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FCE-A > SEC Filings for FCE-A > Form 10-Q on 7-Jun-2012All Recent SEC Filings

Show all filings for FOREST CITY ENTERPRISES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for FOREST CITY ENTERPRISES INC


7-Jun-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") of Forest City Enterprises, Inc. and subsidiaries should be read in conjunction with the financial statements and the footnotes thereto contained in the annual report on Form 10-K for the year ended January 31, 2012.

RESULTS OF OPERATIONS

Corporate Description

We principally engage in the ownership, development, management and acquisition of commercial and residential real estate and land throughout the United States. We operate through three strategic business units and five reportable segments. The Commercial Group, our largest strategic business unit, owns, develops, acquires and operates regional malls, specialty/urban retail centers, office and life science buildings, hotels and mixed-use projects. The Residential Group owns, develops, acquires and operates residential rental properties, including upscale and middle-market apartments and adaptive re-use developments. Additionally, the Residential Group develops for-sale condominium projects and also owns interests in entities that develop and manage military family housing. The Land Development Group acquires and sells both land and developed lots to residential, commercial and industrial customers. It also owns and develops land into master-planned communities and mixed-use projects. On January 31, 2012, our Board of Directors approved a strategic decision by senior management to reposition or divest significant portions of our Land Development Group and is actively reviewing alternatives to do so. See further discussion under "Land Development Group" in this section.

Corporate Activities and The Nets, a member of the National Basketball Association ("NBA") in which we account for our investment on the equity method of accounting, are other reportable segments of ours.

We have approximately $10.5 billion of consolidated assets in 28 states and the District of Columbia at April 30, 2012. Our core markets include Boston, Chicago, Dallas, Denver, Los Angeles, New York, Philadelphia, the Greater San Francisco metropolitan area and the Greater Washington D.C. metropolitan area. We have offices in Albuquerque, Boston, Chicago, Dallas, Denver, London (England), Los Angeles, New York City, San Francisco, Washington, D.C., and our corporate headquarters in Cleveland, Ohio.

Significant milestones occurring during the first quarter of 2012 include:

The announcement that our Board of Directors has determined to reduce the authorized size of the Board from fifteen members to thirteen, effective with our Annual Meeting of Shareholders in June 2012 ("Annual Meeting"). Two non-independent directors, James A. Ratner and Joan K. Shafran, will complete their current terms and will not be re-nominated at the Annual Meeting. This planned change will allow for the election or appointment of an independent director, once a suitable candidate is identified, which is expected to result in a majority of independent directors serving on our Board;

The announcement that we will be changing our fiscal year end from January 31 to December 31, effective with the year ended December 31, 2013 and that we will begin reporting Funds From Operations beginning with our first quarter 2012 results;

The receipt of $33,000,000 from Rock Ohio Caesars Cleveland LLC, as the final installment of the previously announced $85,000,000 air and land rights sale related to the development of a casino in downtown Cleveland. In total, the transaction involved 16 acres of land and related air rights adjacent to Forest City's Tower City Center mixed-use complex;

The sale of Quebec Square, a specialty retail center in Denver, Colorado for a sales price of $34,250,000. The sale generated net cash proceeds of approximately $8,500,000. The disposition of this specialty retail center is part of our retail strategy to divest non-core products;

The opening of our 80,000 square foot anchor tenant, Lord and Taylor, in April 2012 at Westchester's Ridge Hill, a mixed-use retail project located in Yonkers, New York;

The opening of The Aster Town Center, a 85 unit apartment community located at our Stapleton project in Denver, Colorado;

The dedication of the newly completed Las Vegas City Hall, which we developed for the City of Las Vegas on a fee basis as part of a public-private partnership; and


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Closing $149,210,000 in nonrecourse mortgage financing transactions.

In addition, subsequent to April 30, 2012, we achieved the following significant milestones:

The grand opening of the Horseshoe Casino on May 14, 2012, which occupies 303,000 square feet of space in the Higbee Building, which is adjacent to our Tower City Center mixed-use complex located in the heart of downtown Cleveland, Ohio and is the home of the first casino in the state; and

Addressing $202,482,000 of nonrecourse mortgage debt financings that would have matured during the year ended January 31, 2013, through closed transactions, commitments and/or automatic extensions.

Net Earnings Attributable to Forest City Enterprises, Inc. - Net earnings attributable to Forest City Enterprises, Inc. for the three months ended April 30, 2012 was $22,752,000 versus $46,343,000 for the three months ended April 30, 2011. Although we have substantial recurring revenue sources from our properties, we also enter into significant transactions, which create substantial variances in net earnings (loss) between periods. This variance to the prior year period is primarily attributable to the following decreases, which are net of noncontrolling interest:

$42,622,000 related to the 2011 sale of an approximate 6 acre land parcel and air rights for development of a casino in downtown Cleveland, Ohio;

$12,567,000 related to the 2011 gains on disposition of our unconsolidated investments in Metropolitan Lofts and Twin Lake Towers, apartment communities in Los Angeles, California and Denver, Colorado, respectively;

$9,561,000 due to the 2011 gain on disposition of partial interests in 15 retail properties in the New York City metropolitan area, related to the formation of new joint venture agreements with an outside partner;

$6,654,000 related to a 2012 increase in allocated losses from our equity investment in The Nets (see "The Nets" section of the MD&A);

$5,157,000 related to a decrease in income recognized on the sale of state and federal Historic Preservation Tax Credits and New Market Tax Credits in 2012 compared to 2011; and

$2,124,000 related to the 2011 gain on disposition of Charleston Marriott, a hotel in Charleston, West Virginia, offset by the 2012 gain on disposition of Quebec Square.

These decreases were partially offset by the following increases, net of noncontrolling interest:

$36,484,000 related to the 2012 sale of an approximate 10 acre land parcel and air rights for development of a casino in downtown Cleveland, Ohio;

$3,678,000 related to the change in fair market value of certain derivatives between the comparable periods, which was marked to market through interest expense as a result of the derivatives not qualifying for hedge accounting;

$3,454,000 related to the 2012 decrease in impairment charges of consolidated entities; and

$9,145,000 due to decreased income tax expense attributable to both continuing and discontinued operations primarily related to the fluctuations in earnings before income taxes and pre-tax earnings, including gains in discontinued operations. These fluctuations are primarily related to the various transactions discussed herein.


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Net Operating Income

Net Operating Income ("NOI") is defined as revenues (excluding straight-line rent adjustments) less operating expenses (including depreciation and amortization and amortization of mortgage procurement costs for non-real estate groups) plus interest income plus equity in earnings (loss) of unconsolidated entities (excluding gain on disposition and impairment of unconsolidated entities) plus interest expense, gain (loss) on early extinguishment of debt, depreciation and amortization of unconsolidated entities. We believe NOI provides us, as well as our investors, additional information about our core business operations and, along with earnings, is necessary to understand our business and operating results. A reconciliation between NOI and Net Earnings
(Loss), the most comparable financial measure calculated in accordance with accounting principles generally accepted in the United States of America ("GAAP"), is presented below. Although NOI is not presented in accordance with GAAP, investors can use this non-GAAP measure as supplementary information to evaluate our business. NOI is not intended to be a performance measure that should be regarded as an alternative to, or more meaningful than, our GAAP measures.

Reconciliation of Net Operating Income (non-GAAP) to Net Earnings (GAAP) (in thousands):

                                           Three Months April 30, 2012             Three Months April 30, 2011
Revenues from real estate operations                       $       296,652                           $     304,180
Exclude straight-line rent
adjustment                                                          (5,624 )                                (3,099 )

Adjusted revenues                                                  291,028                                 301,081
Add interest and other income                                       10,679                                  15,507
Add equity in earnings of
unconsolidated entities                        3,773                                   19,994
Exclude gain on disposition of
unconsolidated entities                           -                                   (12,567 )
Exclude depreciation and
amortization of unconsolidated
entities                                      19,998                                   14,308
Exclude interest expense of
unconsolidated entities                       26,332                                   23,107

Total NOI from unconsolidated
entities                                      50,103                50,103             44,842               44,842

Total adjusted revenues and NOI from
unconsolidated entities                                            351,810                                 361,430
Operating expenses                                                 166,851                                 160,689
Add back non-Real Estate
depreciation and amortization                                          620                                     702
Exclude straight-line rent
adjustment                                                            (792 )                                (1,211 )
Exclude preference payment                                              -                                     (585 )

Adjusted operating expenses                                        166,679                                 159,595


Net operating income                                               185,131                                 201,835

Interest expense                                                   (58,516 )                               (66,181 )
Loss on early extinguishment of debt                                  (719 )                                  (296 )
Total NOI of unconsolidated entities                               (50,103 )                               (44,842 )
Net gain on disposition of rental
properties and partial interests in
rental properties                                                       -                                    9,561
Impairment of consolidated real
estate                                                              (1,381 )                                (4,835 )
Depreciation and amortization-Real
Estate Groups                                                      (52,213 )                               (55,151 )
Amortization of mortgage procurement
costs-Real Estate Groups                                            (2,869 )                                (2,882 )
Straight-line rent adjustment                                        4,832                                   1,888
Preference payment                                                      -                                     (585 )


Earnings before income taxes                                        24,162                                  38,512

Income tax expense                                                  (9,573 )                               (17,749 )
Equity in earnings of unconsolidated
entities                                                             3,773                                  19,994


Earnings from continuing operations                                 18,362                                  40,757

Discontinued operations, net of tax                                  5,411                                   6,716


Net earnings                                                        23,773                                  47,473

Noncontrolling interests
(Earnings) loss from continuing
operations attributable to
noncontrolling interests                                               (48 )                                   598
Earnings from discontinued
operations attributable to
noncontrolling interests                                              (973 )                                (1,728 )

Noncontrolling interests                                            (1,021 )                                (1,130 )


Net earnings attributable to Forest
City Enterprises, Inc.                                     $        22,752                           $      46,343


Preferred dividends                                                 (3,850 )                                (3,850 )

Net earnings attributable to Forest
City Enterprises, Inc. common
shareholders                                               $        18,902                           $      42,493


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Net Operating Income by Product Type

Full Consolidation (dollars in thousands)

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(1) Includes limited-distribution subsidized senior housing.

(2) Includes write-offs of abandoned development projects, non-capitalized development costs, non-capitalizable marketing/promotional costs associated with Barclays Center and unallocated management and service company overhead, net of tax credit income.


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EBDT and FFO

We believe that Earnings Before Depreciation, Amortization and Deferred Taxes ("EBDT"), along with net earnings, provides additional information about our core operations. While property dispositions, acquisitions or other factors can affect net earnings in the short-term, we believe EBDT presents a more consistent view of the overall financial performance of our business from period-to-period. EBDT has been used by the chief operating decision maker and management to assess performance and resource allocations by strategic business unit and on a consolidated basis. EBDT is similar, but not identical, to FFO (as defined below), a measure of performance used by publicly traded Real Estate Investment Trusts ("REITs").

EBDT is defined as net earnings excluding the following items: i) gain (loss) on disposition of rental properties, divisions and other investments (net of tax);
ii) the adjustment to recognize rental revenues and rental expense using the straight-line method; iii) non-cash charges for real estate depreciation, amortization, and amortization of mortgage procurement costs; iv) deferred income taxes; v) preferred payment which is classified as noncontrolling interest expense on our Consolidated Statement of Operations; vi) impairment of real estate (net of tax); vii) extraordinary items (net of tax); viii) cumulative or retrospective effect of change in accounting principle (net of tax); and ix) revisions of prior period financial statements.

The majority of our peers in the publically traded real estate industry are REITs and report operations using Funds From Operations ("FFO") as defined by the National Association of Real Estate Investment Trusts ("NAREIT"). Although we are not a REIT, we feel it is important to publish this measure to allow for easier comparison of our performance to our peers. The major difference between us and our REIT peers is that we are a taxable entity and any taxable income we generate could result in payment of federal or state income taxes. Our REIT peers typically are not subject to federal or state income taxes, but must pay out a portion of their taxable income to shareholders. Due to our effective tax management policies, we have not historically been a significant payer of income taxes. This has allowed us to retain our internally generated cash flows but has also resulted in large expenses for deferred taxes as required by GAAP. The treatment of deferred taxes is the single biggest difference between EBDT and FFO. We intend to continue to report both EBDT and FFO during the fiscal year ending January 31, 2013. Effective February 1, 2013, we will only report FFO and remove deferred taxes and any other industry accepted exclusion to arrive at Adjusted FFO to be more comparable to our industry peers.

FFO is defined by NAREIT as net earnings excluding the following items: i) gain
(loss) on disposition of rental properties, divisions and other investments (net of tax); ii) non-cash charges for real estate depreciation and amortization;
iii) impairment of depreciable real estate (net of tax); iv) extraordinary items (net of tax); and v) cumulative or retrospective effect of change in accounting principle (net of tax).

The table below will illustrate the differences between FFO and our historical reporting of EBDT. The table will also reconcile these non-GAAP measures to net earnings, the most comparable GAAP measure.

                                             Three Months Ended April 30, 2012              Three Months Ended April 30, 2011
                                               FFO                     EBDT                   FFO                      EBDT
                                                      (in thousands)                                 (in thousands)
Net earnings attributable to Forest
City Enterprises, Inc.                    $       22,752         $         22,752       $         46,343         $         46,343
Depreciation and Amortization-Real
Estate Groups                                     70,417                   70,417                 68,829                   68,829
Impairment of depreciable rental
properties                                         1,381                    1,381                  3,435                    3,435
Gain on disposition of rental
properties and partial interests in
rental properties                                 (7,914 )                 (7,914 )              (32,166 )                (32,166 )

Income tax expense (benefit) on
non-operating earnings (loss)-current
and deferred (1)
Gain on disposition of rental
properties and partial interests in
rental properties                                  3,052                    3,052                 12,467                   12,467
Impairment of depreciable rental
properties                                          (536 )                   (536 )               (1,332 )                 (1,332 )

Straight-line rent adjustments                                             (4,835 )                                        (2,224 )
Impairment of Land Group projects                                              -                                            1,400
Deferred taxes on impairment of Land
Group projects (1)                                                             -                                             (543 )
Deferred income tax expense on
operating earnings (1)                                                     14,492                                          24,950
Amortization of mortgage procurement
costs-Real Estate Groups                                                    3,623                                           3,632
Preference payment                                                             -                                              585
Allowance for projects under
development revision                                                           -                                            2,000

FFO/EBDT                                  $       89,152         $        102,432       $         97,576         $        127,376


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EBDT and FFO (continued)



                                       Three Months Ended April 30, 2012               Three Months Ended April 30, 2011
                                           FFO                     EBDT                    FFO                     EBDT
FFO/EBDT Per Share
Data-Diluted
Numerator (in thousands):
FFO/EBDT                            $          89,152         $      102,432        $          97,576         $      127,376
If-Converted Method
(adjustments for interest, net
of tax):
3.625% Puttable Senior Notes
due 2014                                        1,110                  1,110                    1,110                  1,110
5.00% Convertible Senior Notes
due 2016                                          382                    382                      688                    688
4.25% Convertible Senior Notes
due 2018                                        2,277                  2,277                       -                      -

FFO/EBDT for per share data         $          92,921         $      106,201        $          99,374         $      129,174

Denominator:
Weighted average shares
outstanding-Basic                         169,206,594            169,206,594              165,498,904            165,498,904
Effect of stock options and
restricted stock                              937,272                937,272                1,054,102              1,054,102
Effect of convertible
preferred stock                            14,550,257             14,550,257               14,550,257             14,550,257
Effect of convertible debt                 33,499,503             33,499,503               20,225,204             20,225,204
Effect of convertible Class A
Common Units                                3,646,755              3,646,755                3,646,755              3,646,755

Weighted average shares
outstanding-Diluted                       221,840,381            221,840,381              204,975,222            204,975,222


FFO/EBDT Per Share                  $            0.42         $         0.48        $            0.48         $         0.63

(1) The following table provides detail of Income Tax Expense (Benefit):

                                                          Three Months Ended April 30,
                                                          2012                   2011
Current taxes
Operating earnings                                    $      (3,736 )       $       (12,671 )
Gain on disposition of rental properties and
partial interests in rental properties                        4,865                  30,304

Subtotal                                                      1,129                  17,633

Discontinued operations
Operating earnings                                             (169 )                  (623 )
Gain on disposition of rental properties and
partial interests in rental properties                          680                   1,201

Subtotal                                                        511                     578

Total Current taxes                                           1,640                  18,211


Deferred taxes
Operating earnings                                           14,302                  24,540
Gain on disposition of rental properties and
partial interests in rental properties                       (5,322 )               (22,549 )
Impairment of depreciable rental properties                    (536 )                (1,332 )
Impairment of Land Group projects                                -                     (543 )

Subtotal                                                      8,444                     116


Discontinued operations
Operating earnings                                              190                     410
Gain on disposition of rental properties and
partial interests in rental properties                        2,829                   3,511

Subtotal                                                      3,019                   3,921

Total Deferred taxes                                         11,463                   4,037


Grand Total                                           $      13,103         $        22,248


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Summary of Segment Operating Results - The following tables present a summary of revenues from real estate operations, operating expenses, interest expense, equity in earnings (loss) of unconsolidated entities and impairment of unconsolidated entities by segment. See discussion of these amounts by segment in the narratives following the tables.

                                                           Three Months Ended April 30,
                                                      2012             2011           Variance
                                                                  (in thousands)
Revenues from Real Estate Operations
Commercial Group                                    $ 179,191        $ 196,334        $ (17,143 )
Commercial Group Land Sales                            40,000           46,252           (6,252 )
Residential Group                                      65,305           53,504           11,801
Land Development Group                                 12,156            8,090            4,066
The Nets                                                   -                -                -
Corporate Activities                                       -                -                -

Total Revenues from Real Estate Operations          $ 296,652        $ 304,180        $  (7,528 )


Operating Expenses
Commercial Group                                    $  93,988        $  97,539        $  (3,551 )
Cost of Commercial Group Land Sales                     3,516            2,521              995
Residential Group                                      44,939           36,777            8,162
Land Development Group                                 11,677            9,225            2,452
The Nets                                                   -                -                -
Corporate Activities                                   12,731           14,627           (1,896 )

Total Operating Expenses                            $ 166,851        $ 160,689        $   6,162


Interest Expense
Commercial Group                                    $  38,822        $  45,224        $  (6,402 )
Residential Group                                       4,348            6,214           (1,866 )
Land Development Group                                  1,751              824              927
. . .
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