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. During the nine months ended October 31, 2012, we established and continued to execute on our land divestiture strategy. See further discussion under "Land Held for Divestiture Activities" 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 $10.7 billion of consolidated assets in 27 states and the District of Columbia at October 31, 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, Los Angeles, New York City, San Francisco, Washington, D.C., and our corporate headquarters in Cleveland, Ohio.
While certain of our assets, primarily in the New York metropolitan area, Boston and other Midwest markets, sustained varying levels of storm damage as a result of Hurricane Sandy, we do not expect any of the damage to have a material effect on our future operations or cash flows.
Significant milestones occurring during the third quarter of 2012 include:
• The opening of Barclays Center, a state-of-the-art arena located in Brooklyn, New York and the anchor of our Atlantic Yards mixed-use project. This 670,000 square foot world-class arena is the home to Brooklyn Nets basketball, future home of the New York Islanders and will host more than 200 cultural and sporting events annually. The site also includes a new Atlantic Avenue-Barclays Center subway entrance and the arena is designed to meet LEED guidelines;

• The privately negotiated exchange of $133,724,000 aggregate amount of liquidation preference consisting of 2,674,471 shares of our Series A Cumulative Perpetual Convertible preferred stock for 8,844,204 shares of our Class A common stock and a cash payment of $13,881,000 for additional exchange consideration;

• Closing a two-year extension, with an additional one-year option, of the previous $497,000,000 nonrecourse construction mortgage secured by Westchester's Ridge Hill, a mixed-use retail project located in Yonkers, New York. As a result of the extension, we are required to make principal paydowns aggregating $32,000,000 over the next ten months, resulting in a $465,000,000 nonrecourse construction mortgage financing on the project. This extension provides us additional time to complete lease-up, stabilize the project and position the asset for permanent financing;

• The sale of White Oak Village, a specialty retail center in Richmond, Virginia, for a sales price of $68,000,000, which generated net cash proceeds of approximately $13,000,000;

• The sale of Southfield, an apartment community in Whitemarsh, Maryland, for a sales price of $32,650,000, which generated net cash proceeds of approximately $16,900,000;

• The opening of Botanica Eastbridge, a 118 unit apartment community located at our Stapleton project in Denver, Colorado;

• Commencing construction on two projects located at The Yards, our mixed-use project in the Capital Riverfront District of Washington D.C. The first is Twelve12, a mixed-use project with 218 apartments above street level retail, including a grocery store and fitness center. Our second new start is Lumber Shed, a 32,000 square-foot, mixed-use project with street-level restaurants featuring outdoor seating to take advantage of its location along the Anacostia River:

• Commencing construction of Stratford Avenue, a 128 unit apartment community in Fairfield, Connecticut; and

• Commencing construction of 120 Kingston, a 240 unit apartment community within the Chinatown district of downtown Boston, Massachusetts.

In addition, subsequent to October 31, 2012, we achieved the following significant milestones:
• The announcement of Kenneth J. Bacon, co-founder of RailField Partners and presiding director of the board for Comcast Corporation, as a new Class B member of our board of directors, which was effective December 3, 2012; and

• Addressing $70,598,000 of the remaining $180,643,000 of nonrecourse mortgage debt financings that would have matured during the year ending January 31, 2013, through closed transactions, commitments and/or automatic extensions.

Net Earnings (Loss) Attributable to Forest City Enterprises, Inc. - Net loss attributable to Forest City Enterprises, Inc. for the three months ended October 31, 2012 was $1,078,000 versus $36,801,000 for the three months ended October 31, 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 increases, which are net of noncontrolling interest:
• $21,632,000 related to a 2012 decrease in impairment charges of consolidated (including discontinued operations) and unconsolidated entities;

• $19,299,000 related to the 2012 gains on disposition of rental properties;

• $4,092,000 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;

• $3,806,000 related to a 2012 decrease in allocated losses from our equity investment in The Nets; and

• $2,285,000 of decreased write-offs of abandoned development projects in 2012 compared with 2011.

These increases were partially offset by the following decreases, net of noncontrolling interest:
• $7,235,000 related to decreased gains on extinguishment of debt in 2012 compared with 2011;

• $5,849,000 related to the 2011 gain on disposition of partial interest in rental properties; and

• $6,559,000 due to increased income tax expense attributable to both continuing and discontinued operations primarily related to the fluctuations in pre-tax earnings, including gains in discontinued operations. These fluctuations are primarily related to the various transactions discussed herein.

Net loss attributable to Forest City Enterprises, Inc. for the nine months ended October 31, 2012 was $22,043,000 versus net earnings of $18,900,000 for the nine months ended October 31, 2011. This variance to the prior year period is primarily attributable to the following decreases, which are net of noncontrolling interest:
• $51,575,000 related to the net loss on land held for divestiture activities for fully consolidated land projects and land projects accounted for under the equity method of accounting;

• $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;

• $15,410,000 due to the 2011 gain on disposition of partial interests in rental properties;

• $12,724,000 related to 2011 gains on disposition of rental properties exceeding 2012 gains;

• $8,072,000 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 with 2011;

• $7,738,000 related to a 2012 increase in allocated losses from our equity investment in The Nets; and

• $5,823,000 of increased write-offs of abandoned development projects in 2012 compared with 2011.

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;

• $21,762,000 related to a 2012 decrease in impairment charges of consolidated (including discontinued operations) and unconsolidated entities;

• $11,106,000 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;

• $6,033,000 primarily related to higher land sales at our Stapleton project in Denver, Colorado in 2012 compared with 2011;

• $4,064,000 related to the net gain on change in control of interests related to the acquisition of our partners' interests in certain equity method investments during the three months ended July 31, 2012. The gain represents the adjustment to fair value of all of the assets and liabilities of the entities including the noncontrolling interests of the remaining partner;

• $3,540,000 related to 2012 gains on disposition of our unconsolidated investments exceeding 2011 gains; and

• $18,969,000 due to decreased income tax expense attributable to both continuing and discontinued operations primarily related to the fluctuations in pre-tax earnings, including gains in discontinued operations. These fluctuations are primarily related to the various transactions discussed herein.

Net Operating Income
We define Net Operating Income ("NOI") 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 (Loss) (GAAP) (in thousands):

                                       Nine Months Ended October      Nine Months Ended October
                                                31, 2012                       31, 2011
Revenues from real estate operations                 $   843,067                    $   794,189
Exclude straight-line rent adjustment                    (13,145 )                       (5,465 )
Adjusted revenues                                        829,922                        788,724
Add interest and other income                             34,768                         42,110
Add equity in earnings (loss) of
unconsolidated entities, including
impairment                            $   (17,933 )                  $   (17,637 )
Exclude net loss on land held for
divestiture of unconsolidated
entities                                   42,170                              -
Exclude gain on disposition of
unconsolidated entities                   (16,107 )                      (12,567 )
Exclude impairment of unconsolidated
real estate                                   390                         41,289
Exclude depreciation and amortization
of unconsolidated entities                 60,415                         49,881
Exclude interest expense of
unconsolidated entities                    76,230                         74,501
Exclude loss on extinguishment of
debt of unconsolidated entities             1,313                            480
Total NOI from unconsolidated
entities                              $   146,478        146,478     $   135,947        135,947
Total adjusted revenues and NOI from
unconsolidated entities                                1,011,168                        966,781
Operating expenses                                       523,261                        472,728
Add back non-Real Estate depreciation
and amortization                                           2,233                          2,400
Exclude straight-line rent adjustment                     (1,807 )                       (3,395 )
Exclude preference payment                                     -                         (1,756 )
Adjusted operating expenses                              523,687                        469,977
Net operating income                                     487,481                        496,804
Interest expense                                        (188,640 )                     (192,545 )
Gain on extinguishment of debt                             7,288                          9,334
Net loss on land held for divestiture
activity                                                  (5,651 )                            -
Total NOI of unconsolidated entities                    (146,478 )                     (135,947 )
Net gain on disposition of rental
properties and partial interests in
rental properties                                              -                         15,410
Impairment of consolidated real
estate                                                   (30,660 )                       (2,085 )
Depreciation and amortization-Real
Estate Groups                                           (161,414 )                     (158,488 )
Amortization of mortgage procurement
costs-Real Estate Groups                                  (9,054 )                       (8,791 )
Straight-line rent adjustment                             11,338                          2,070
Preference payment                                             -                         (1,756 )
Earnings (loss) before income taxes                      (35,790 )                       24,006
Income tax benefit (expense)                              16,698                           (848 )
Net gain on change in control of
interests                                                  6,766                              -

Equity in earnings (loss) of
unconsolidated entities, including
impairment                                                24,237                        (17,637 )
Net loss on land held for divestiture
activity of unconsolidated entities                      (42,170 )                            -
                                                         (17,933 )                      (17,637 )
Earnings (loss) from continuing
operations                                               (30,259 )                        5,521
Discontinued operations, net of tax                       14,501                         99,475
Net earnings (loss)                                      (15,758 )                      104,996
Noncontrolling interests
Earnings from continuing operations
attributable to noncontrolling
interests                                                 (4,827 )                       (1,871 )
Earnings from discontinued operations
attributable to noncontrolling
interests                                                 (1,458 )                      (84,225 )
Noncontrolling interests                                  (6,285 )                      (86,096 )
Net earnings (loss) attributable to
Forest City Enterprises, Inc.                        $   (22,043 )                  $    18,900
Preferred dividends and inducements
of preferred stock conversion                            (25,431 )                      (11,550 )
Net earnings (loss) attributable to
Forest City Enterprises, Inc. common
shareholders                                         $   (47,474 )                  $     7,350

Net Operating Income by Product Type
Full Consolidation (dollars in thousands)
Nine Months Ended October 31, 2012    Nine Months Ended October 31, 2011


                               [[Image Removed]]
       NOI by Product Type    $   547,430                 NOI by Product Type    $   516,159
       Casino Land Sale            36,484                 Casino Land Sale            42,622
       Arena                       (9,231 )               Arena                       (6,561 )
       The Nets                   (22,707 )               The Nets                   (14,969 )
       Corporate Activities       (41,390 )               Corporate Activities       (37,452 )
       Other (2)                  (23,105 )               Other (2)                   (2,995 )
       Grand Total NOI        $   487,481                 Grand Total NOI        $   496,804

(1) Includes limited-distribution subsidized senior housing.
(2) Includes write-offs of abandoned development projects and unallocated management and service company overhead, net of tax credit income.

EBDT and FFO
We believe that Earnings Before Depreciation, Amortization and Deferred Taxes ("EBDT") and Funds From Operations ("FFO"), 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 and FFO present 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 at our proportional share: 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 publicly traded real estate industry are REITs and report operations using 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 to be more comparable to our industry peers.
FFO is defined by NAREIT as net earnings excluding the following items at our proportional share: 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).

EBDT and FFO (continued)
The table below illustrates the differences between FFO and our historical
reporting of EBDT and reconciles these non-GAAP measures to net earnings (loss),
the most comparable GAAP measure.
                                     Three Months Ended October    Three Months Ended October   Nine Months Ended October    Nine Months Ended October
                                              31, 2012                      31, 2011                     31, 2012                     31, 2011
                                          FFO           EBDT            FFO          EBDT            FFO          EBDT            FFO          EBDT
                                                                                       (in thousands)
Net earnings (loss) attributable to
Forest City Enterprises, Inc.        $   (1,078 )   $   (1,078 )   $  (36,801 )  $  (36,801 )   $  (22,043 )  $  (22,043 )   $   18,900    $   18,900
Depreciation and Amortization-Real
Estate Groups(1)                         73,526         73,526         71,304        71,304        216,436       216,436        209,062       209,062
Impairment of depreciable rental
properties                               30,364         30,364         49,446        49,446         35,304        35,304         53,116        53,116
Gain on disposition of rental
properties and partial interests in
rental properties                       (19,299 )      (19,299 )       (5,849 )      (5,849 )      (43,320 )     (43,320 )      (67,914 )     (67,914 )
Income tax expense (benefit)
adjustments - current and
deferred(2)
Gain on disposition of rental
properties and partial interests in
rental properties                         7,893          7,893          2,275         2,275         17,174        17,174         26,339        26,339
Impairment of depreciable rental
properties                              (11,776 )      (11,776 )      (19,177 )     (19,177 )      (13,692 )     (13,692 )      (20,600 )     (20,600 )
Straight-line rent adjustments                -         (3,107 )            -        (3,268 )            -       (11,717 )            -        (2,995 )
Net gain on change in control of
interests                                     -              -              -             -              -        (4,064 )            -             -
Net (gain) loss on land held for
divestiture activity                          -           (277 )            -             -              -        51,575              -             -
Impairment of Land Group projects             -              -              -         2,550              -             -              -         3,950
Amortization of mortgage procurement
costs-Real Estate Groups                      -          3,364              -         4,052              -        11,340              -        11,099
Preference payment                            -              -              -           585              -             -              -         1,756
Allowance for projects under
development revision                          -              -              -        (2,000 )            -             -              -        (2,000 )
Income tax expense (benefit)
adjustments - current and
deferred(2)
Deferred income tax expense
(benefit) on operating earnings               -         (2,547 )            -        15,349              -        17,655              -        46,378
Impairment of Land Group projects             -              -              -          (989 )            -             -              -        (1,532 )
Net gain (loss) on land held for
divestiture activity                          -            115              -             -              -       (20,003 )            -             -
Net gain on change in control of
interests                                     -              -              -             -              -         1,576              -             -
FFO/EBDT                             $   79,630     $   77,178     $   61,198    $   77,477     $  189,859    $  236,221     $  218,903    $  275,559


                                                 Three Months Ended October 31, 2012     Three Months Ended October 31, 2011     Nine Months Ended October 31, 2012      Nine Months Ended October 31, 2011
                                                         FFO               EBDT                  FFO               EBDT                  FFO               EBDT                  FFO               EBDT
FFO/EBDT Per Share - Diluted
Numerator (in thousands):
FFO/EBDT                                        $            79,630   $      77,178     $            61,198   $      77,477     $           189,859   $     236,221     $           218,903   $     275,559
If-Converted Method (adjustments for interest,
net of tax):
3.625% Puttable Senior Notes due 2014                         1,110           1,110                   1,110           1,110                   3,329           3,329                   3,329           3,329
5.00% Convertible Senior Notes due 2016                         382             382                     382             382                   1,148           1,148                   1,485           1,485
4.25% Convertible Senior Notes due 2018                       2,277           2,277                   2,277           2,277                   6,830           6,830                   2,605           2,605
FFO/EBDT for per share data                     $            83,399   $      80,947     $            64,967   $      81,246     $           201,166   $     247,528     $           226,322   $     282,978
Denominator
Weighted average shares outstanding-Basic               170,777,898     170,777,898             169,150,429     169,150,429             169,817,482     169,817,482             167,838,122     167,838,122
. . .