F INANCIAL S TATEMENTS. WEA Finance LLC Year Ended December 31, 2013 With Report of Independent Auditors. Ernst & Young LLP

Transcription

1 F INANCIAL S TATEMENTS WEA Finance LLC Year Ended December 31, 2013 With Report of Independent Auditors Ernst & Young LLP

2 TABLE OF CONTENTS Page Report of Independent Auditors... 1 Financial Statements: Balance Sheets... 2 Statements of Operations and Changes in Member s Equity... 3 Statements of Cash Flows... 4 Notes to Financial Statements

3 Ernst & Young LLP Suite South Figueroa Street Los Angeles, CA Tel: Fax: ey.com REPORT OF INDEPENDENT AUDITORS To the Member of WEA Finance LLC We have audited the accompanying financial statements of WEA Finance LLC, a Delaware limited liability company (the Company ), which comprise the balance sheet as of December 31, 2013, and the related statements of operations and changes in member s equity, and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosure in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of WEA Finance LLC at December 31, 2013, and the results of its operations and its cash flows for the year then ended in accordance with U.S. generally accepted accounting principles. March 5, 2014 ey 1 A member firm of Ernst & Young Global Limited

4 BALANCE SHEETS AS OF DECEMBER 31, 2013 ASSETS: Cash and cash equivalents... $ 8 Notes receivable from Member... 4,368,287 Interest and other receivables from Member and affiliate, net... 58,118 Deferred loan costs, net of accumulated amortization of $32,797 at December 31, ,713 Unrealized gain on interest rate swaps with third parties, net... 72,860 Total assets... $4,540,986 LIABILITIES AND MEMBER S EQUITY: Notes payable... $4,410,000 Interest payable to third parties, net... 58,074 Unrealized loss on interest rate swaps with Member, net... 72,860 Accounts payable and accrued liabilities... 7 Total liabilities... 4,540,941 Member s equity and retained earnings Other comprehensive income... Total Member s equity Total liabilities and Member s equity... $4,540,986 The accompanying notes are an integral part of the financial statements. 2

5 STATEMENTS OF OPERATIONS AND CHANGES IN MEMBER S EQUITY FOR THE YEAR ENDED DECEMBER 31, 2013 REVENUES: Interest income from Member... $ 245,201 Total income ,201 EXPENSES: Interest expense ,201 General and administrative expenses Total expense ,216 OTHER INCOME (EXPENSE): Realized loss on debt extinguishment and interest rate swaps with third parties, net... (65,328) Realized gain on extinguishment of notes receivable and interest rate swaps with Member, net... 65,328 Interest rate swap and foreign currency fair value adjustments with third parties, net... (33,336) Interest rate swap and foreign currency fair value adjustments with Member, net... 33,336 Net loss... (15) CHANGES IN MEMBER S EQUITY: Member s equity beginning of year Member s equity end of year... $ 45 The accompanying notes are an integral part of the financial statements. 3

6 STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2013 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss... $ (15) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of deferred loan costs... 10,181 Amortization of note receivable issuance fees... (10,181) Changes in assets and liabilities: Realized loss on debt extinguishment and interest rate swaps with third parties, net... 64,342 Realized gain on extinguishment of notes receivable and interest rate swaps with Member, net... (64,342) Unrealized gain/loss on interest rate and cross currency swaps with third parties, net... 33,336 Unrealized gain/loss on interest rate and cross currency swaps with Member, net... (33,336) Interest and other receivables from member and affiliate, net... 20,280 Interest payable to third parties, net... (20,226) Accounts payable and accrued liabilities... (88) Net cash used in operating activities... (49) CASH FLOWS FROM INVESTING ACTIVITIES: Notes receivable advances to Member, net of issuance fees... (469,670) Notes receivable payments received from Member... 1,381,296 Net provided investing activities ,626 CASH FLOWS FROM FINANCING ACTIVITIES: Debt issuance and extension costs... (330) Borrowings under revolving credit facilities ,000 Repayments of revolving credit facilities... (470,000) Repayment of unsecured fixed rate notes... (911,296) Net cash used in financing activities... (911,626) Net decrease in cash and cash equivalents... (49) CASH AND CASH EQUIVALENTS, beginning of year CASH AND CASH EQUIVALENTS, end of year... $ 8 Supplemental cash flow information: Interest paid, including realized swap termination losses... $ 267,191 The accompanying notes are an integral part of the financial statements. 4

7 1. ORGANIZATION: WEA Finance LLC, a Delaware limited liability company (the Company ), is a whollyowned subsidiary of Westfield America Limited Partnership (the Member ). The Company was formed for the purpose of borrowing funds and loaning the proceeds to Westfield America, Inc. and its subsidiaries, including the Member. Profits, losses and distributions are allocated to its sole Member. In accordance with the terms of the Agreement of Limited Liability Company, the Member is not bound by, or liable for, the expenses, liabilities or obligations of the Company, and is not liable for any negative balance in the Member s capital account. The Member is a majority-owned subsidiary of Westfield America, Inc. ( WEA ). The majority of the common stock of WEA is held by Westfield America Management Limited ( WAML ), as responsible entity of Westfield America Trust ( WAT ). In July 2004, the securities of WAT were stapled with those of Westfield Holdings Limited ( WHL ) and Westfield Trust ( WT ) to form the Westfield Group. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Cash and Cash Equivalents: The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Notes Receivable from Member: Notes receivable from member are loans that the Company has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, and are carried at cost, adjusted for an allowance for loan losses and any deferred loan fees on the originated loans, which are the responsibility of the Member and have been deducted in recording the net proceeds loaned to the Member. Deferred loan fees are recognized in interest income over the life of the related notes receivable. 5

8 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued) Deferred Loan Costs: Deferred loan costs include costs associated with obtaining the notes payable and extending credit facility maturity dates, and are amortized to interest expense over the life of the related notes payable including any extension periods. The Company expensed $986 of deferred loan costs with the repurchase of the June 2014 and November 2014 Notes (see Note 3). Derivative Instruments and Hedging Activities: The Company enters into interest rate swap contracts, treasury rate lock agreements and foreign currency hedges with external parties to reduce its exposure to fluctuations in interest rates and foreign currency exchange rates. The Company does not enter into interest rate swap contracts for speculative purposes. The Company also enters into interest rate swap contracts and treasury rate lock agreements with the Member to transfer the risks and benefits of the external agreements to the Member. The Company recognizes all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value and reflected as income or expense. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets or liabilities through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Upon termination of a hedge relationship, the related balance in Other Comprehensive Income is recognized into income in the period the related hedged item matures or is terminated. The ineffective portion of a derivative s change in fair value is immediately recognized in earnings. The Company has elected not to account for its interest rate swap contracts and cross currency swaps as hedges and has recognized the derivatives changes in fair value in earnings. Revenue Recognition: Interest income is recognized when earned. Income Taxes: Income of the Company is included in the Member s tax return; therefore, no provision is made in the accompanying financial statements for federal or state income taxes. Franchise taxes are minimal and are included in general and administrative expenses. 6

9 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued) Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Fair Value Measurements: The Company uses a fair value hierarchy that distinguishes between data obtained from sources independent of the reporting entity and the reporting entity s own assumptions about market participant assumptions. The three levels of hierarchy are: 1) using quoted prices in active markets for identical assets or liabilities; 2) significant other observable inputs ; and 3) significant unobservable inputs. Significant other observable inputs can include quoted prices for similar assets or liabilities in active markets, as well as inputs that are observable for the asset or liability, such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals. Significant unobservable inputs are typically based on an entity s own assumptions, as there is little, if any, related market activity. In instances where 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 input that is significant to the fair value measurement in its entirety. The Company s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The fair values of interest rate swap contracts and cross currency swaps are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. The analysis reflects the contractual terms of the swaps, including the period to maturity, and uses observable market-based inputs, including interest rate curves ( significant other observable inputs ). The fair value calculation also includes an amount for risk of non-performance using significant unobservable inputs such as estimates of current credit spreads to evaluate the likelihood of default. 7

10 3. NOTES PAYABLE: A summary of notes payable is as follows as of December 31, 2013: Unsecured Global Syndicated Facility with a maximum commitment to the Westfield Group of $1.185 billion, bearing interest at LIBOR (0.168% at December 31, 2013) plus a percentage spread based upon the Westfield Group credit rating, payable monthly, maturing in December 2015 (the US Syndicated Credit Facility )... $ Unsecured Global Syndicated Facilities with a maximum commitment to the Westfield Group of $4.015 billion, bearing interest at variable rates based upon the Westfield Group credit rating, payable monthly, with maturities from 2015 through 2018 (the Group Bilateral Facilities )... Guaranteed Senior Notes consisting of: Unsecured fixed rate notes issued in 2004; bearing interest at 5.125%, payable semi-annually, maturing in November 2014 (the November 2014 Notes )... Unsecured fixed rate notes issued in 2006; bearing interest at 5.7%, payable semi-annually, maturing in October 2016 (the 2016 Notes ) ,000 Unsecured fixed rate notes issued in 2008; bearing interest at 7.125%, payable semi-annually, maturing in April 2018 (the 2018 Notes )... 1,100,000 Unsecured fixed rate notes issued in 2009; bearing interest at 7.5%, payable semi-annually, maturing in June 2014 (the June 2014 Notes )... Unsecured fixed rate notes issued in 2009; bearing interest at 6.75%, payable semi-annually, maturing in September 2019 (the 2019 Notes )... 1,150,000 Unsecured fixed rate notes issued in 2011; bearing interest at 4.625%, payable semi-annually, maturing in May 2021 (the 2021 Notes )... 1,000,000 Unsecured fixed rate notes issued in 2012; bearing interest at 3.375%, payable semi-annually, maturing in October 2022 (the 2022 Notes ) ,000 $ 4,410,000 8

11 3. NOTES PAYABLE: (continued) The annual maturities of notes payable and the revolving credit facilities as of December 31, 2013, are as follows: $ , ,100,000 Thereafter... 2,450,000 $ 4,410,000 Unsecured Global Syndicated Credit Facilities: In December 2005, the Westfield Group closed on a $1.945 billion Unsecured Global Syndicated Facility (the US Syndicated Credit Facility ) maturing in December In March 2010, the available portion of the US Syndicated Credit Facility was amended and refinanced into two tranches maturing in June 2013 and totaling $1.265 billion. In December 2011, the US Syndicated Credit Facility was further amended and refinanced into two new tranches maturing in December 2015 totaling $1.185 billion. Tranche A is a Global Facility Tranche of $895 million which allows borrowing in US dollars, Pounds, Euros and Australian dollars. Tranche B is a US dollar Tranche of $290 million. Both Tranches are available to all of the Westfield Group s subsidiaries, including the Company. The US Syndicated Credit Facility provides for floating interest rates with varying rates based on LIBOR plus a percentage spread dependent upon the Westfield Group credit rating at the time of each borrowing. The US Syndicated Credit Facility is guaranteed by WHL, WML and WAML on a several basis as discussed below. In August 2012, the Westfield Group established and amended the Westfield Group Bilateral Facilities (the Group Bilateral Facilities ), equivalent to $4.015 billion at December 31, 2013, maturing from 2014 through In July 2013, the Westfield Group amended the Group Bilateral Facilities to extend 2014 maturities through At December 31, 2013, the Company is able to borrow $3.175 billion under the Group Bilateral Facilities. The Group Bilateral Facilities provide for floating interest rates with varying rates by tranche based on LIBOR plus a percentage spread dependent upon the Westfield Group credit rating at the time of each borrowing. The Group Bilateral Facilities are guaranteed by WHL, Westfield Management Ltd ( WML ) and Westfield America Management Limited ( WAML ) on a several basis as discussed below. At December 31, 2013, the Company had no outstanding borrowings under these facilities and the Westfield Group had $2.424 billion outstanding under these facilities. 9

12 3. NOTES PAYABLE: (continued) Availability Under Credit Facilities: At December 31, 2013, the Group had approximately $2.562 billion available under the Group Bilateral Facilities and US Syndicated Credit Facility after considering outstanding letters of credit of $11.8 million under the US Syndicated Credit Facility and $14.6 million under the Group Bilateral Facilities. Unsecured Guaranteed Senior Notes: In November 2004, Westfield Capital Corporation Limited ( WCCL ), WT Finance (Aust) Pty Limited ( WT Finance ) and the Company (collectively, the Issuers ), issued, on a joint and several basis, $2.6 billion of Guaranteed Senior Notes in an offering conducted in accordance with Rule 144A under the Securities Act. The notes consisted of $500 million due in November 2007 with interest payable at 3-month LIBOR plus 0.30% (the 2007 Notes ), $700 million due in November 2010 with interest payable at 4.375% (the 2010 Notes ) and $1.4 billion due in November 2014 with interest payable at 5.125% (the November 2014 Notes ). Concurrently with the issuance of the Guaranteed Senior Notes, the Issuers entered into an agreement (the Co-Issuer Agreement ) setting forth the proceeds that each Issuer received and obligating each Issuer to pay interest and principal on the proceeds received by that Issuer. The Company received proceeds of $250 million from the 2007 Notes, $100 million from the 2010 Notes, and $850 million from the November 2014 Notes, and is responsible for all interest and principal payments on those amounts. The Company repaid the 2007 Notes at maturity and repurchased $3.0 million of its share of the 2010 Notes in December The Company repaid the remainder of the 2010 Notes at maturity. In October 2012, the Issuers made a tender offer and repurchased $133,654 principal of November 2014 Notes for $144,278. The Company s share of the tender offer was $81,147 principal of November 2014 Notes repurchased for $87,597. In July 2013, the Issuers made a tender offer and repurchased the remaining $1,266,346 principal of November 2014 Notes for $1,344,834. The Company s share of the tender offer was $768,853 principal of November 2014 Notes repurchased for $816,506. In September 2006, the Company and WCI Finance LLC (collectively, the Issuers ), issued, on a joint and several basis, $1.5 billion of Guaranteed Senior Notes in an offering conducted in accordance with Rule 144A under the Securities Act. The notes consisted of $600 million due in October 2012 with interest payable at 5.4% (the 2012 Notes ) and $900 million due in October 2016 with interest payable at 5.7% (the 2016 Notes ). Concurrently with the issuance of the 2012 and 2016 Notes, the Issuers entered into an 10

13 3. NOTES PAYABLE: (continued) Unsecured Guaranteed Senior Notes: (continued) agreement (the Co-Issuer Agreement ) setting forth the proceeds that each Issuer received and obligating each Issuer to pay interest and principal on the proceeds received by that Issuer. The Company received proceeds of $860 million from the 2016 Notes which were used to reduce borrowings under the Unsecured Global Syndicated Facility and the balance was loaned to the Member. The 2012 Notes were repaid at maturity. In April 2008, the Company issued $1.1 billion of Guaranteed Senior Notes due in April 2018 with interest payable at 7.125% (the 2018 Notes ) in an offering conducted in accordance with Rule 144A under the Securities Act. The Company received all proceeds from the 2018 Notes. In May 2009, the Company and WT Finance (collectively, the Issuers ), issued, on a joint and several basis, $700 million of Guaranteed Senior Notes due in June 2014 (the June 2014 Notes ) with interest payable at 7.5%. The offering was conducted in accordance with Rule 144A under the Securities Act. Concurrently with the issuance of the June 2014 Notes, the Issuers entered into an agreement (the Co-Issuer Agreement ) setting forth the proceeds that each Issuer received and obligating each Issuer to pay interest and principal on the proceeds received by that Issuer. The Company received proceeds of $100 million from the June 2014 Notes which were used to reduce borrowings under the US Syndicated Credit Facility. In October 2012, the Issuers made a tender offer and repurchased $153,288 principal of June 2014 Notes for $168,732. The Company s share of the tender offer was $21,898 principal of June 2014 Notes repurchased for $24,105. In July 2013, the Issuers made a tender offer and repurchased the remaining $546,712 principal of June 2014 Notes for $579,558. The Company s share of the tender offer was $78,101 principal of June 2014 Notes repurchased for $82,794. In September 2009, the Company and WT Finance (collectively, the Issuers ), issued, on a joint and several basis, $2.0 billion of Guaranteed Senior Notes in an offering conducted in accordance with Rule 144A under the Securities Act. The notes consisted of $750 million due in September 2015 with interest payable at 5.75% (the 2015 Notes ), and $1.25 billion due in September 2019 with interest payable at 6.75% (the 2019 Notes ). Concurrently with the issuance of the 2015 and 2019 Notes, the Issuers entered into an agreement (the Co-Issuer Agreement ) setting forth the proceeds that each Issuer received from the offering and obligating each Issuer to pay interest and principal on the 11

14 3. NOTES PAYABLE: (continued) Unsecured Guaranteed Senior Notes: (continued) proceeds received by that Issuer. The Company received proceeds of $1.15 billion from the 2019 Notes which were used to reduce borrowings under the US Syndicated Credit Facility. The Company did not receive any proceeds from the 2015 notes. In May 2011, the Company issued $1.0 billion of Guaranteed Senior Notes due in May 2021 (the 2021 Notes ) with interest payable at 4.625%. The offering was conducted in accordance with Rule 144A under the Securities Act. The Company received all proceeds from the 2021 Notes. In October 2012, the Company, WT Finance and WT Finance (NZ) Limited (collectively, the Issuers ), issued, on a joint and several basis $500 million of Guaranteed Senior Notes due in October 2022 (the 2022 Notes ) with interest payable at 3.375%. The offering was conducted in accordance with Rule 144A under the Securities Act. The Company received proceeds of $300 million from the 2022 Notes. Unsecured Euro Notes: In June 2005, Westfield Europe Finance plc ( WEF ), WT Finance and the Company (collectively, the Issuers ), issued, on a joint and several basis, guaranteed notes in an offering conducted in accordance with Section 83 of the Financial Services and Markets Act 2000 (the FSMA ) and Regulation 13 of the European Communities (Stock Exchange) Regulations 1984 (as amended) of Ireland (the 1984 Regulations ), respectively. The notes consisted of 600,000, due in June 2012 with interest payable at 3.625% (the 2012 Euro Notes ) and UK 600,000, due in June 2017 with interest payable at 5.500% (the 2017 UK Notes ). The 2012 Euro Notes and 2017 UK Notes are guaranteed by WHL, WML and WAML on a several basis, as discussed below. Concurrently with the issuance of the Notes, the Issuers entered into an agreement (the Co-Issuer Agreement ) setting forth the proceeds that each Issuer received from the offering and obligating each issuer to pay interest and principal on the proceeds received by that Issuer. The Company received proceeds of 400,000 from the 2012 Euro Notes which were used to reduce borrowings under the Unsecured Global Syndicated Facility. These notes have been translated based on the currency exchange rates at December This currency translation movement is offset by the related cross currency swap. The Company received no proceeds from the 2017 UK Notes. 12

15 3. NOTES PAYABLE: (continued) Unsecured Euro Notes: (continued) Concurrent with this financing, the Company entered into two cross currency swaps with the same start and termination dates as the 2012 Euro Notes, which essentially converted the proceeds from Euro dollars to US dollars, as well as the interest from a fixed rate payable annually to a variable rate payable monthly. The purpose of the currency swaps was to fix the 2012 Euro Notes in US dollars and resulted in proceeds of $303,250, bearing interest at LIBOR plus % and $181,860 bearing interest at LIBOR plus %, both payable monthly. In April 2009, the issuers of the 2012 Euro Notes repurchased bonds with a face value of 40,000 together with a proportionate close out of the cross currency swap. The Company s share of the repayment was 26,667. This resulted in a gain from early extinguishment of this debt of $7,084 and a realized mark-to-market gain on the close out of the foreign currency and interest rate components of cross currency swap of $896 for the year ended December 31, The foreign currency and the interest rate components of the remaining cross currency swaps have been marked-to-market through maturity (see Note 4). The remaining $452,779 of outstanding balance on the 2012 Euro Notes was repaid at maturity. Cross Guarantees: WHL, WML, as responsible entity of WT, and WAML directly guarantee, on a several basis, the obligations under the US Syndicated Credit Facility, the Group Bilateral Facilities and the 2017 UK Notes, and all issues of Guaranteed Senior Notes, including the payment of principal and interest. Additionally, cross guarantees are in place between the finance subsidiaries of the Westfield Group, including the Company, providing for the guarantee on a joint and several basis of the obligations under the US Syndicated Credit Facility, the Group Bilateral Facilities and the 2017 UK Notes, and all issues of Guaranteed Senior Notes. In the event of non-performance by any of the borrowers or guarantors, the Company would potentially be liable for the entire amount of the US Syndicated Credit Facility, the Group Bilateral Facilities and the 2017 UK Notes, and all issues of Guaranteed Senior Notes. However, the Company has a right of reimbursement against the other guarantors to the extent they make any payment in respect of the obligations of any of the other borrowers as determined by the Co-Issuer Agreement. Additionally, the Member guarantees the performance of all loans made by the Company. The Company does not expect non-performance by the cross guarantors. 13

16 3. NOTES PAYABLE: (continued) Restrictive Covenants: The US Syndicated Credit Facility, the Group Bilateral Facilities and the 2017 UK Notes, and all issues of Guaranteed Senior Notes provide for restrictive covenants relating to the Westfield Group s maintenance of specified financial performance ratios such as debt to asset ratios, secured debt ratios, earnings (as defined) to interest expense and minimum unencumbered assets to unsecured debt. As of December 31, 2013, the Westfield Group was in compliance with these covenants. 4. DERIVATIVE FINANCIAL INSTRUMENTS: Interest Rate Swap Contracts: The Company has entered into interest rate swap contracts to reduce exposure to fluctuations in interest rates and does not enter into interest rate swap contracts for speculative purposes. Interest rate swaps are contractual agreements between the Company and third parties to exchange fixed and floating interest payments periodically without the exchange of the underlying principal amounts (notional amounts). In the unlikely event that a counterparty fails to meet the terms of an interest rate swap contract, the Company s exposure is limited to the interest rate differential on the notional amount. The Company does not anticipate non-performance by any of the counterparties. The agreements consist of current and deferred start interest swaps and involve the receipt or payment of a floating rate based on LIBOR and the payment or receipt of a fixed rate. Interest rate swap agreements with third parties as of December 31, 2013, are summarized as follows: Notional Amount Range of Fixed Rates Range of Maturity Dates Current swaps where the Company is a payer of LIBOR... $ 1,350, % 6.88% 11/17/14 03/02/20 14

17 4. DERIVATIVE FINANCIAL INSTRUMENTS: (continued) Interest Rate Swap Contracts: (continued) The Company has also entered into interest rate swap contracts with the Member based upon the above contracts with third parties. Interest rate swap agreements with the Member as of December 31, 2013, are summarized as follows: Notional Amount Range of Fixed Rates Range of Maturity Dates Current swaps where the Company is a receiver of LIBOR... $ 1,350, % 6.88% 11/17/14 03/02/20 During 2013, the Company terminated deferred fixed rate interest swaps with notional amounts totaling $1,000,000, at a realized loss of $11,945, based on the fair value of the swaps at the date of termination. These swap terminations were transacted in order to eliminate an over-hedged position resulting from previously projected floating rate debt levels not transpiring. The fair value of the interest rate swaps and options with third parties was a net asset representing unrealized gains of $72,860 at December 31, The fair value of the interest rate swaps and options with the Member was a net liability representing unrealized losses of $72,860 December 31, For interest rate swaps with banks and other financial institutions, the Company recognized net interest income of $52,807 for the year ended December 31, related to net current payments and receipts due under the swaps (reflected in interest expense in the accompanying Statements of Operations and Changes in Member s Equity). Additionally, for current interest rate swaps with the Member, the Company recognized net interest expense of $52,807 for the year ended December 31, 2013, (reflected in interest income from Member in the accompanying Statements of Operations and Changes in Member s Equity). 15

18 4. DERIVATIVE FINANCIAL INSTRUMENTS: (continued) Interest Rate Swap Contracts: (continued) The table below presents the amount of gains and losses on derivative instruments which are reported within interest rate swap and foreign currency fair value adjustments with third parties, net and interest rate swap and foreign currency fair value adjustments with Member, net, for the year ended December 31, Interest rate swap adjustment with third parties, net.... $ (33,336) Interest rate swap adjustment with Member, net... 33, NOTES RECEIVABLE FROM MEMBER: In connection with the issuance of all notes payable, the Company has loaned the proceeds to its Member at terms based on the underlying notes payable (see Note 3) and has entered into current and deferred interest rate swap agreements with the Member (see Notes 2 and 4). A summary of notes receivable from the Member is as follows at December 31, 2013: Unsecured variable rate note, bearing interest at LIBOR (0.168% at December 31, 2012) plus a percentage spread based upon the Westfield Group credit rating, payable monthly, maturing in December $ Unsecured fixed rate notes issued in 2004, bearing interest at 5.125%, payable semi-annually, maturing in November Unsecured fixed rate note issued in 2006; bearing interest at 5.7%, payable semi-annually, maturing in October ,000 Unsecured fixed rate notes issued in 2008; bearing interest at 7.125%, payable semi-annually, maturing in April ,100,000 Unsecured fixed rate notes issued in 2009; bearing interest at 7.5%, payable semi-annually, maturing in June Unsecured fixed rate notes issued in 2009; bearing interest at 6.75%, payable semi-annually, maturing in September ,150,000 16

19 5. NOTES RECEIVABLE FROM MEMBER: (continued) Unsecured fixed rate notes issued in 2011; bearing interest at 4.625%, payable semi-annually, maturing in May $ 1,000,000 Unsecured fixed rate notes issued in 2012; bearing interest at 3.375%, payable semi-annually, maturing in October 2022 (the 2022 Notes ) ,000 4,410,000 Less: Deferred loan fees... (41,713) $ 4,368,287 The Company recognized interest income of $298,008 on notes receivable from the Member for the year ended December 31, FINANCIAL INSTRUMENTS: The estimated fair value of the Company s financial instruments has been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to management as of December 31, Management is not aware of any other factors that would significantly affect the estimated fair value amounts. As of December 31, 2013, future estimates of fair value and the amount that may be paid for or realized in the future may differ significantly from the amounts presented herein. Notes Payable and Notes Receivable: To determine the fair market value, the notes payable and notes receivable are discounted at a rate based on current lending rates and the remaining term to maturity. At December 31, 2013, the fair value of the notes payable and notes receivable was $4,957,

20 6. FINANCIAL INSTRUMENTS: (continued) Notes Payable and Notes Receivable: (continued) Currently, the Company uses interest rate swaps to manage interest rate risk resulting from variable interest payments on its floating rate debt. These financial instruments are carried in the balance sheet at fair value based on the assumptions that market participants would use in pricing the asset or liability. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. As a basis for considering market participant assumptions in fair value measurements, the Company uses a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. The Company incorporates credit valuation adjustments to appropriately reflect its own nonperformance risk and the respective counterparty s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. The Company determined all of its derivative valuations are classified in Level 2 of the fair value hierarchy and does not have any fair value measurements using significant unobservable inputs (Level 3) as of December 31,

21 6. FINANCIAL INSTRUMENTS: (continued) Notes Payable and Notes Receivable: (continued) The table below presents the assets and liabilities measured at fair value on a recurring basis as of December 31, 2013, aggregated by the level in the fair value hierarchy within which those measurements fall. Total Quoted Prices Significant Significant Fair Value in Active Other Other Measurement Markets for Observable Unobservable at December 31, Identical Assets Inputs Inputs 2013 (Level 1) (Level 2) (Level 3) Assets Interest rate swaps with third party... $ 72,860 $ $ 72,860 $ Liabilities Interest rate swaps with Member... 72,860 72, COMMITMENTS AND CONTINGENCIES: The Company currently is neither subject to any material litigation nor, to management s knowledge, is any material litigation currently threatened against the Company. 8. NON-CASH INFORMATION: Non-cash investing activity is summarized as follows for the year ended December 31, 2013: Retirement of: Deferred Loan Fees SUBSEQUENT EVENTS: The Company has evaluated subsequent events through March 5, 2014, the date of issuance of the financial statements. No material subsequent events have occurred since December 31, 2013 that required recognition or disclosures in the financial statements. 19

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