862
)
Net income attributable to ROP common unitholder
$
29,206

 
$
134,258

 
$
44,637

 
$
148,054

Amounts attributable to ROP common unitholder:
 
 
 
 
 
 
 
Income from continuing operations
$
29,206

 
$
15,081

 
$
44,637

 
$
28,171

Discontinued operations

 
119,177

 

 
119,883

Net income attributable to ROP common unitholder
$
29,206

 
$
134,258

 
$
44,637

 
$
148,054



The accompanying notes are an integral part of these financial statements.

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Table of Contents

Reckson Operating Partnership, L.P.
Consolidated Statements of Comprehensive Income
(unaudited, in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
(as adjusted)
 
 
 
(as adjusted)
Net income attributable to ROP common unitholder
$
29,206

 
$
134,258

 
$
44,637

 
$
148,054

Other comprehensive income:
 
 
 
 
 
 
 
Change in net unrealized gain on derivative instruments
223

 
179

 
404

 
377

Comprehensive income attributable to ROP common unitholder
$
29,429

 
$
134,437

 
$
45,041

 
$
148,431



The accompanying notes are an integral part of these financial statements.

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Table of Contents

Reckson Operating Partnership, L.P.
Consolidated Statement of Capital
(unaudited, in thousands)
 
General
Partner's
Capital
Class A
Common
Units
 
Limited Partner's Capital
 
Noncontrolling
Interests
In Other
Partnerships
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Total
Capital
Balance at December 31, 2014, as adjusted
$
3,381,383

 
$

 
$
348,221

 
$
(3,106
)
 
$
3,726,498

Contributions
726,009

 

 
6,124

 

 
732,133

Distributions
(955,959
)
 

 
(558
)
 

 
(956,517
)
Net income
44,637

 

 
6,930

 

 
51,567

Other comprehensive income

 

 

 
404

 
404

Balance at June 30, 2015
$
3,196,070

 
$

 
$
360,717

 
$
(2,702
)
 
$
3,554,085



The accompanying notes are an integral part of these financial statements.


5

Table of Contents
Reckson Operating Partnership, L.P.
Consolidated Statements of Cash Flows
(unaudited, in thousands)

 
Six Months Ended June 30,
 
2015
 
2014
 
 
 
(as adjusted)
Operating Activities
 
 
 
Net income
$
51,567

 
$
148,916

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
102,896

 
103,393

Equity in net income from unconsolidated joint venture
(1,702
)
 
(1,094
)
Distributions of cumulative earnings from unconsolidated joint ventures
1,702

 
612

Loss on early extinguishment of debt
49

 
519

Gain on sale of discontinued operations

 
(117,829
)
Deferred rents receivable
(10,298
)
 
(10,236
)
Other non-cash adjustments
(16,816
)
 
(23,202
)
Changes in operating assets and liabilities:
 
 
 
Restricted cash—operations
702

 
(2,531
)
Tenant and other receivables
(6,060
)
 
2,955

Deferred lease costs
(25,470
)
 
(3,999
)
Other assets
4,141

 
(4,800
)
Accounts payable, accrued expenses and other liabilities
1,275

 
718

Deferred revenue and land leases payable
(1,768
)
 
(264
)
Net cash provided by operating activities
100,218

 
93,158

Investing Activities
 
 
 
Additions to land, buildings and improvements
(34,144
)
 
(45,842
)
Escrowed cash—capital improvements/acquisition deposits
388

 
(1,071
)
Distributions in excess of cumulative earnings from unconsolidated joint ventures
10

 

Net proceeds from disposition of real estate/joint venture interest

 
137,059

Origination of preferred equity investments
(32,139
)
 
(14,173
)
Net cash (used in) provided by investing activities
(65,885
)
 
75,973

Financing Activities
 
 
 
Repayments of mortgages and other loans payable
(120,000
)
 
(82,181
)
Proceeds from credit facility and senior unsecured notes
1,055,000

 
683,000

Repayments of credit facility and senior unsecured notes
(735,007
)
 
(520,000
)
Contributions from common unitholder
726,009

 
732,007

Contributions to noncontrolling interests in other partnerships
6,124

 

Distributions to noncontrolling interests in other partnerships
(558
)
 
(3,214
)
Distributions to common unitholder
(955,959
)
 
(983,346
)
Deferred loan costs and capitalized lease obligation
(4,533
)
 
(2,671
)
Net cash used in financing activities
(28,924
)
 
(176,405
)
Net increase (decrease) in cash and cash equivalents
5,409

 
(7,274
)
Cash and cash equivalents at beginning of period
34,641

 
48,070

Cash and cash equivalents at end of period
$
40,050

 
$
40,796

 
 
 
 
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
 
 
 
Tenant improvements and capital expenditures payable
$
5,845

 
$
6,471

Deferred leasing payable
6,915

 
230

Change in fair value of hedge
226

 
215

Transfer to assets held for sale
138,421

 

Transfer to liabilities related to assets held for sale
5,770

 



The accompanying notes are an integral part of these financial statements.

6

Table of Contents

Reckson Operating Partnership, L.P.
Notes to Consolidated Financial Statements
June 30, 2015
(unaudited)
1. Organization and Basis of Presentation
Reckson Operating Partnership, L.P., or ROP, commenced operations on June 2, 1995. The sole general partner of ROP is a wholly-owned subsidiary of SL Green Operating Partnership, L.P., or the Operating Partnership. The sole limited partner of ROP is the Operating Partnership. The Operating Partnership is 96.22% owned by SL Green Realty Corp., or SL Green, as of June 30, 2015. SL Green is a self-administered and self-managed real estate investment trust, and is the sole managing general partner of the Operating Partnership. Unless the context requires otherwise, all references to "we," "our," "us" and the "Company" means ROP and all entities owned or controlled by ROP.
ROP is engaged in the acquisition, ownership, management and operation of commercial and residential real estate properties, principally office properties, and also owns land for future development, located in New York City, Westchester County, Connecticut and New Jersey, which collectively is also known as the New York Metropolitan area.
SL Green transferred one property and 40% of SL Green's tenancy in common interest in a fee interest with total assets of $207.7 million during the first quarter of 2015 to ROP, and one additional property and the remaining 60% of SL Green's tenancy in common interest in a fee interest with total assets of $187.3 million during second quarter of 2015 to ROP. Subsequent to June 30, 2014, SL Green transferred four properties with total assets aggregating to $786.4 million as of December 31, 2014 to ROP. Under the business combinations guidance (Accounting Standard Codification, or ASU, 805-50), these transfers were determined to be transfers of businesses between the indirect parent company and its wholly-owned subsidiary. As such, the assets and liabilities of the properties were transferred at their carrying values and were recorded as of the beginning of the current reporting period as though the assets and liabilities had been transferred at that date. The financial statements and financial information presented for all prior periods have been retrospectively adjusted to furnish comparative information.
As of June 30, 2015, we owned the following interests in commercial and residential properties in the New York Metropolitan area, primarily in midtown Manhattan. Our investments in the New York Metropolitan area also include investments in Brooklyn, Westchester County, Connecticut and New Jersey, which are collectively known as the Suburban properties:
Location
 
Type
 
Number of
Properties
 
Approximate Square Feet
 
Weighted Average
Occupancy(1) 
Commercial:
 
 
 
 
 
 
 
 
Manhattan
 
Office
 
15

 
8,239,645

 
95.5
%
 
 
Retail(2)(3)
 
5

 
352,892

 
98.8
%
 
 
Fee Interest
 
2

 
197,654

 
100.0
%
 
 
 
 
22

 
8,790,191

 
95.7
%
Suburban
 
Office
 
20

 
3,417,900

 
82.3
%
 
 
Retail
 
1

 
52,000

 
100.0
%
 
 
 
 
21

 
3,469,900

 
82.5
%
Total commercial properties
 
 
 
43

 
12,260,091

 
92.0
%
Residential:
 
 
 
 
 
 
 
 
Manhattan
 
Residential(2)
 

 
222,855

 
96.4
%
Total portfolio
 
 
 
43

 
12,482,946

 
92.0
%
____________________________________________________________________
(1)
The weighted average occupancy for commercial properties represents the total leased square feet divided by total available rentable square feet. The weighted average occupancy for residential properties represents the total occupied units divided by total available units.
(2)
As of June 30, 2015, we owned a building that was comprised of approximately 270,132 square feet of retail space and approximately 222,855 square feet of residential space. For the purpose of this report, we have included the building in the retail properties count and have bifurcated the square footage into the retail and residential components.
(3)
Includes two retail properties held for sale as of June 30, 2015.
As of June 30, 2015, we also held preferred equity and other investments with a book value of $209.1 million.
Basis of Quarterly Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered

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Table of Contents
Reckson Operation Partnership, L.P.
Notes to Consolidated Financial Statements (cont.)
June 30, 2015
(unaudited)

necessary for the fair presentation of the financial position of the Company at June 30, 2015 and the results of operations for the periods presented have been included. The operating results for the period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. These financial statements should be read in conjunction with the financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2014.
The consolidated balance sheet at December 31, 2014 has been derived from the audited financial statements as of that date, and adjusted for the transfer of three properties to ROP in 2015 but does not include all the information and footnotes required by U.S. GAAP for complete financial statements. Also, as a result of the transfer of these three properties in 2015 and four properties in 2014 to ROP, the consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2014, statement of cash flows for the six months ended June 30, 2014 and related financial information have been adjusted to furnish comparative information.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include our accounts and those of our subsidiaries, which are wholly-owned or controlled by us. Entities which we do not control through our voting interest and entities which are variable interest entities, but where we are not the primary beneficiary, are accounted for under the equity method or as preferred equity investments. See Note 5, "Preferred Equity and Other Investments." ROP's investments in majority-owned and controlled real estate joint ventures are reflected in the financial statements on a consolidated basis with a reduction for the noncontrolling partners' interests. All significant intercompany balances and transactions have been eliminated.
We consolidate a variable interest entity, or VIE, in which we are considered the primary beneficiary. The primary beneficiary is the entity that has (i) the power to direct the activities that most significantly impact the entity's economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE.
A noncontrolling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to us. Noncontrolling interests are required to be presented as a separate component of capital in the consolidated balance sheet and the presentation of net income is modified to present earnings and other comprehensive income attributed to controlling and noncontrolling interests.
We assess the accounting treatment for each joint venture and preferred equity investment. This assessment includes a review of each joint venture or limited liability company agreement to determine which party has what rights and whether those rights are protective or participating. For all VIEs, we review such agreements in order to determine which party has the power to direct the activities that most significantly impact the entity's economic performance. In situations where we and our partner approve, among other things, the annual budget, receive a detailed monthly reporting package from us, meet on a quarterly basis to review the results of the joint venture, review and approve the joint venture's tax return before filing, and approve all leases that cover more than a nominal amount of space relative to the total rentable space at each property, we do not consolidate the joint venture as we consider these to be substantive participation rights that result in shared power of the activities that most significantly impact the performance of the joint venture. Our joint venture agreements typically contain certain protective rights such as the requirement of partner approval to sell, finance or refinance the property and the payment of capital expenditures and operating expenditures outside of the approved budget or operating plan.
Investment in Commercial Real Estate Properties
On a periodic basis, we assess whether there are any indications that the value of our real estate properties may be other than temporarily impaired or that their carrying value may not be recoverable. A property's value is considered impaired if management's estimate of the aggregate future cash flows (undiscounted and without interest charges for consolidated properties) to be generated by the property is less than the carrying value of the property. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the property over the calculated fair value of the property. We also evaluate our real estate properties for potential impairment when a real estate property has been classified as held for sale. Real estate assets held for sale are valued at the lower of their carrying value or fair value less costs to sell. We do not believe that the values of any of our consolidated properties were other than temporarily impaired at June 30, 2015.
We allocate the purchase price of real estate to land and building (inclusive of tenant improvements) and, if determined to be material, intangibles, such as the value of the above- and below-market leases and origination costs associated with the in-place leases. We depreciate the amount allocated to building (inclusive of tenant improvements) over their estimated useful lives, which generally range from three to 40 years. We amortize the amount allocated to the above- and below-market leases over the remaining term of the associated lease, which generally range from one to 14 years, and record it as either an increase (in the case of below-

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Table of Contents
Reckson Operation Partnership, L.P.
Notes to Consolidated Financial Statements (cont.)
June 30, 2015
(unaudited)

market leases) or a decrease (in the case of above-market leases) to rental income. We amortize the amount allocated to the values associated with in-place leases over the expected term of the associated lease, which generally ranges from one to 14 years. If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related intangible will be written off. The tenant improvements and origination costs are amortized as an expense over the remaining life of the lease (or charged against earnings if the lease is terminated prior to its contractual expiration date). We assess fair value of the leases based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property. To the extent acquired leases contain fixed rate renewal options that are below-market and determined to be material, we amortize such below-market lease value into rental income over the renewal period.
We recognized an increase of $6.9 million, $12.6 million, $5.4 million and $11.2 million in rental revenue for the three and six months ended June 30, 2015 and 2014, respectively, for the amortization of aggregate below-market leases in excess of above-market leases and a reduction in lease origination costs, resulting from the allocation of the purchase price of the applicable properties.
The following summarizes our identified intangible assets (acquired above-market leases and in-place leases) and intangible liabilities (acquired below-market leases) as of June 30, 2015 and December 31, 2014 (in thousands):
 
June 30, 2015
 
December 31, 2014
Identified intangible assets (included in other assets):
 
 
 
Gross amount
$
289,180

 
$
293,354

Accumulated amortization
(221,273
)
 
(212,957
)
Net
$
67,907

 
$
80,397

Identified intangible liabilities (included in deferred revenue):
 
 
 
Gross amount
$
434,723

 
$
443,520

Accumulated amortization
(324,960
)
 
(315,889
)
Net
$
109,763

 
$
127,631

____________________________________________________________________
(1)
As of June 30, 2015, $1.8 million and $5.8 million of net intangible assets and net intangible liabilities, respectively, were reclassed to assets held for sale and liabilities related to assets held for sale
Investment in Unconsolidated Joint Ventures
We may originate loans for real estate acquisition, development and construction, where we expect to receive some or all of the residual profit from such projects. When the risk and rewards of these arrangements are essentially the same as an investor or joint venture partner, we account for these arrangements as real estate investments under the equity method of accounting for investments. Otherwise, we account for these arrangements consistent with our loan accounting for our preferred equity investments.
Revenue Recognition
Rental revenue is recognized on a straight-line basis over the term of the lease. Rental revenue recognition commences when the tenant takes possession or controls the physical use of the leased space. In order for the tenant to take possession, the leased space must be substantially ready for its intended use. To determine whether the leased space is substantially ready for its intended use, management evaluates whether we are or the tenant is the owner of tenant improvements for accounting purposes. When management concludes that we are the owner of tenant improvements, rental revenue recognition begins when the tenant takes possession of the finished space, which is when such tenant improvements are substantially complete. In certain instances, when management concludes that we are not the owner (the tenant is the owner) of tenant improvements, rental revenue recognition begins when the tenant takes possession of or controls the space. When management concludes that we are the owner of tenant improvements for accounting purposes, we record amounts funded to construct the tenant improvements as a capital asset. For these tenant improvements, we record amounts reimbursed by tenants as a reduction of the capital asset. When management concludes that the tenant is the owner of tenant improvements for accounting purposes, we record our contribution towards those improvements as a lease incentive, which is included in deferred costs, net on our consolidated balance sheets and amortized as a reduction to rental revenue on a straight-line basis over the term of the lease. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in deferred rents receivable on the consolidated balance sheets. We establish, on a current basis, an allowance for future potential tenant credit losses, which may occur against this account. The balance reflected on the consolidated balance sheets is net of such allowance.

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Table of Contents
Reckson Operation Partnership, L.P.
Notes to Consolidated Financial Statements (cont.)
June 30, 2015
(unaudited)

In addition to base rent, our tenants also generally will pay their pro rata share of increases in real estate taxes and operating expenses for the building over a base year. In some leases, in lieu of paying additional rent based upon increases in building operating expenses, the tenant will pay additional rent based upon increases in the wage rate paid to porters over the porters' wage rate in effect during a base year or increases in the consumer price index over the index value in effect during a base year. In addition, many of our leases contain fixed percentage increases over the base rent to cover escalations. Electricity is most often supplied by the landlord either on a sub-metered basis, or rent inclusion basis (i.e., a fixed fee is included in the rent for electricity, which amount may increase based upon increases in electricity rates or increases in electrical usage by the tenant). Base building services other than electricity (such as heat, air conditioning and freight elevator service during business hours, and base building cleaning) are typically provided at no additional cost, with the tenant paying additional rent only for services which exceed base building services or for services which are provided outside normal business hours. These escalations are based on actual expenses incurred in the prior calendar year. If the expenses in the current year are different from those in the prior year, then during the current year, the escalations will be adjusted to reflect the actual expenses for the current year.
We record a gain on sale of real estate when title is conveyed to the buyer, subject to the buyer's financial commitment being sufficient to provide economic substance to the sale and we have no substantial economic involvement with the buyer.
Interest income on preferred equity investments is accrued based on the outstanding principal amount and contractual terms of the instruments and when, in the opinion of management, it is deemed collectible. Several of the preferred equity investments provide for accrual of interest at specified rates, which differ from current payment terms. Interest is recognized on such loans at the accrual rate subject to management's determination that accrued interest is ultimately collectible, based on the underlying collateral and operations of the borrower. If management cannot make this determination, interest income above the current pay rate is recognized only upon actual receipt.
Deferred origination fees, original issue discounts and loan origination costs, if any, are recognized as a reduction to the interest income over the terms of the related investments using the effective interest method. Fees received in connection with loan commitments are also deferred until the loan is funded and are then recognized over the term of the loan as an adjustment to yield. Discounts or premiums associated with the purchase of loans are amortized or accreted into interest income as a yield adjustment on the effective interest method based on expected cashflows through the expected maturity date of the related investment. If we purchase a preferred equity investment at a discount, intend to hold it until maturity and expect to recover the full value of the investment, we accrete the discount into income as an adjustment to yield over the term of the investment. If we purchase a preferred equity investment at a discount with the intention of foreclosing on the collateral, we do not accrete the discount. For investments acquired at a discount for credit quality, the difference between contractual cash flows and expected cash flows at acquisition is not accreted. Anticipated exit fees, the collection of which is expected, are also recognized over the term of the loan as an adjustment to yield.
Preferred equity investments are placed on a non-accrual status at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of interest income becomes doubtful. Interest income recognition on any non-accrual preferred equity investment is resumed when such non-accrual preferred equity investment becomes contractually current and performance is demonstrated to be resumed. Interest is recorded as income on impaired loans only to the extent cash is received.
We may syndicate a portion of the loans that we originate or sell these loans individually. When a transaction meets the criteria of sale accounting, we derecognize the loan sold and recognize gain or loss based on the difference between the sales price and the carrying value of the loan sold. Any related unamortized deferred origination fees, original issue discounts, loan origination costs, discounts or premiums at the time of sale are recognized as an adjustment to the gain or loss on sale, which is included in investment income on the consolidated statements of operations. Any fees received at the time of sale or syndication are recognized as part of investment income.
Asset management fees are recognized on a straight-line basis over the term of the asset management agreement.
Reserve for Possible Credit Losses
The expense for possible credit losses in connection with preferred equity investments is the charge to earnings to increase the allowance for possible credit losses to the level that we estimate to be adequate, based on Level 3 data, considering delinquencies, loss experience and collateral quality. Other factors considered relate to geographic trends and product diversification, the size of the portfolio and current economic conditions. Based upon these factors, we establish the provision for possible credit losses on each individual investment. When it is probable that we will be unable to collect all amounts contractually due, the investment is considered impaired.

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Table of Contents
Reckson Operation Partnership, L.P.
Notes to Consolidated Financial Statements (cont.)
June 30, 2015
(unaudited)

Where impairment is indicated on an investment that is held to maturity, a valuation allowance is measured based upon the excess of the recorded investment amount over the net fair value of the collateral. Any deficiency between the carrying amount of an asset and the calculated value of the collateral is charged to expense. We continue to assess or adjust our estimates based on circumstances of a loan and the underlying collateral. If the additional information obtained reflects increased recovery of our investment, we will adjust our reserves accordingly. There were no loan reserves recorded during the three and six months ended June 30, 2015 and 2014.
Income Taxes
ROP is a partnership and, as a result, all income and losses of the partnership are allocated to the partners for inclusion in their respective income tax returns. No provision has been made for income taxes in the consolidated financial statements since such taxes, if any, are the responsibility of the individual partners.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Fair Value Measurements
See Note 9, "Fair Value Measurements."
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash investments, preferred equity investments and accounts receivable. We place our cash investments in excess of insured amounts with high quality financial institutions. The collateral securing our preferred equity investments is located in New York City. See Note 5, "Preferred Equity and Other Investments." We perform ongoing credit evaluations of our tenants and require most tenants to provide security deposits or letters of credit. Though these security deposits and letters of credit are insufficient to meet the total value of a tenant's lease obligation, they are a measure of good faith and a source of funds to offset the economic costs associated with lost rent and the costs associated with re-tenanting a space. Although the properties in our real estate portfolio are primarily located in Manhattan, we also have properties located in Brooklyn, Westchester County, Connecticut and New Jersey. The tenants located in our buildings operate in various industries. Other than two tenants who account for 4.6% and 3.7% of our share of annualized cash rent, respectively, no other tenant in the portfolio accounted for more than 2.7% of our share of annualized cash rent, including our share of joint venture annualized cash rent, at June 30, 2015. Approximately 15.7%, 9.8%, 7.9%, 8.4%, and 7.1%, of our share of annualized cash rent was attributable to 1185 Avenue of the Americas, 625 Madison Avenue, 750 Third Avenue, 919 Third Avenue and 1350 Avenue of the Americas, respectively, for the three months ended June 30, 2015.
Reclassification
Certain prior year balances have been reclassified to conform to our current year presentation primarily in order to include the transfer of three properties in 2015 and four properties in 2014, which were transferred subsequent to June 30, 2014.
Accounting Standards Updates
In April 2015, the Financial Accounting Standards Board, or FASB, issued final guidance to simplify the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability (ASU No, 2015-03). The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the guidance is permitted. Upon adoption, an entity must apply the new guidance retrospectively for all prior periods presented in the financial statements. The Company expects to adopt the guidance effective January 1, 2016 and the guidance is not anticipated to have a material impact on our consolidated financial statements.
In February 2015, the FASB, issued new guidance that amends the current consolidation guidance, including introducing a separate consolidation analysis specific to limited partnerships and other similar entities (ASU No. 2015-02). Under this analysis, limited partnerships and other similar entities will be considered a VIE unless the limited partners hold substantive kick-out rights or participating rights. The guidance is effective for annual and interim periods beginning after December 15, 2015. Early adoption of this guidance is permitted. The Company is currently evaluating the new guidance to determine the impact it may have on our consolidated financial statements.

11

Table of Contents
Reckson Operation Partnership, L.P.
Notes to Consolidated Financial Statements (cont.)
June 30, 2015
(unaudited)

In May 2014, the FASB issued a new comprehensive revenue recognition guidance which requires us to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods and services (ASU No. 2014-09). The guidance also requires enhanced disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is not permitted. In July 2015, the FASB voted to defer by one year the effective date of ASU No. 2014-09 for both public and nonpublic entities and give both public and private companies the option to early adopt using the original effective date. The new guidance can be applied either retrospectively to each prior reporting period presented, or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the new guidance to determine the impact it may have on our consolidated financial statements.
In April 2014, the FASB issued new guidance on reporting discontinued operations which raises the threshold for disposals to qualify as discontinued operations (ASU No. 2014-08). The guidance also allows us to have a significant continuing involvement and continuing cash flows with the discontinued operations. Additionally, the guidance requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. The guidance is effective for calendar year public companies beginning in the first quarter of 2015 and is to be applied on a prospective basis for new disposals. Early adoption of this guidance was permitted. The Company has adopted the standard beginning in the first quarter of 2015. The adoption of this guidance changed the presentation of discontinued operations for all properties held for sale and/or disposed of subsequent to January 1, 2015.
3. Property Acquisition
2014 Acquisition
During the six months ended June 30, 2015, we finalized the purchase price allocation based on third party appraisal and additional facts and circumstances that existed at the acquisition dates for the following 2014 acquisitions (in thousands):
 
 
102 Greene
Street
(1)
 
115 Spring
Street(1)
Acquisition Date
 
October 2014
 
July 2014
Ownership Type
 
Fee Interest
 
Fee Interest
Property Type
 
Retail
 
Retail
 
 
 
 
 
Purchase Price Allocation:
 
 
 
 
Land
 
$
8,215

 
$
11,078

Building and building leasehold
 
26,717

 
44,799

Above-market lease value
 

 

Acquired in-place lease value
 
1,015

 
2,037

Other assets, net of other liabilities
 
3

 

Assets acquired
 
35,950

 
57,914

Mark-to-market assumed debt
 

 

Below-market lease value
 
3,701

 
4,789

Liabilities assumed
 
3,701

 
4,789

Purchase price
 
$
32,249

 
$
53,125

Net consideration funded by us at closing, excluding consideration financed by debt
 
$
32,249

 
$
53,125

Equity and/or debt investment held
 
$

 
$

Debt assumed
 
$

 
$

____________________________________________________________________
(1)
Based on our preliminary analysis of the purchase price, we had allocated $11.3 million and $21.0 million to land and building, respectively, at 102 Greene Street, and $15.9 million and $37.2 million to land and building, respectively, at 115 Spring Street. The impact to our consolidated statement of operations for the six months ended June 30, 2015 was $1.1 million in rental revenue for the amortization of aggregate below-market leases and $1.0 million of depreciation expense.

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Table of Contents
Reckson Operation Partnership, L.P.
Notes to Consolidated Financial Statements (cont.)
June 30, 2015
(unaudited)

4. Property Held for Sale and Property Disposition
Properties Held for Sale
During the second quarter of 2015, we entered into an agreement to sell an 80% interest in 131-137 Spring Street based on a gross asset valuation of $277.8 million. In August, we completed this sale.
Discontinued Operations
The Company adopted ASU 2014-08 effective January 1, 2015. As a result, the Company classified 131-137 Spring Street as held for sale as of June 30, 2015 and included the results of operations in continuing operations for all periods presented. Discontinued operations included the results of operations of real estate assets sold prior to January 1, 2015. This included 673 First Avenue, which was sold in May 2014. There were no discontinued operations for the three and six months ended June 30, 2015.
The following table summarizes net income from discontinued operations for the three and six months ended June 30, 2014 (in thousands):
 
 
Three Months Ended June 30, 2014
 
Six Months Ended June 30, 2014
Revenues
 
 
 
 
Rental revenue
 
$
2,777

 
$
7,853

Escalation and reimbursement revenues
 
259

 
1,080

Total revenues
 
3,036

 
8,933

Operating expenses
 
280

 
1,164

Real estate taxes
 
383

 
1,402

Ground rent
 
805

 
3,001

Interest expense, net of interest income
 
220

 
879

Depreciation and amortization
 

 
433

Total expenses
 
1,688

 
6,879

Net income from discontinued operations
 
$
1,348

 
$
2,054

5. Preferred Equity and Other Investments
Preferred Equity Investments
As of June 30, 2015 and December 31, 2014, we held the following preferred equity investments, with an aggregate weighted average current yield of approximately 10.18% at June 30, 2015 (in thousands):
Type
 
June 30, 2015
Future Funding
Obligations
 
June 30, 2015
Senior
Financing
 
June 30,2015
Carrying
 Value (1)
 
December 31, 2014
Carrying Value
(1)
 
Initial
Mandatory
Redemption
Preferred equity(2)(3)
 
$

 
$
550,000

 
$
126,817

 
$
123,041

 
July 2015
Preferred equity(4)
 

 
70,000

 
9,960

 
9,954

 
March 2018
Preferred equity

5,580

 
60,795

 
32,162

 

 
November 2018
 
 
$
5,580

 
$
680,795

 
$
168,939

 
$
132,995

 
 
____________________________________________________________________
(1)
Carrying value is net of deferred origination fees.
(2)
The difference between the pay and accrual rates is included as an addition to the principal balance outstanding.
(3)
This investment was redeemed in July 2015.
(4)
In March 2015, the redemption date was extended to March 2018.
At June 30, 2015 and December 31, 2014, all preferred equity investments were performing in accordance with the terms of the related agreements.
Other Investments
Other investments pertain to investments accounted for under the equity method of accounting.

13

Table of Contents
Reckson Operation Partnership, L.P.
Notes to Consolidated Financial Statements (cont.)
June 30, 2015
(unaudited)

We have one preferred equity investment which meets the criteria of a real estate investment under the guidance for Acquisition, Development and Construction arrangements and have accounted for this wholly owned investment under the equity method of accounting. As of June 30, 2015, the book value of this investment was $40.2 million, which is due to mature in March 2016, subject to three one-year extension options and a two-year option for the last extension.
6. Mortgages Payable
The first mortgages collateralized by the property and assignment of leases at June 30, 2015 and December 31, 2014, respectively, were as follows (amounts in thousands):
Property
 
Maturity Date
 
Interest Rate(1)
 
June 30, 2015
 
December 31, 2014
 
 
 
 
 
 
 
 
(as adjusted)
919 Third Avenue(2)
 
June 2023
 
5.12
%
 
$
500,000

 
$
500,000

711 Third Avenue(3)
 
 
 
 
 

 
120,000

 
 
 
 
 

 
$
500,000

 
$
620,000

____________________________________________________________________
(1)
Effective weighted average interest rate for the three months ended June 30, 2015.
(2)
We own a 51.0% controlling interest in the joint venture that is the borrower on this loan.
(3)
In March 2015, we repaid the mortgage.
The gross book value of the property collateralizing the mortgages payable was $1.3 billion and $1.4 billion at June 30, 2015 and December 31, 2014, respectively.
7. Corporate Indebtedness
2012 Credit Facility
In March 2014, we entered into an amendment to the $1.6 billion credit facility entered into by the Company in November 2012, or the 2012 credit facility, which among other things, increased the term loan portion of the facility by $383.0 million to $783.0 million, decreased the interest-rate margin applicable to the term loan portion of the facility by 25 basis points and extended the maturity of the term loan portion of the facility from March 30, 2018 to June 30, 2019. In November 2014, we increased the term loan portion of the facility by $50.0 million to $833.0 million. In January 2015, we entered into a second amended and restated credit agreement, which decreased the interest-rate margin and facility fee applicable to the revolving credit facility by 20 basis points and five basis points, respectively, and extended the maturity date of the revolving credit facility to March 29, 2019 with an as-of-right extension through March 29, 2020. We also have an option, subject to customary conditions, to increase the capacity under the revolving credit facility to $1.5 billion at any time prior to the maturity date for the revolving credit facility without the consent of existing lenders, by obtaining additional commitments from our existing lenders and other financial institutions. As of June 30, 2015, the 2012 credit facility, as amended, consisted of a $1.2 billion revolving credit facility, or the revolving credit facility, and an $833.0 million term loan, or the term loan facility.
As of June 30, 2015, the 2012 credit facility bore interest at a spread over LIBOR ranging from (i) 87.5 basis points to 155 basis points for loans under the revolving credit facility and (ii) 95 basis points to 190 basis points for loans under the term loan facility, in each case based on the credit rating assigned to the senior unsecured long term indebtedness of ROP. At June 30, 2015, the applicable spread was 125 basis points for revolving credit facility and 140 basis points for the term loan facility. At June 30, 2015, the effective interest rate was 1.44% for the revolving credit facility and 1.66% for the term loan facility. We are required to pay quarterly in arrears a 12.5 to 30 basis point facility fee on the total commitments under the revolving credit facility based on the credit rating assigned to the senior unsecured long term indebtedness of ROP. As of June 30, 2015, the facility fee was 25 basis points. As of June 30, 2015, we had $89.4 million of outstanding letters of credit, $705.0 million drawn under the revolving credit facility and $833.0 million outstanding under the term loan facility, with total undrawn capacity of $405.6 million under the 2012 credit facility.
We, SL Green and the Operating Partnership are all borrowers jointly and severally obligated under the 2012 credit facility. None of SL Green's other subsidiaries are obligors under the 2012 credit facility.
The 2012 credit facility includes certain restrictions and covenants (see Restrictive Covenants below).

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Table of Contents
Reckson Operation Partnership, L.P.
Notes to Consolidated Financial Statements (cont.)
June 30, 2015
(unaudited)

Senior Unsecured Notes
The following table sets forth our senior unsecured notes and other related disclosures as of June 30, 2015 and December 31, 2014, respectively, by scheduled maturity date (dollars in thousands):
Issuance
 
June 30, 2015 Unpaid Principal Balance
 
June 30, 2015 Accreted Balance
 
December 31, 2014 Accreted Balance
 
Coupon
Rate(1)
 
Effective
Rate
 
Term
(in Years)
 
Maturity Date
March 31, 2006
 
$
255,308

 
$
255,272

 
$
255,250

 
6.00
%
 
6.00
%
 
10
 
March 31, 2016
August 5, 2011(2)
 
250,000

 
249,777

 
249,744

 
5.00
%
 
5.00
%
 
7
 
August 15, 2018
March 16, 2010(2)
 
250,000

 
250,000

 
250,000

 
7.75
%
 
7.75
%
 
10
 
March 15, 2020
November 15, 2012(2)
 
200,000

 
200,000

 
200,000

 
4.50
%
 
4.50
%
 
10
 
December 1, 2022
June 27, 2005(3)
 

 

 
7

 
 
 
 
 
 
 
 
 
 
$
955,308

 
$
955,049

 
$
955,001

 
 

 
 

 
 
 
 
______________________________________________________________________
(1)
Interest on the senior unsecured notes is payable semi-annually with principal and unpaid interest due on the scheduled maturity dates.
(2)
Issued by SL Green, the Operating Partnership and ROP, as co-obligors.
(3)
In April 2015, we redeemed the outstanding exchangeable senior debentures.
ROP also provides a guaranty of the Operating Partnership's obligations under its 3.00% Exchangeable Senior Notes due 2017.
Restrictive Covenants
The terms of the 2012 credit facility, as amended, and certain of our senior unsecured notes include certain restrictions and covenants which may limit, among other things, SL Green's ability to pay dividends, make certain types of investments, incur additional indebtedness, incur liens and enter into negative pledge agreements and dispose of assets, and which require compliance with financial ratios relating to the maximum ratio of total indebtedness to total asset value, a minimum ratio of EBITDA to fixed charges, a maximum ratio of secured indebtedness to total asset value and a maximum ratio of unsecured indebtedness to unencumbered asset value. The dividend restriction referred to above provides that SL Green will not during any time when a default is continuing, make distributions with respect to SL Green's common stock or other equity interests, except to enable SL Green to continue to qualify as a REIT for Federal income tax purposes. As of June 30, 2015, we were in compliance with all such covenants.
Principal Maturities
Combined aggregate principal maturities of our mortgage, 2012 credit facility and senior unsecured notes as of June 30, 2015, including as-of-right extension options and put options, were as follows (in thousands):
 
Scheduled
Amortization
 
Principal
Repayments
 
Revolving
Credit
Facility
 
Unsecured Term Loan
 
Senior
Unsecured
Notes
 
Total
Remaining 2015
$

 
$

 
$

 
$

 
$

 
$

2016
3,566

 

 

 

 
255,308

 
258,874

2017
7,411

 

 

 

 

 
7,411

2018
7,799

 

 

 

 
250,000

 
257,799

2019
8,207

 

 

 
833,000

 

 
841,207

Thereafter
31,423

 
441,594

 
705,000

 

 
450,000

 
1,628,017

 
$
58,406

 
$
441,594

 
$
705,000

 
$
833,000

 
$
955,308

 
$
2,993,308


15

Table of Contents
Reckson Operation Partnership, L.P.
Notes to Consolidated Financial Statements (cont.)
June 30, 2015
(unaudited)

Consolidated interest expense, excluding capitalized interest, was comprised of the following (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
(as adjusted)
 
 
 
(as adjusted)
Interest expense
$
27,654

 
$
31,631

 
$
55,390

 
$
63,436

Interest income
(5
)
 
(6
)
 
(12
)
 
(11
)
Interest expense, net
$
27,649

 
$
31,625

 
$
55,378

 
$
63,425

Interest capitalized
$
321

 
$
954

 
$
1,107

 
$
1,898

8. Partners' Capital
Since consummation of the Merger on January 25, 2007, the Operating Partnership has owned all the economic interests in ROP either by direct ownership or by indirect ownership through our general partner, which is its wholly-owned subsidiary.
Intercompany transactions between SL Green and ROP are generally recorded as contributions and distributions.
9. Fair Value Measurements
We are required to disclose fair value information with regard to our financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practical to estimate fair value. The FASB guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. We measure and/or disclose the estimated fair value of financial assets and liabilities based on a hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. This hierarchy consist of three broad levels: Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date; Level 2 - inputs other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and Level 3 - unobservable inputs for the asset or liability that are used when little or no market data is available. We follow this hierarchy for our assets and liabilities measured at fair value on a recurring and nonrecurring basis. In instances in which the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level of input that is significant to the fair value measurement in its entirety. Our assessment of the significance of the particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The fair value of derivative instruments is based on current market data received from financial sources that trade such instruments and are based on prevailing market data and derived from third party proprietary models based on well-recognized financial principles and reasonable estimates about relevant future market conditions, which are classified as Level 2 inputs.
The financial assets and liabilities that are not measured at fair value on our consolidated balance sheets include cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses, preferred equity investments, mortgages and other loans payable and other secured and unsecured debt. The carrying amount of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable and accrued expenses reported in our consolidated balance sheets approximates fair value due to the short term nature of these instruments. The fair value of preferred equity investments, which is classified as Level 3, is estimated by discounting the future cash flows using current interest rates at which similar loans with the same maturities would be made to borrowers with similar credit ratings. The fair value of borrowings, which is classified as Level 3, is estimated by discounting the contractual cash flows of each debt instrument to their present value using adjusted market interest rates, which is provided by a third-party specialist.

16

Table of Contents
Reckson Operation Partnership, L.P.
Notes to Consolidated Financial Statements (cont.)
June 30, 2015
(unaudited)

The following table provides the carrying value and fair value of these financial instruments as of June 30, 2015 and December 31, 2014 (in thousands):
 
June 30, 2015
 
December 31, 2014
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
 
 
 
 
(as adjusted)
 
(as adjusted)
Preferred equity investments
$
168,939

(1) 
(2)

 
$
132,995

(1) 
(2)

 
 
 
 
 
 
 
 
Fixed rate debt
$
1,485,049

 
$
1,614,431

 
$
1,605,001

 
$
1,737,673

Variable rate debt
1,508,000

 
1,570,857

 
1,188,000

 
1,230,470

 
$
2,993,049

 
$
3,185,288

 
$
2,793,001

 
$
2,968,143

______________________________________________________________________
(1)
Excludes one investment with a book value of $40.2 million as of June 30, 2015 and December 31, 2014, which we accounted for under the equity method accounting as a result of meeting the criteria of a real estate investment under the guidance for Acquisition, Development and Construction arrangements.
(2)
At June 30, 2015, preferred equity investments had an estimated fair value ranging between $185.8 million and $211.2 million. At December 31, 2014, preferred equity investments had an estimated fair value ranging between $146.3 million and $166.2 million.
Disclosure about fair value of financial instruments was based on pertinent information available to us as of June 30, 2015 and December 31, 2014. Although we are not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.
10. Financial Instruments: Derivatives and Hedging
In the normal course of business, we use a variety of commonly used derivative instruments, such as interest rate swaps, caps, collar and floors, to manage, or hedge interest rate risk. We hedge our exposure to variability in future cash flows for forecasted transactions in addition to anticipated future interest payments on existing debt. We recognize all derivatives on the balance sheets at fair value. Derivatives that are not hedges are adjusted to fair value through earnings. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedge asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Reported net income and capital may increase or decrease prospectively, depending on future levels of interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows. Currently, all of our designated derivative instruments are effective hedging instruments.
As of June 30, 2015, the Company had designated an interest swap agreement on $30.0 million of the 2012 credit facility. The following table summarizes the notional and fair value of our derivative financial instrument at June 30, 2015 based on Level 2 inputs. The notional value is an indication of the extent of our involvement in that instrument at that time, but does not represent exposure to credit, interest rate or market risks.
 
 
Notional
Value
 
Strike
Rate
 
Effective
Date
 
Expiration
Date
 
Balance Sheet Location
 
Fair
Value
Interest Rate Swap
 
$
30,000

 
2.295
%
 
July 2010
 
June 2016
 
Other Liabilities
 
$
(548
)
Gains and losses on terminated hedges are included in the accumulated other comprehensive loss, and are recognized into earnings over the term of the related senior unsecured notes. As of June 30, 2015 and December 31, 2014, the deferred net losses from these terminated hedges, which are included in accumulated other comprehensive loss relating to net unrealized loss on derivative instrument, was approximately $2.2 million and $2.3 million, respectively.
Over time, the realized and unrealized gains and losses held in accumulated other comprehensive loss will be reclassified into earnings as an adjustment to interest expense in the same periods in which the hedged interest payments affect earnings. We estimate that approximately $0.9 million of the current balance held in accumulated other comprehensive loss will be reclassified into interest expense within the next 12 months.

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Reckson Operation Partnership, L.P.
Notes to Consolidated Financial Statements (cont.)
June 30, 2015
(unaudited)

The following table presents the effect of our derivative financial instrument that is designated and qualifies as a hedging instrument on the consolidated statements of operations for the three months ended June 30, 2015 and 2014, respectively (in thousands):
 
 
Amount of Loss
Recognized in
Other Comprehensive
Loss
(Effective Portion)
 
Location of Loss Reclassified from Accumulated Other Comprehensive Loss into Income
 
Amount of Gain
 Reclassified from
Accumulated Other
Comprehensive Loss  into Income
(Effective Portion)
 
Location of Gain Recognized in Income on Derivative
 
Amount of Gain  Recognized
into Income
(Ineffective Portion)
 
 
Three Months Ended June 30,
 
 
Three Months Ended June 30,
 
 
Three Months Ended June 30,
Derivative
 
2015
 
2014
 
 
2015
 
2014
 
 
2015
 
2014
Interest Rate Swap
 
$
(27
)
 
$
(66
)
 
Interest expense
 
$
250

 
$
245

 
Interest expense
 
$
1

 
$
1

The following table presents the effect of our derivative financial instrument that is designated and qualifies as a hedging instrument on the consolidated statements of operations for the six months ended June 30, 2015 and 2014, respectively (in thousands):
 
 
Amount of Loss
Recognized in
Other Comprehensive
Loss
(Effective Portion)
 
Location of Loss Reclassified from Accumulated Other Comprehensive Loss into Income
 
Amount of Gain
 Reclassified from
Accumulated Other
Comprehensive Loss  into Income
(Effective Portion)
 
Location of Gain Recognized in Income on Derivative
 
Amount of Gain  Recognized
into Income
(Ineffective Portion)
 
 
Six Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
Six Months Ended June 30,
Derivative
 
2015
 
2014
 
 
2015
 
2014
 
 
2015
 
2014
Interest Rate Swap
 
$
(95
)
 
$
(110
)
 
Interest expense
 
$
499

 
$
487

 
Interest expense
 
$
2

 
$
2

11. Related Party Transactions
Cleaning/ Security/ Messenger and Restoration Services
Through Alliance Building Services, or Alliance, First Quality Maintenance, L.P., or First Quality, provides cleaning, extermination and related services, Classic Security LLC provides security services, Bright Star Couriers LLC provides messenger services, and Onyx Restoration Works provides restoration services with respect to certain properties owned by us. Alliance is partially owned by Gary Green, a son of Stephen L. Green, the chairman of SL Green's board of directors. In addition, First Quality has the non-exclusive opportunity to provide cleaning and related services to individual tenants at our properties on a basis separately negotiated with any tenant seeking such additional services. An affiliate of ours has entered into an arrangement with Alliance whereby it will receive a profit participation above a certain threshold for services provided by Alliance to certain tenants at certain buildings above the base services specified in their lease agreements. Income earned from profit participation, which is included in other income on the consolidated statements of operations, was $0.8 million, $1.7 million, $0.8 million and $1.6 million for the three and six months ended June 30, 2015 and 2014. We also recorded expenses of $2.1 million, $4.0 million, $2.1 million and $3.6 million for the three and six months ended June 30, 2015 and 2014, respectively, for these services (excluding services provided directly to tenants).
Allocated Expenses from SL Green
Property operating expenses include an allocation of salary and other operating costs from SL Green based on square footage of the related properties. Such amount was approximately $2.5 million, $4.9 million, $2.3 million and $4.6 million for the three and six months ended June 30, 2015 and 2014, respectively.
Insurance
We obtain insurance coverage through an insurance program administered by SL Green. In connection with this program, we incurred insurance expense of approximately $1.7 million, $3.3 million, $1.6 million and $3.2 million for the three and six months ended June 30, 2015 and 2014.

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Table of Contents
Reckson Operation Partnership, L.P.
Notes to Consolidated Financial Statements (cont.)
June 30, 2015
(unaudited)

12. Commitments and Contingencies
Legal Proceedings
As of June 30, 2015, we were not involved in any material litigation nor, to management's knowledge, was any material litigation threatened against us or our portfolio which if adversely determined could have a material adverse impact on us other than routine litigation arising in the ordinary course of business or litigation that is adequately covered by insurance.
Environmental Matters
Our management believes that the properties are in compliance in all material respects with applicable Federal, state and local ordinances and regulations regarding environmental issues. Management is not aware of any environmental liability that it believes would have a materially adverse impact on our financial position, results of operations or cash flows. Management is unaware of any instances in which it would incur significant environmental cost if any of our properties were sold.
Ground Leases Arrangements
The following is a schedule of future minimum lease payments under non-cancellable operating leases with initial terms in excess of one year as of June 30, 2015 (in thousands):
 
 
Non-cancellable
operating leases
Remaining 2015
 
$
10,168

2016
 
20,440

2017
 
20,586

2018
 
20,586

2019
 
20,586

Thereafter
 
348,672

Total minimum lease payments
 
$
441,038

13. Segment Information
We are engaged in acquiring, owning, managing and leasing commercial properties in Manhattan, Brooklyn, Westchester County, Connecticut and New Jersey and have two reportable segments, real estate and preferred equity investments. We evaluate real estate performance and allocate resources based on earnings contribution to income from continuing operations.
The primary sources of revenue are generated from tenant rents and escalations and reimbursement revenue. Real estate property operating expenses consist primarily of security, maintenance, utility costs, real estate taxes and ground rent expense (at certain applicable properties). See Note 5, "Preferred Equity and Other Investments," for additional details on our preferred equity investments.
Selected results of operations for the three and six months ended June 30, 2015 and 2014, and selected asset information as of June 30, 2015 and December 31, 2014, regarding our operating segments are as follows (in thousands):
 
 
Real Estate
Segment
 
Preferred
Equity
Segment
 
Total
Company
Total revenues:
 
 
 
 
 
 
Three months ended:
 
 
 
 
 
 
June 30, 2015
 
$
188,624

 
$
4,268

 
$
192,892

June 30, 2014, as adjusted
 
164,618

 
8,777

 
173,395

Six months ended:
 
 
 
 
 
 
June 30, 2015
 
$
361,609

 
$
7,871

 
$
369,480

June 30, 2014, as adjusted
 
327,371

 
18,052

 
345,423


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Reckson Operation Partnership, L.P.
Notes to Consolidated Financial Statements (cont.)
June 30, 2015
(unaudited)

 
 
Real Estate
Segment
 
Preferred
Equity
Segment
 
Total
Company
Income from continuing operations:
 
 
 
 
 
 
Three months ended:
 
 
 
 
 
 
June 30, 2015
 
$
31,208

 
$
4,374

 
$
35,582

June 30, 2014, as adjusted
 
7,666

 
8,216

 
15,882

Six months ended:
 
 
 
 
 
 
June 30, 2015
 
$
43,483

 
$
8,084

 
$
51,567

June 30, 2014, as adjusted
 
13,347

 
15,686

 
29,033

Total assets
 
 
 
 
 
 
As of:
 
 
 
 
 
 
June 30, 2015
 
$
6,574,369

 
$
209,437

 
$
6,783,806

December 31, 2014, as adjusted
 
6,607,809

 
173,300

 
6,781,109

Income from continuing operations represents total revenues less total expenses for the real estate segment and total investment income and equity in net income from unconsolidated joint venture less allocated interest expense and provision for loan losses for the preferred equity segment. Interest costs for the preferred equity segment are imputed assuming the portfolio is 100% leveraged by our 2012 revolving credit facility borrowing cost. We also allocate loan loss reserves, net of recoveries and transaction related costs to the preferred equity segment. We do not allocate marketing, general and administrative expenses to the preferred equity segment, since we base performance on the individual segments prior to allocating marketing, general and administrative expenses. All other expenses, except interest, relate entirely to the real estate assets. There were no transactions between the above two segments.
14. Subsequent Events
In July, the Company expanded its unsecured corporate credit facility by $500.0 million to $2.533 billion. The revolving line of credit portion of the facility, which matures in March 2020, was increased by $400.0 million to $1.6 billion and the term loan portion of the facility, which matures in June 2019, was increased by $100.0 million to $933.0 million.
In August, the Operating Partnership transferred an entity that held debt investments and financing receivables with an aggregate carrying value as of June 30, 2015 of $1.7 billion to ROP.


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Table of Contents

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Reckson Operating Partnership, L.P., or ROP, commenced operations on June 2, 1995. The sole general partner of ROP is a wholly-owned subsidiary of SL Green Operating Partnership, L.P., or the Operating Partnership. The sole limited partner of ROP is the Operating Partnership.
ROP is engaged in the acquisition, ownership, management and operation of commercial and residential real estate properties, principally office properties, and also owns land for future development, located in New York City, Westchester County, Connecticut and New Jersey, which collectively is also known as the New York Metropolitan area.
SL Green transferred one property and 40% of SL Green's tenancy in common interest in a fee interest with total assets of $207.7 million during the first quarter of 2015 to ROP, and one additional property and the remaining 60% of SL Green's tenancy in common interest in a fee interest with total assets of $187.3 million during second quarter of 2015 to ROP. Subsequent to June 30, 2014, SL Green transferred four properties with total assets aggregating to $786.4 million as of December 31, 2014 to ROP. Under the business combinations guidance (Accounting Standard Codification, or ASU, 805-50), these transfers were determined to be transfers of businesses between the indirect parent company and its wholly-owned subsidiary. As such, the assets and liabilities of the properties were transferred at their carrying values and were recorded as of the beginning of the current reporting period as though the assets and liabilities had been transferred at that date. The financial statements and financial information presented for all prior periods have been retrospectively adjusted to furnish comparative information.
As of June 30, 2015, we owned the following interests in commercial and residential properties in the New York Metropolitan area, primarily in midtown Manhattan. Our investments in the New York Metropolitan area also include investments in Brooklyn, Westchester County, Connecticut and New Jersey, which are collectively known as the Suburban properties:
Location
 
Type
 
Number of
Properties
 
Approximate Square Feet
 
Weighted Average
Occupancy
(1)
Commercial:
 
 
 
 
 
 
 
 
Manhattan
 
Office
 
15

 
8,239,645

 
95.5
%
 
 
Retail(2)(3)
 
5

 
352,892

 
98.8
%
 
 
Fee Interest
 
2

 
197,654

 
100.0
%
 
 
 
 
22

 
8,790,191

 
95.7
%
Suburban
 
Office
 
20

 
3,417,900

 
82.3
%
 
 
Retail
 
1

 
52,000

 
100.0
%
 
 
 
 
21

 
3,469,900

 
82.5
%
Total commercial properties
 
 
 
43

 
12,260,091

 
92.0
%
Residential:
 
 
 
 
 
 
 
 
Manhattan
 
Residential(2)
 

 
222,855

 
96.4
%
Total portfolio
 
 
 
43

 
12,482,946

 
92.0
%
____________________________________________________________________
(1)
The weighted average occupancy for commercial properties represents the total leased square feet divided by total available rentable square feet. The weighted average occupancy for residential properties represents the total occupied units divided by total available units.
(2)
As of June 30, 2015, we owned a building that was comprised of approximately 270,132 square feet of retail space and approximately 222,855 square feet of residential space. For the purpose of this report, we have included the building in the retail properties count and have bifurcated the square footage into the retail and residential components.
(3)
Includes two retail properties held for sale as of June 30, 2015.
As of June 30, 2015, we also held preferred equity and other investments with a book value of $209.1 million.
Critical Accounting Policies
Refer to our 2014 Annual Report on Form 10-K for a discussion of our critical accounting policies, which include investment in commercial real estate properties, investment in unconsolidated joint ventures, revenue recognition, allowance for doubtful accounts, reserve for possible credit losses and derivative instruments. There have been no changes to these accounting policies during the three and six months ended June 30, 2015.

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Table of Contents

Results of Operations
Comparison of the three months ended June 30, 2015 to the three months ended June 30, 2014
The following section compares the results of operations for the three months ended June 30, 2015 to the three months ended June 30, 2014 for the 43 properties owned by ROP. The Company adopted ASU 2014-08 effective January 1, 2015. As a result, the Company classified 131-137 Spring Street as held for sale as of June 30, 2015 and included the results of operations in continuing operations for all periods presented. Any assets sold or held for sale prior to January 1, 2015 are excluded from income from continuing operations and from the following discussion.
(in thousands)
 
2015
 
2014
 
$
Change
 
%
Change
 
 
 
 
(as adjusted)
 
 
 
 
Rental revenue, net
 
$
153,082

 
$
142,440

 
$
10,642

 
7.5
 %
Escalation and reimbursement
 
23,279

 
21,540

 
1,739

 
8.1
 %
Investment income
 
4,268

 
8,777

 
(4,509
)
 
(51.4
)%
Other income
 
12,263

 
638

 
11,625

 
1,822.1
 %
Total revenues
 
192,892

 
173,395

 
19,497

 
11.2
 %
 
 
 
 
 
 
 
 
 
Property operating expenses
 
78,808

 
74,693

 
4,115

 
5.5
 %
Transaction related costs
 
23

 
117

 
(94
)
 
(80.3
)%
Marketing, general and administrative
 
160

 
90

 
70

 
77.8
 %
 
 
78,991

 
74,900

 
4,091

 
5.5
 %
 
 
 
 
 
 
 
 
 
Net operating income
 
113,901

 
98,495

 
15,406

 
15.6
 %
 
 
 
 
 
 
 
 
 
Interest expense and amortization of financing costs, net of interest income
 
(28,929
)
 
(33,239
)
 
4,310

 
(13.0
)%
Depreciation and amortization
 
(50,241
)
 
(49,949
)
 
(292
)
 
0.6
 %
Equity in net income from unconsolidated joint venture
 
853

 
1,094

 
(241
)
 
(22.0
)%
Loss on early extinguishment of debt
 

 
(519
)
 
519

 
(100.0
)%
Income from continuing operations
 
35,584

 
15,882

 
19,702

 
124.1
 %
Net income from discontinued operations
 

 
1,348

 
(1,348
)
 
(100.0
)%
Gain on sale of discontinued operations
 

 
117,829

 
(117,829
)
 
(100.0
)%
Net income
 
$
35,584

 
$
135,059

 
$
(99,475
)
 
(73.7
)%
Rental, Escalation and Reimbursement Revenues
Rental revenue increased primarily as a result of an increase in occupancy ($6.7 million), the acquisitions of 115 Spring Street, 635 Madison Avenue and 102 Greene Street in 2014 ($2.3 million), and increased occupancy at a property that was placed in service ($1.6 million).
Escalation and reimbursement revenue increased primarily as a result of higher real estate tax recoveries ($1.5 million).
Occupancy in our Manhattan office operating properties was 95.5% at June 30, 2015 compared to 90.4% at June 30, 2014. Occupancy in our Suburban office operating properties was 82.3% at June 30, 2015 compared to 79.4% at June 30, 2014. At June 30, 2015, approximately 2.4% and 6.8% of the space leased at our Manhattan and Suburban operating properties, respectively, is expected to expire during the remainder of 2015. Based on our estimates, the current market asking rents on all our Manhattan operating properties for leases that are expected to expire during the remainder of 2015 would be approximately 16.6% higher than the existing in-place fully escalated rents while the current market asking rents on all our Manhattan operating properties for leases that are scheduled to expire in future years would be approximately 10.0% higher than the existing in-place fully escalated rents. Based on our estimates, the current market asking rents on all our Suburban operating properties for leases that are expected to expire during the remainder of 2015 would be approximately 1.8% lower than the existing in-place fully escalated rents while the current market asking rents on all our Suburban operating properties for leases that are scheduled to expire in future years would be approximately 4.9% higher than the existing in-place fully escalated rents.
Investment Income
Investment income decreased primarily as a result the redemption of one of our preferred equity investments during the fourth quarter of 2014 ($5.0 million).

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Table of Contents

Other Income
Other income increased primarily as a result of a lease termination fee received at 919 Third Avenue in 2015 ($11.3 million).
Property Operating Expenses
Property operating expenses increased primarily as a result of higher real estate taxes resulting from higher assessed values and tax rates ($2.6 million) and repairs and maintenance ($1.0 million).
Interest Expense and Amortization of Financing Costs, Net of Interest Income
Interest expense and amortization of financing costs, net of interest income, decreased primarily as a result of the repayment of debt at 625 Madison Avenue ($2.2 million) and 125 Park Avenue ($1.4 million) during the fourth quarter of 2014 and 711 Third ($1.6 million) in the first quarter of 2015, and the repayment of 5.875% senior notes in August 2014 ($1.1 million), partially offset by increased borrowings on the 2012 credit facility ($2.7 million).
Discontinued Operations
Discontinued operations for the three months ended June 30, 2014 included the gain recognized on the sale of 673 First Avenue ($117.8 million) and the results of operations for 673 First Avenue, which was sold in May 2014.
Comparison of the six months ended June 30, 2015 to the six months ended June 30, 2014
The following section compares the results of operations for the six months ended June 30, 2015 to the six months ended June 30, 2014 for the 43 properties owned by ROP. The Company adopted ASU 2014-08 effective January 1, 2015. As a result, the Company classified 131-137 Spring Street as held for sale as of June 30, 2015 and included the results of operations in continuing operations for all periods presented. Any assets sold or held for sale prior to January 1, 2015 are excluded from income from continuing operations and from the following discussion.
(in thousands)
 
2015
 
2014
 
$
Change
 
%
Change
 
 
 
 
(as adjusted)
 
 
 
 
Rental revenue, net
 
$
302,477

 
$
283,438

 
$
19,039

 
6.7
 %
Escalation and reimbursement
 
46,210

 
42,684

 
3,526

 
8.3
 %
Investment income
 
7,871

 
18,052

 
(10,181
)
 
(56.4
)%
Other income
 
12,922

 
1,249

 
11,673

 
934.6
 %
Total revenues
 
369,480

 
345,423

 
24,057

 
7.0
 %
 
 
 
 
 
 
 
 
 
Property operating expenses
 
160,997

 
149,426

 
11,571

 
7.7
 %
Transaction related costs
 
39

 
988

 
(949
)
 
(96.1
)%
Marketing, general and administrative
 
256

 
166

 
90

 
54.2
 %
 
 
161,292

 
150,580

 
10,712

 
7.1
 %
 
 
 
 
 
 
 
 
 
Net operating income
 
208,188

 
194,843

 
13,345

 
6.8
 %
 
 
 
 
 
 
 
 
 
Interest expense and amortization of financing costs, net of interest income
 
(58,605
)
 
(66,594
)
 
7,989

 
(12.0
)%
Depreciation and amortization
 
(99,669
)
 
(99,791
)
 
122

 
(0.1
)%
Equity in net income from unconsolidated joint venture
 
1,702

 
1,094

 
608

 
55.6
 %
Loss on early extinguishment of debt
 
(49
)
 
(519
)
 
470

 
(90.6
)%
Income from continuing operations
 
51,567

 
29,033

 
22,534

 
77.6
 %
Net income from discontinued operations
 

 
2,054

 
(2,054
)
 
(100.0
)%
Gain on sale of discontinued operations
 

 
117,829

 
(117,829
)
 
(100.0
)%
Net income
 
$
51,567

 
$
148,916

 
$
(97,349
)
 
(65.4
)%
Rental, Escalation and Reimbursement Revenues
Rental revenue increased primarily as a result of an increase in occupancy ($11.9 million), the acquisitions of 115 Spring Street, 635 Madison Avenue and 102 Greene Street in 2014 ($5.0 million), and increased occupancy at a property that was placed in service ($2.0 million).

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Table of Contents

Escalation and reimbursement revenue increased primarily as a result of higher real estate tax recoveries ($2.8 million) and higher utility recoveries ($0.5 million).
Investment Income
Investment income decreased primarily as a result the redemption of one of our preferred equity investments during the fourth quarter of 2014 ($9.9 million).
Other Income
Other income increased primarily as a result of a lease termination fee received at 919 Third Avenue in 2015 ($11.3 million).
Property Operating Expenses
Property operating expenses increased primarily as a result of higher real estate taxes resulting from higher assessed values and tax rates ($6.1 million), other operating expenses ($2.0 million), and repairs and maintenance ($1.6 million).
Interest Expense and Amortization of Financing Costs, Net of Interest Income
Interest expense and amortization of financing costs, net of interest income, decreased primarily as a result of the repayment of debt at 625 Madison Avenue ($4.4 million) and 125 Park Avenue ($2.9 million) during the fourth quarter of 2014, 711 Third ($1.6 million) in the first quarter of 2015, 16 Court Street, Brooklyn during the second quarter of 2014 ($0.9 million), the redemption of a preferred equity investment which secured a loan during the fourth quarter of 2014 ($2.0 million), and the repayment of 5.875% senior notes in August 2014 ($2.2 million), partially offset by increased borrowings on the 2012 credit facility ($5.3 million).
Discontinued Operations
Discontinued operations for the six months ended June 30, 2014 included the gain recognized on the sale of 673 First Avenue ($117.8 million) and the results of operations for 673 First Avenue, which was sold in May 2014.
Liquidity and Capital Resources
On January 25, 2007, we were acquired by SL Green. See Item 7 "Management's Discussion and Analysis Liquidity and Capital Resources" in SL Green and the Operating Partnership's Annual Report on Form 10-K for the year ended December 31, 2014 for a complete discussion of additional sources of liquidity available to us due to our indirect ownership by SL Green.
We currently expect that our principal sources of funds to meet our short-term and long-term liquidity requirements for working capital and funds for acquisition and development or redevelopment of properties, tenant improvements, leasing costs, repurchases or repayments of outstanding indebtedness (which may include exchangeable debt) and for preferred equity investments will include:
(1)
cash flow from operations;
(2)
cash on hand;
(3)
borrowings under the 2012 credit facility;
(4)
other forms of secured or unsecured financing;
(5)
net proceeds from divestitures of properties and redemptions, participations and dispositions of preferred equity investments; and
(6)
proceeds from debt offerings by us.
Cash flow from operations is primarily dependent upon the occupancy level of our portfolio, the net effective rental rates achieved on our leases, the collectability of rent, operating escalations and recoveries from our tenants and the level of operating and other costs. Additionally, we believe that our preferred equity investment program will continue to serve as a source of operating cash flow.
We believe that our sources of working capital, specifically our cash flow from operations and SL Green's liquidity are adequate for us to meet our short-term and long-term liquidity requirements for the foreseeable future.
Cash Flows
The following summary discussion of our cash flows is based on our consolidated statements of cash flows in "Item 1. Financial Statements" and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below.

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Table of Contents

Cash and cash equivalents were $40.1 million and $40.8 million at June 30, 2015 and 2014, respectively, representing a decrease of $0.7 million. The decrease was a result of the following changes in cash flows (in thousands):
 
Six Months Ended June 30,
 
2015
 
2014
 
Change
 
 
 
(as adjusted)
 
 
Net cash provided by operating activities
$
100,218

 
$
93,158

 
$
7,060

Net cash (used in) provided by investing activities
$
(65,885
)
 
$
75,973

 
$
(141,858
)
Net cash used in financing activities
$
(28,924
)
 
$
(176,405
)
 
$
147,481

Our principal source of operating cash flow is related to the leasing and operating of the properties in our portfolio. Our properties provide a relatively consistent stream of cash flow that provides us with resources to pay operating expenses, debt service and make distributions to SL Green. At June 30, 2015, our operating portfolio was 92.0% occupied. Our preferred investments also provide a steady stream of operating cash flow to us.
Cash is used in investing activities to fund acquisitions, development or redevelopment projects and recurring and nonrecurring capital expenditures. We selectively invest in new projects that enable us to take advantage of our development, leasing, financing and property management skills and invest in existing buildings that meet our investment criteria. During the six months ended June 30, 2015, when compared to the six months ended June 30, 2014, we used cash primarily for the following investing activities (in thousands):
Capital expenditures and capitalized interest
$
11,698

Net proceeds from sale of real estate/joint venture interest
(137,059
)
Distributions from unconsolidated joint ventures
10

Repayment or redemption of preferred equity and other investments, net of originations or investments
(17,966
)
Restricted cash—capital improvements
1,459

Increase in net cash used in investing activities
$
(141,858
)
Funds spent on capital expenditures, which comprise building and tenant improvements, decreased from $45.8 million for the six months ended June 30, 2014 compared to $34.1 million for the six months ended June 30, 2015. The decrease in capital expenditures relate primarily to lower costs incurred in connection with the redevelopment of a property and the build-out of space for tenants.
We generally fund our investment activity through property-level financing, our 2012 credit facility, senior unsecured notes and sale of real estate. During the six months ended June 30, 2015, when compared to the six months ended June 30, 2014, we used cash for the following financing activities (in thousands):
Repayments under our debt obligations
$
(252,826
)
Proceeds from debt obligations
372,000

Contributions from common unitholder and noncontrolling interests
126

Distributions to common unitholder and noncontrolling interests
30,043

Deferred loan costs
(1,862
)
Decrease in cash used in financing activities
$
147,481

Capitalization
All of our issued and outstanding Class A common units are owned by Wyoming Acquisition GP LLC or the Operating Partnership.

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Table of Contents

Corporate Indebtedness
2012 Credit Facility
In March 2014, we entered into an amendment to the $1.6 billion credit facility entered into by the Company in November 2012, or the 2012 credit facility, which among other things, increased the term loan portion of the facility by $383.0 million to $783.0 million, decreased the interest-rate margin applicable to the term loan portion of the facility by 25 basis points and extended the maturity of the term loan portion of the facility from March 30, 2018 to June 30, 2019. In November 2014, we increased the term loan portion of the facility by $50.0 million to $833.0 million. In January 2015, we entered into a second amended and restated credit agreement, which decreased the interest-rate margin and facility fee applicable to the revolving credit facility by 20 basis points and five basis points, respectively, and extended the maturity date of the revolving credit facility to March 29, 2019 with an as-of-right extension through March 29, 2020. We also have an option, subject to customary conditions to increase the capacity under the revolving credit facility to $1.5 billion at any time prior to the maturity date for the revolving credit facility without the consent of existing lenders, by obtaining additional commitments from our existing lenders and other financial institutions. As of June 30, 2015, the 2012 credit facility, as amended, consisted of a $1.2 billion revolving credit facility, or the revolving credit facility, and an $833.0 million term loan, or the term loan facility.
As of June 30, 2015, the 2012 credit facility bore interest at a spread over LIBOR ranging from (i) 87.5 basis points to 155 basis points for loans under the revolving credit facility and (ii) 95 basis points to 190 basis points for loans under the term loan facility, in each case based on the credit rating assigned to the senior unsecured long term indebtedness of ROP. At June 30, 2015, the applicable spread was 125 basis points for revolving credit facility and 140 basis points for the term loan facility. At June 30, 2015, the effective interest rate was 1.44% for the revolving credit facility and 1.66% for the term loan facility. We are required to pay quarterly in arrears a 12.5 to 30 basis point facility fee on the total commitments under the revolving credit facility based on the credit rating assigned to the senior unsecured long term indebtedness of ROP. As of June 30, 2015, the facility fee was 25 basis points. As of June 30, 2015, we had $89.4 million of outstanding letters of credit, $705.0 million drawn under the revolving credit facility and $833.0 million outstanding under the term loan facility, with total undrawn capacity of $405.6 million under the 2012 credit facility.
We, SL Green and the Operating Partnership are all borrowers jointly and severally obligated under the 2012 credit facility. None of SL Green's other subsidiaries are obligors under the 2012 credit facility.
The 2012 credit facility includes certain restrictions and covenants (see Restrictive Covenants below).
Senior Unsecured Notes
The following table sets forth our senior unsecured notes and other related disclosures as of June 30, 2015 and December 31, 2014, respectively, by scheduled maturity date (dollars in thousands):
Issuance
 
June 30, 2015 Unpaid Principal Balance
 
June 30, 2015 Accreted Balance
 
December 31, 2014 Accreted Balance
 
Coupon
Rate
(1)
 
Effective
Rate
 
Term
(in Years)
 
Maturity Date
March 31, 2006
 
$
255,308

 
$
255,272

 
$
255,250

 
6.00
%
 
6.00
%
 
10
 
March 31, 2016
August 5, 2011(2)
 
250,000

 
249,777

 
249,744

 
5.00
%