Derivative Instruments and Hedging Activities (Notes)

6 Months Ended

Jun. 30, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities [Text Block]

7. Derivative Instruments and Hedging Activities

As of June 30, 2016, Boston Properties Limited Partnership has entered into seventeen forward-starting interest rate swap contracts that fix the 10-year swap rate at a weighted-average rate of approximately 2.423% per annum on notional amounts aggregating $550.0 million. These interest rate swap contracts were entered into in advance of a financing with a target commencement date in September 2016 and maturity in September 2026. In addition, as of June 30, 2016, 767 Fifth Partners LLC, which is the consolidated entity (in which the Company has a 60% interest and owns 767 Fifth Avenue (the General Motors Building) in New York City), has entered into sixteen forward-starting interest rate swap contracts (including two contracts entered into during the six months ended June 30, 2016 with notional amounts aggregating $50.0 million), which fix the 10-year swap rate at a weighted-average rate of approximately 2.619% per annum on notional amounts aggregating $450.0 million. These interest rate swap contracts were entered into in advance of a financing with a target commencement date in June 2017 and maturity in June 2027.

Boston Properties Limited Partnership’s and 767 Fifth Avenue Partners LLC’s interest rate swap contracts consisted of the following at June 30, 2016 (dollars in thousands):

Derivative Instrument	Aggregate Notional Amount		Effective Date	Maturity Date	Strike Rate Range					Balance Sheet Location	Fair Value
					Low			High
Boston Properties Limited Partnership:
Interest Rate Swaps	$	550,000	September 1, 2016	September 1, 2026	2.129	%	-	2.571	%	Other Liabilities	$	(53,861	)
767 Fifth Partners LLC:
Interest Rate Swaps	$	450,000	June 7, 2017	June 7, 2027	2.336	%	-	2.950	%	Other Liabilities	$	(47,438	)
	$	1,000,000									$	(101,299	)

Boston Properties Limited Partnership’s and 767 Fifth Avenue Partners LLC’s interest rate swap contracts consisted of the following at December 31, 2015 (dollars in thousands):

Derivative Instrument	Aggregate Notional Amount		Effective Date	Maturity Date	Strike Rate Range					Balance Sheet Location	Fair Value
					Low			High
Boston Properties Limited Partnership:
Interest Rate Swaps	$	400,000	September 1, 2016	September 1, 2026	2.348	%	-	2.571	%	Other Liabilities	$	(5,419	)
Interest Rate Swaps	150,000		September 1, 2016	September 1, 2026	2.129	%	-	2.325	%	Prepaid Expenses and Other Assets	1,188
	$	550,000									$	(4,231	)
767 Fifth Partners LLC:
Interest Rate Swaps	$	250,000	June 7, 2017	June 7, 2027	2.677	%	-	2.950	%	Other Liabilities	$	(7,247	)
Interest Rate Swaps	150,000		June 7, 2017	June 7, 2027	2.336	%	-	2.430	%	Prepaid Expenses and Other Assets	1,176
	$	400,000									$	(6,071	)
	$	950,000									$	(10,302	)

Boston Properties Limited Partnership entered into the interest rate swap contracts designated and qualifying as cash flow hedges to reduce its exposure to the variability in future cash flows attributable to changes in the 10-year swap rate in contemplation of obtaining 10-year fixed-rate financing in September 2016. The Company’s 767 Fifth Partners LLC consolidated entity entered into the interest rate swap contracts designated and qualifying as cash flow hedges to reduce its exposure to the variability in future cash flows attributable to changes in the 10-year swap rate in contemplation of obtaining 10-year fixed-rate financing in June 2017. Boston Properties Limited Partnership has formally documented all of its relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. Boston Properties Limited Partnership also assesses and documents, both at the hedging instrument’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows associated with the hedged items. All components of the forward-starting interest rate swap contracts were included in the assessment of hedge effectiveness. Boston Properties Limited Partnership has agreements with each of its derivative counterparties that contain a provision where it could be declared in default on its derivative obligations if repayment of its indebtedness is accelerated by the lender due to its default on the indebtedness. As of June 30, 2016, the fair value of derivatives in a liability position, excluding any adjustment for nonperformance risk and excluding accrued interest, related to these agreements was approximately $101.6 million. As of June 30, 2016, Boston Properties Limited Partnership has not posted any collateral related to these agreements. If Boston Properties Limited Partnership had breached any of these provisions at June 30, 2016, it could have been required to settle its obligations under the agreements at their termination value of approximately $101.6 million. The Company accounts for the effective portion of changes in the fair value of a derivative in accumulated other comprehensive loss and subsequently reclassifies the effective portion to earnings over the term that the hedged transaction affects earnings. The Company accounts for the ineffective portion of changes in the fair value of a derivative directly in earnings. The Company has recorded the changes in fair value of the swap contracts related to the effective portion of the interest rate contracts aggregating approximately $101.3 million in Other Liabilities and Accumulated Other Comprehensive Loss within the Company’s Consolidated Balance Sheets. During the six months ended June 30, 2016, the Company did not record any hedge ineffectiveness. The Company expects that within the next twelve months it will reclassify into earnings as an increase to interest expense approximately $4.8 million of the amounts recorded within Accumulated Other Comprehensive Loss relating to the forward-starting interest rate swap contracts in effect and as of June 30, 2016.

The following table presents the location in the financial statements of the losses recognized related to the Company’s cash flow hedges for the three and six months ended June 30, 2016 and 2015:

	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
	(in thousands)
Amount of income (loss) related to the effective portion recognized in other comprehensive loss	$	(32,351	)	$	15,639		$	(90,997	)	$	12,106
Amount of loss related to the effective portion subsequently reclassified to earnings (1)	$	(628	)	$	(628	)	$	(1,255	)	$	(1,255	)
Amount of gain (loss) related to the ineffective portion and amount excluded from effectiveness testing	$	—		$	—		$	—		$	—

___________

(1) Consists of amounts from previous interest rate hedging programs entered into prior to 2015.

Boston Properties, Inc.

The following table reflects the changes in accumulated other comprehensive loss for the six months ended June 30, 2016 and 2015 (in thousands):

Balance at December 31, 2015	$	(14,114	)
Effective portion of interest rate contracts	(90,997		)
Amortization of interest rate contracts (1)	1,255
Other comprehensive loss attributable to noncontrolling interests	24,108
Balance at June 30, 2016	$	(79,748	)
Balance at December 31, 2014	$	(9,304	)
Effective portion of interest rate contracts	12,106
Amortization of interest rate contracts (1)	1,255
Other comprehensive income attributable to noncontrolling interests	(2,209		)
Balance at June 30, 2015	$	1,848

___________

(1) Consists of amounts from previous interest rate hedging programs entered into prior to 2015.

Boston Properties Limited Partnership

The following table reflects the changes in accumulated other comprehensive loss for the six months ended June 30, 2016 and 2015 (in thousands):

Balance at December 31, 2015	$	(18,337	)
Effective portion of interest rate contracts	(90,997		)
Amortization of interest rate contracts (1)	1,255
Other comprehensive loss attributable to noncontrolling interests	16,547
Balance at June 30, 2016	$	(91,532	)
Balance at December 31, 2014	$	(12,973	)
Effective portion of interest rate contracts	12,106
Amortization of interest rate contracts (1)	1,255
Other comprehensive income attributable to noncontrolling interests	(916		)
Balance at June 30, 2015	$	(528	)

___________

(1) Consists of amounts from previous interest rate hedging programs entered into prior to 2015.