XNYS:FCEB Forest City Enterprises Inc Class B Quarterly Report 10-Q Filing - 4/30/2012

Effective Date 4/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2012

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                 

Commission file number 1-4372

 

 

FOREST CITY ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Ohio     34-0863886

(State or other jurisdiction of

incorporation or organization)

   

(I.R.S. Employer

Identification No.)

Terminal Tower

Suite 1100

 

50 Public Square

Cleveland, Ohio

  44113
(Address of principal executive offices)   (Zip Code)

216-621-6060

Registrant’s telephone number, including area code

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding, including unvested restricted stock, of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

   Outstanding at May 31, 2012

Class A Common Stock, $.33 1/3 par value

   150,848,084 shares

Class B Common Stock, $.33 1/3 par value

   20,899,371 shares

 

 

 


Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Table of Contents

 

 

          Page  
PART I. FINANCIAL INFORMATION   

        Item 1.

   Financial Statements   
   Forest City Enterprises, Inc. and Subsidiaries   
  

Consolidated Balance Sheets April 30, 2012 and January 31, 2012

     2   
  

Consolidated Statements of Operations Three Months Ended April 30, 2012 and 2011

     3   
  

Consolidated Statements of Comprehensive Income (Loss) Three Months Ended April 30,  2012 and 2011

     4   
  

Consolidated Statements of Equity Three Months Ended April 30,  2012 and Year Ended January 31, 2012

     5   
  

Consolidated Statements of Cash Flows Three Months Ended April 30, 2012 and 2011

     6   
   Notes to Consolidated Financial Statements      8   

        Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      26   

        Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      46   

        Item 4.

   Controls and Procedures      51   
PART II. OTHER INFORMATION   

        Item 1.

   Legal Proceedings      51   

        Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      51   

        Item 6.

   Exhibits      52   

        Signatures

     53   

        Certifications

  

 

i


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Forest City Enterprises, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

 

     April 30, 2012        
      (Unaudited)     January 31, 2012  
     (in thousands)  

Assets

    

Real Estate

    

Completed rental properties

   $ 7,261,572      $ 7,183,448   

Projects under construction and development

     2,423,580        2,328,979   

Land held for development and sale

     80,185        77,298   
  

 

 

   

 

 

 

Total Real Estate

     9,765,337        9,589,725   

Less accumulated depreciation

     (1,561,063     (1,526,503
  

 

 

   

 

 

 

Real Estate, net—(variable interest entities $2,203.6 million and $2,103.8 million, respectively)

     8,204,274        8,063,222   

Cash and equivalents—(variable interest entities $23.2 million and $17.8 million, respectively)

     287,678        217,486   

Restricted cash and escrowed funds—(variable interest entities $ 190.4 million and $348.1million, respectively)

     385,116        542,566   

Notes and accounts receivable, net

     375,974        406,244   

Investments in and advances to unconsolidated entities

     619,510        609,079   

Other assets—(variable interest entities $132.0 million and $130.8 million, respectively)

     600,570        608,541   

Land held for divestiture

     58,114        57,145   
  

 

 

   

 

 

 

Total Assets

   $ 10,531,236      $ 10,504,283   
  

 

 

   

 

 

 

Liabilities and Equity

    

Liabilities

    

Mortgage debt and notes payable, nonrecourse—(variable interest entities $1,144.9 million and $1,122.0 million, respectively)

   $ 5,671,705      $ 5,640,439   

Bank revolving credit facility

     —          —     

Senior and subordinated debt—(variable interest entities $29.0 million as of each period)

     1,038,610        1,038,529   

Accounts payable, accrued expenses and other liabilities—(variable interest entities $187.3 million and $171.0 million, respectively)

     1,068,924        1,112,462   

Cash distributions and losses in excess of investments in unconsolidated entities

     278,756        279,708   

Deferred income taxes

     448,520        433,040   

Mortgage debt and notes payable, nonrecourse of land held for divestiture

     18,171        19,084   
  

 

 

   

 

 

 

Total Liabilities

     8,524,686        8,523,262   

Redeemable Noncontrolling Interest

     230,438        229,149   

Commitments and Contingencies

     —          —     

Equity

    

Shareholders’ Equity

    

Preferred stock—7.0% Series A cumulative perpetual convertible, without par value, $50 liquidation preference; 6,400,000 shares authorized; 4,399,998 shares issued and outstanding

     220,000        220,000   

Preferred stock—without par value; 13,600,000 shares authorized; no shares issued

     —          —     

Common stock—$.33 1/3 par value

    

Class A, 371,000,000 shares authorized, 148,687,783 and 148,336,178 shares issued and 148,501,425 and 148,227,849 shares outstanding, respectively

     49,563        49,445   

Class B, convertible, 56,000,000 shares authorized, 20,911,371 and 20,934,335 shares issued and outstanding, respectively; 26,257,961 issuable

     6,970        6,978   
  

 

 

   

 

 

 

Total common stock

     56,533        56,423   

Additional paid-in capital

     742,283        740,988   

Retained earnings

     590,891        571,989   

Less treasury stock, at cost; 186,358 and 108,329 Class A shares, respectively

     (3,043     (1,874
  

 

 

   

 

 

 

Shareholders’ equity before accumulated other comprehensive loss

     1,606,664        1,587,526   

Accumulated other comprehensive loss

     (114,339     (120,460
  

 

 

   

 

 

 

Total Shareholders’ Equity

     1,492,325        1,467,066   

Noncontrolling interest

     283,787        284,806   
  

 

 

   

 

 

 

Total Equity

     1,776,112        1,751,872   
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 10,531,236      $ 10,504,283   
  

 

 

   

 

 

 

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

 

2


Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

     Three Months Ended April 30,  
     2012     2011  
     (in thousands, except per share data)  

Revenues from real estate operations

   $ 296,652      $ 304,180   

Expenses

    

Operating expenses

     166,851        160,689   

Depreciation and amortization

     52,833        55,853   

Impairment of real estate

     1,381        4,835   
  

 

 

   

 

 

 
     221,065        221,377   
  

 

 

   

 

 

 

Interest expense

     (58,516     (66,181

Amortization of mortgage procurement costs

     (2,869     (2,882

Loss on extinguishment of debt

     (719     (296

Interest and other income

     10,679        15,507   

Net gain on disposition of partial interests in rental properties

     —          9,561   
  

 

 

   

 

 

 

Earnings before income taxes

     24,162        38,512   
  

 

 

   

 

 

 

Income tax expense

    

Current

     1,129        17,633   

Deferred

     8,444        116   
  

 

 

   

 

 

 
     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:

    

Operating earnings from rental properties

     41        997   

Gain on disposition of rental properties

     5,370        5,719   
  

 

 

   

 

 

 
     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
  

 

 

   

 

 

 
     (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   
  

 

 

   

 

 

 

Basic earnings per common share

    

Earnings from continuing operations attributable to Forest City Enterprises, Inc. common shareholders

   $ 0.08      $ 0.22   

Earnings from discontinued operations attributable to Forest City Enterprises, Inc. common shareholders

     0.03        0.03   
  

 

 

   

 

 

 

Net earnings attributable to Forest City Enterprises, Inc. common shareholders

   $ 0.11      $ 0.25   
  

 

 

   

 

 

 

Diluted earnings per common share

    

Earnings from continuing operations attributable to Forest City Enterprises, Inc. common shareholders

   $ 0.08      $ 0.21   

Earnings from discontinued operations attributable to Forest City Enterprises, Inc. common shareholders

     0.03        0.02   
  

 

 

   

 

 

 

Net earnings attributable to Forest City Enterprises, Inc. common shareholders

   $ 0.11      $ 0.23   
  

 

 

   

 

 

 

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

 

3


Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

     Three Months Ended April 30,  
     2012     2011  
     (in thousands)  

Net earnings

   $ 23,773      $ 47,473   
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

    

Unrealized net gains (losses) on investment securities (net of tax of $2 and $(8), respectively)

     (5     14   

Foreign currency translation adjustments (net of tax of $(89) and $(128), respectively)

     142        202   

Unrealized net gains (losses) on interest rate derivative contracts (net of tax of $(3,786) and $271, respectively)

     5,988        (554
  

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     6,125        (338
  

 

 

   

 

 

 

Comprehensive income

     29,898        47,135   

Comprehensive income attributable to noncontrolling interest

     (1,025     (1,067
  

 

 

   

 

 

 

Total comprehensive income attributable to Forest City Enterprises, Inc.

   $ 28,873      $ 46,068   
  

 

 

   

 

 

 

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

 

4


Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Consolidated Statements of Equity

(Unaudited)

 

                                                                Accumulated              
    Preferred Stock     Common Stock     Additional                       Other              
    Series A     Class A     Class B     Paid-In     Retained     Treasury Stock     Comprehensive     Noncontrolling        
    Shares     Amount     Shares     Amount     Shares     Amount     Capital     Earnings     Shares     Amount
    (Loss) Income     Interest     Total  
    (in thousands)  

Balances at January 31, 2011

    4,400      $ 220,000        144,252      $ 48,084        21,219      $ 7,073      $ 689,004      $ 673,875        21      $ (259   $ (94,429   $ 330,912      $ 1,874,260   

Net earnings, net of $4,567 attributable to redeemable noncontrolling interest

                  (86,486           90,485        3,999   

Other comprehensive loss, net of tax

                        (26,031     1,050        (24,981

Purchase of treasury stock

                    90        (1,670         (1,670

Conversion of Class B to Class A shares

        284        95        (284     (95                 —     

Issuance of Class A shares in exchange for Convertible Senior Notes due 2016

        3,444        1,148            47,594                  48,742   

Restricted stock vested

        343        114            (114               —     

Exercise of stock options

        13        4            136          (3     55            195   

Preferred stock dividends

                  (15,400             (15,400

Stock-based compensation

                12,585                  12,585   

Excess income tax deficiency from stock-based compensation

                (812               (812

Redeemable noncontrolling interest adjustment

                (6,887               (6,887

Acquisition of partners’ noncontrolling interest in consolidated subsidiaries

                (518             (20,435     (20,953

Contributions from noncontrolling interests

                          6,087        6,087   

Distributions to noncontrolling interests

                          (89,644     (89,644

Change to equity method of accounting for subsidiaries

                          (33,598     (33,598

Other changes in noncontrolling interests

                          (51     (51
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at January 31, 2012

    4,400      $ 220,000        148,336      $ 49,445        20,935      $ 6,978      $ 740,988      $ 571,989        108      $ (1,874   $ (120,460   $ 284,806      $ 1,751,872   

Net earnings, net of $1,691 attributable to redeemable noncontrolling interest

                  22,752              2,712        25,464   

Other comprehensive income, net of tax

                        6,121        4        6,125   

Purchase of treasury stock

                    79        (1,182         (1,182

Conversion of Class B to Class A shares

        23        8        (23     (8                 —     

Restricted stock vested

        329        110            (110               —     

Exercise of stock options

                (7       (1     13            6   

Preferred stock dividends

                  (3,850             (3,850

Stock-based compensation

                4,531                  4,531   

Excess income tax deficiency from stock-based compensation

                (139               (139

Redeemable noncontrolling interest adjustment

                (2,980               (2,980

Contributions from noncontrolling interests

                          64        64   

Distributions to noncontrolling interests

                          (2,694     (2,694

Change to equity method of accounting for subsidiary

                          (724     (724

Other changes in noncontrolling interests

                          (381     (381
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at April 30, 2012

    4,400      $ 220,000        148,688      $ 49,563        20,912      $ 6,970      $ 742,283      $ 590,891        186      $ (3,043   $ (114,339   $ 283,787      $ 1,776,112   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

5


Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

     Three Months Ended April 30,  
     2012     2011  
     (in thousands)  

Net earnings

   $ 23,773      $ 47,473   

Depreciation and amortization

     52,833        55,853   

Amortization of mortgage procurement costs

     2,869        2,882   

Impairment of real estate

     1,381        4,835   

Write-offs of abandoned development projects

     447        157   

Loss on extinguishment of debt

     719        296   

Net gain on disposition of partial interests in rental properties

     —          (9,561

Deferred income tax expense

     8,444        116   

Equity in earnings of unconsolidated entities

     (3,773     (19,994

Stock-based compensation expense

     2,528        2,811   

Amortization and mark-to-market adjustments of derivative instruments

     (3,133     (153

Non-cash interest expense related to Senior Notes

     81        557   

Cash distributions from operations of unconsolidated entities

     16,014        9,459   

Discontinued operations:

    

Depreciation and amortization

     —          2,538   

Amortization of mortgage procurement costs

     —          567   

Deferred income tax expense

     3,019        3,921   

Gain on disposition of rental properties

     (8,879     (10,431

Cost of sales of land included in projects under construction and development and completed rental properties

     2,825        1,535   

Increase in land held for development and sale

     (5,337     (9,957

Decrease (increase) in notes and accounts receivable

     22,527        (10,326

Decrease (increase) in other assets

     4,098        (9,794

Increase in restricted cash and escrowed funds used for operating purposes

     (1,392     (536

Decrease in accounts payable, accrued expenses and other liabilities

     (42,338     (14,802
  

 

 

   

 

 

 

Net cash provided by operating activities

     76,706        47,446   
  

 

 

   

 

 

 

Cash Flows from Investing Activities

    

Capital expenditures

     (196,354     (167,698

Payment of lease procurement costs

     (2,049     (2,932

Decrease (increase) in other assets

     4,662        (13,082

Decrease in restricted cash and escrowed funds used for investing purposes

     158,794        87,233   

Proceeds from disposition of full or partial interests in rental properties

     8,642        193,338   

(Increase) decrease in investments in and advances to unconsolidated entities

     (21,645     7,563   
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (47,950     104,422   
  

 

 

   

 

 

 

Cash Flows from Financing Activities

    

Proceeds from nonrecourse mortgage debt and notes payable

     210,957        101,444   

Principal payments on nonrecourse mortgage debt and notes payable

     (157,733     (147,313

Borrowings on bank revolving credit facility

     75,000        250,075   

Payments on bank revolving credit facility

     (75,000     (305,800

Payment of transaction costs related to exchange of Convertible Senior Notes due 2016 for Class A common stock

     —          (2,200

Payment of deferred financing costs

     (4,132     (8,334

Change in restricted cash and escrowed funds and book overdrafts

     —          (10,590

Purchase of treasury stock

     (1,182     (1,339

Exercise of stock options

     6        169   

Dividends paid to preferred shareholders

     (3,850     (3,850

Contributions from noncontrolling interests

     64        38   

Distributions to noncontrolling interests

     (2,694     (12,899
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     41,436        (140,599
  

 

 

   

 

 

 

Net increase in cash and equivalents

     70,192        11,269   

Cash and equivalents at beginning of period

     217,486        193,372   
  

 

 

   

 

 

 

Cash and equivalents at end of period

   $ 287,678      $ 204,641   
  

 

 

   

 

 

 

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

 

6


Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

Supplemental Non-Cash Disclosures:

The following table represents a summary of non-cash transactions primarily as a result of changes in consolidation methods due to the occurrence of triggering events including, but not limited to, the dispositions of partial interests of rental properties. Other non-cash transactions included in the table include acquisitions of partners noncontrolling interests, dispositions of properties whereby the nonrecourse mortgage debt is assumed by the buyer, change in construction payables, reclassification prior to sale of outlot land parcels from projects under construction and development or completed rental properties to land held for sale and the capitalization of stock-based compensation granted to employees directly involved with the development and construction of real estate.

 

     Three Months Ended April 30,  
     2012     2011  
     (in thousands)  

Operating Activities

  

Increase in land held for development and sale

   $ (1,350   $ (5,690

Decrease in notes and accounts receivable

     2,535        29,345   

Decrease in other assets

     1,869        62,234   

Decrease in restricted cash and escrowed funds

     49        9,127   

Increase in accounts payable and accrued expenses

     7,533        20,645   
  

 

 

   

 

 

 

Total effect on operating activities

   $ 10,636      $ 115,661   
  

 

 

   

 

 

 

Investing Activities

    

Increase in projects under construction and development

   $ (14,713   $ (14,628

Decrease in completed rental properties

     26,995        469,948   

Increase in investments in and advances to affiliates

     (809     (42,659
  

 

 

   

 

 

 

Total effect on investing activities

   $ 11,473      $ 412,661   
  

 

 

   

 

 

 

Financing Activities

    

Decrease in nonrecourse mortgage debt and notes payable

   $ (22,871   $ (532,841

(Decrease) increase in additional paid-in capital

     (1,116     4,054   

Increase in redeemable noncontrolling interest

     2,980        619   

Decrease in noncontrolling interest

     (1,102     (154
  

 

 

   

 

 

 

Total effect on financing activities

   $ (22,109   $ (528,322
  

 

 

   

 

 

 

 

7


Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

A. Accounting Policies

Basis of Presentation

The interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended January 31, 2012. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In the opinion of management, all adjustments considered necessary for a fair statement of financial position, results of operations and cash flows at the dates and for the periods presented have been included.

Revision of Prior Period Financial Statements

Historically, the Company wrote-off specific development projects when management determined it was probable the specific project would not be developed. In addition, the Company recorded an allowance for estimated project development write-offs for projects under development that had not yet been abandoned (the “Allowance”). In connection with the preparation of its financial statements for the year ended January 31, 2012, the Company reconsidered the historical accounting policy related to the Allowance and determined that recording the Allowance was not in accordance with ASC 970-360-40 (Real Estate – Abandonments) and concluded that the reserve should be removed (“Allowance Revision”). The Company assessed the materiality of this error on prior periods’ financial statements in accordance with ASC 250 (SEC’s Staff Accounting Bulletin No. 99, Materiality), and concluded that the error was not material to any prior annual or interim periods, but the cumulative adjustment necessary to remove the Allowance would be material if the correction was recorded during the year ended January 31, 2012. Accordingly, in accordance with ASC 250 (SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”), the financial statements for the three months ended April 30, 2011, which are presented herein, have been revised. The following are selected line items from our financial statements illustrating the effect of the error correction thereon:

 

 

     As Reported  (1)      Adjustment     As Revised  

Consolidated Statement of Operations for the three months ended April 30, 2011

   (in thousands, except per share data)  

Operating expenses

   $ 158,689       $ 2,000      $ 160,689   

Deferred income tax expense (benefit)

     892         (776     116   

Earnings (loss) from continuing operations

     41,981         (1,224     40,757   

Net earnings (loss) attributable to Forest City Enterprises, Inc. common shareholders

     43,717         (1,224     42,493   

Basic earnings (loss) per common share from continuing operations attributable to Forest City Enterprises, Inc. common shareholders

     0.23         (0.01     0.22   

Diluted earnings per common share from continuing operations attributable to Forest City Enterprises, Inc. common shareholders

     0.21         —          0.21   

Basic net earnings (loss) per common share attributable to Forest City Enterprises, Inc. common shareholders

     0.26         (0.01     0.25   

Diluted net earnings (loss) per common share attributable to Forest City Enterprises, Inc. common shareholders

     0.24         (0.01     0.23   

 

(1)

Adjusted to reflect the impact of discontinued operations (see Note L).

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the Company to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. Some of the critical estimates made by the Company include, but are not limited to, determination of the primary beneficiary of variable interest entities (“VIEs”), estimates of useful lives for long-lived assets, reserves for collection on accounts and notes receivable and other investments, impairment of real estate and other-than-temporary impairments on its equity method investments. As a result of the nature of estimates made by the Company, actual results could differ.

Reclassification

Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation.

 

8


Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

A. Accounting Policies (continued)

 

Variable Interest Entities

The Company’s VIEs consist of joint ventures that are engaged, directly or indirectly, in the ownership, development and management of office buildings, regional malls, specialty retail centers, apartment communities, military housing, a hotel, land development and The Nets, a member of the National Basketball Association (“NBA”). As of April 30, 2012, the Company determined that it was the primary beneficiary of 32 VIEs representing 21 properties (16 VIEs representing 7 properties in the Residential Group, 14 VIEs representing 12 properties in the Commercial Group and 2 VIEs/properties in the Land Development Group). The creditors of the consolidated VIEs do not have recourse to the Company’s general credit. As of April 30, 2012, the Company held variable interests in 60 VIEs for which it is not the primary beneficiary. The maximum exposure to loss as a result of its involvement with these unconsolidated VIEs is limited to the Company’s investments in those VIEs totaling approximately $67,000,000 at April 30, 2012. In addition, the Company consolidates a VIE which holds collateralized borrowings of $29,000,000 as of April 30, 2012.

Accumulated Other Comprehensive Loss

The following table summarizes the components of accumulated other comprehensive income (loss) (“accumulated OCI”):

 

     April 30, 2012     January 31, 2012  
     (in thousands)  

Unrealized losses on securities

   $ 452      $ 445   

Unrealized losses on foreign currency translation

     1,327        1,558   

Unrealized losses on interest rate contracts (1)

     185,150        194,928   
  

 

 

   

 

 

 
     186,929        196,931   

Noncontrolling interest and income tax benefit

     (72,590     (76,471
  

 

 

   

 

 

 

Accumulated Other Comprehensive Loss

   $ 114,339      $ 120,460   
  

 

 

   

 

 

 

 

(1)

Included in the amounts as of April 30 and January 31, 2012 are $136,517 and $143,303, respectively, of unrealized losses on an interest rate swap associated with New York Times, an office building in Manhattan, New York, on its nonrecourse mortgage debt with a notional amount of $640,000. This swap effectively fixes the mortgage at an all-in lender interest rate of 6.40% (5.50% swap rate plus 0.90% lender spread) and expires in September 2017.

Noncontrolling Interest

Interests held by partners in consolidated entities are reflected in noncontrolling interest, which represents the noncontrolling interests’ share of the underlying net assets of the Company’s consolidated subsidiaries. Noncontrolling interest that is not redeemable is reported in the equity section of the Consolidated Balance Sheets.

Noncontrolling interests where the Company may be required to repurchase the noncontrolling interest at fair value under a put option or other contractual redemption requirement are reported in the mezzanine section of the Consolidated Balance Sheets between liabilities and equity, as redeemable noncontrolling interest. The Company adjusts the redeemable noncontrolling interest to redemption value (which approximates fair value) at each balance sheet date with changes recognized as an adjustment to additional paid-in capital (see Note F – Fair Value Measurements).

New Accounting Guidance

The following accounting pronouncements were adopted during the three months ended April 30, 2012:

In September 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment to the accounting guidance on testing goodwill for impairment. This guidance provides an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If after performing a qualitative assessment, an entity determines that it is not more likely than not that the fair market value of a reporting unit is less than its carrying amount, then performing the two-step goodwill impairment test is not necessary. If an entity concludes otherwise, it is then required to perform the first step of the two-step goodwill impairment test. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this guidance on February 1, 2012 did not impact the Company’s consolidated financial statements.

 

9


Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

A. Accounting Policies (continued)

 

In June 2011, the FASB issued an amendment to the accounting guidance for the presentation of comprehensive income. This guidance provides an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance is effective for annual and interim reporting periods beginning after December 15, 2011. The adoption of this guidance on February 1, 2012 did not have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued amendments to the accounting guidance on fair value measurement and disclosure requirements. This guidance results in common fair value measurement and disclosure requirements for financial statements prepared in accordance with GAAP and International Financial Reporting Standards. As a result, this guidance changes the wording used to describe many of the existing requirements for measuring fair value and for disclosing information about fair value measurements, but for many requirements the intent is not to change the existing application. Some of the guidance clarifies the FASB’s intent about the application of existing fair value measurement requirements or may change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This guidance is effective for annual and interim reporting periods beginning after December 15, 2011. The required disclosures upon adoption of this guidance on February 1, 2012 are included in the Company’s consolidated financial statements.

In April 2011, the FASB issued an amendment to the guidance on accounting for transfers and servicing to improve the accounting for repurchase agreements and other agreements that entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The guidance specifies when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements, based upon whether the entity has maintained effective control over the transferred financial assets. This guidance is effective for annual and interim reporting periods beginning on or after December 15, 2011. The adoption of this guidance on February 1, 2012 did not impact the Company’s consolidated financial statements.

The following new accounting pronouncements will be adopted on the respective required effective dates:

In December 2011, the FASB issued an amendment to the accounting guidance on derecognition of in substance real estate. This guidance specifies that when a parent company (reporting entity) ceases to have a controlling financial interest (as described in the accounting guidance on Consolidation) in a subsidiary that is in substance real estate as a result of a default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance on property, plant and equipment to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness. This guidance is effective for annual and interim reporting periods beginning on or after June 15, 2012. Early adoption is permitted. As this guidance is transactional based, the Company cannot estimate the impact on its consolidated financial statements.

In December 2011, the FASB issued an amendment to the accounting guidance that requires entities to disclose both gross and net information on financial instruments and transactions eligible for offset on the balance sheets and financial instruments and transactions subject to an agreement similar to a master netting arrangement. This guidance is effective for annual and interim reporting periods beginning on or after January 1, 2013. Early adoption is not permitted. The Company does not expect the adoption of the guidance to have a material impact on its consolidated financial statements.

B. Mortgage Debt and Notes Payable, Nonrecourse

The following table summarizes the composition of mortgage debt and notes payable, nonrecourse maturities including scheduled amortization and balloon payments as of April 30, 2012:

 

Fiscal Years Ending January 31,

   Total
Maturities
     Scheduled
Amortization
     Scheduled
Balloon
Payments
 
     (in thousands)  

2013

   $ 1,207,169       $ 33,620       $ 1,173,549   

2014

     762,901         40,640         722,261   

2015

     319,939         33,220         286,719   

2016

     346,398         30,631         315,767   

2017

     420,636         23,749         396,887   

Thereafter

     2,632,833         
  

 

 

       

Total

   $ 5,689,876         
  

 

 

       

 

10


Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

C. Bank Revolving Credit Facility

The Company has a Third Amended and Restated Credit Agreement and a Third Amended and Restated Guaranty of Payment of Debt (collectively, the “Credit Facility”) which provides total available borrowings of $450,000,000. The Credit Facility matures on March 30, 2014 and provides for one, 12-month extension option, subject to certain conditions. Borrowings bear interest at LIBOR, subject to a floor of 100 basis points, plus 3.75%. Up to $100,000,000 of the available borrowings may be used, in the aggregate, for letters of credit and/or surety bonds. The Credit Facility has a number of restrictive covenants, including a prohibition on certain consolidations and mergers, limitations on the amount of debt, guarantees and property liens that the Company may incur and restrictions on the pledging of ownership interests in subsidiaries. Additionally, the Credit Facility contains certain development limitations and financial covenants, including the maintenance of minimum liquidity, certain debt service and cash flow coverage ratios, and specified levels of shareholders’ equity (all as specified in the Credit Facility). At April 30, 2012, the Company was in compliance with all of these financial covenants.

The Company also has a First Amended Pledge Agreement (“Pledge Agreement”) with the banks party to the Credit Facility. The Pledge Agreement secures the Company’s obligations under the Credit Facility by granting a security interest to the bank group in its right, title and interest as a member, partner, shareholder or other equity holder of certain direct subsidiaries, including, but not limited to, its right to receive profits, proceeds, accounts, income, dividends, distributions or return of capital from such subsidiaries, to the extent the granting of such security interest would not result in a default under project level financing or the organizational documents of such subsidiary.

The following table summarizes the available credit on the Credit Facility:

 

     April 30, 2012      January 31, 2012  
     (in thousands)  

Maximum borrowings

   $ 450,000       $ 450,000   

Less outstanding balances:

     

Borrowings

     —           —     

Letters of credit

     66,258         69,389   

Surety bonds

     —           —     
  

 

 

    

 

 

 

Available credit

   $ 383,742       $ 380,611   
  

 

 

    

 

 

 

D. Senior and Subordinated Debt

The following table summarizes the Company’s senior and subordinated debt:

 

     April 30, 2012      January 31, 2012  
     (in thousands)  

Senior Notes:

     

3.625% Puttable Equity-Linked Senior Notes due 2014, net of discount

   $ 199,213       $ 199,132   

7.625% Senior Notes due 2015

     178,253         178,253   

5.000% Convertible Senior Notes due 2016

     50,000         50,000   

6.500% Senior Notes due 2017

     132,144         132,144   

4.250% Convertible Senior Notes due 2018

     350,000         350,000   

7.375% Senior Notes due 2034

     100,000         100,000   
  

 

 

    

 

 

 

Total Senior Notes

     1,009,610         1,009,529   
  

 

 

    

 

 

 

Subordinated Debt:

     

Subordinate Tax Revenue Bonds due 2013

     29,000         29,000   
  

 

 

    

 

 

 

Total Senior and Subordinated Debt

   $ 1,038,610       $ 1,038,529   
  

 

 

    

 

 

 

All of the Company’s senior notes are unsecured senior obligations and rank equally with all existing and future unsecured indebtedness; however, they are effectively subordinated to all existing and future secured indebtedness and other liabilities of the Company’s subsidiaries to the extent of the value of the collateral securing such other debt, including the Credit Facility. The indentures governing the senior notes contain covenants providing, among other things, limitations on incurring additional debt and payment of dividends. At April 30, 2012, the Company was in compliance with these financial covenants.

 

11


Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

E. Derivative Instruments and Hedging Activities

Risk Management Objective of Using Derivatives

The Company maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned decreases in earnings and cash flows that may be caused by interest rate volatility. The Company’s strategy includes the use of interest rate swaps and option contracts that have indices related to the pricing of specific balance sheet liabilities. The Company enters into interest rate swaps to convert certain floating-rate debt to fixed-rate long-term debt, and vice-versa, depending on market conditions, or forward starting swaps to hedge the changes in benchmark interest rates on forecasted financings. The Company enters into interest rate swap agreements for hedging purposes for periods that are generally one to ten years. Option products utilized include interest rate caps, floors and Treasury options. The use of these option products is consistent with the Company’s risk management objective to reduce or eliminate exposure to variability in future cash flows primarily attributable to changes in benchmark rates relating to forecasted financings, and the variability in cash flows attributable to increases relating to interest payments on its floating-rate debt. The caps and floors have typical durations ranging from one to three years while the Treasury options are for periods of five to ten years. The Company does not have any Treasury options outstanding at April 30, 2012.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. The Company primarily uses interest rate caps and swaps as part of its interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an upfront premium. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated OCI and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company did not incur any charges for ineffectiveness related to fully consolidated cash flow hedges during the three months ended April 30, 2012 and 2011. As of April 30, 2012, the Company expects that within the next twelve months it will reclassify amounts recorded in accumulated OCI into earnings as an increase in interest expense of approximately $27,751,000, net of tax. However, the actual amount reclassified could vary due to future changes in fair value of these derivatives.

Fair Value Hedges of Interest Rate Risk

From time to time, the Company and/or certain of its joint ventures (the “Joint Ventures”) enter into a total rate of return swap (“TRS”) on various tax-exempt fixed-rate borrowings generally held by the Company and/or within the Joint Ventures. The TRS convert these borrowings from a fixed rate to a variable rate and provide an efficient financing product to lower the cost of capital. In exchange for a fixed rate, the TRS require the Company and/or the Joint Ventures pay a variable rate, generally equivalent to the SIFMA rate plus a spread. At April 30, 2012, the SIFMA rate was 0.25%. Additionally, the Company and/or the Joint Ventures have guaranteed the fair value of the underlying borrowing. Any fluctuation in the value of the TRS would be offset by the fluctuation in the value of the underlying borrowing, resulting in minimal financial impact to the Company and/or the Joint Ventures. At April 30, 2012, the aggregate notional amount of TRS that are designated as fair value hedging instruments is $271,660,000. The underlying TRS borrowings are subject to a fair value adjustment (see Note F – Fair Value Measurements).

Nondesignated Hedges of Interest Rate Risk

The Company has entered into derivative contracts that are intended to economically hedge certain interest rate risk, even though the contracts do not qualify for or the Company has elected not to apply hedge accounting. In situations in which hedge accounting is discontinued, or not elected, and the derivative remains outstanding, the Company records the derivative at its fair value and recognizes changes in the fair value in the Consolidated Statements of Operations.

 

12


Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

E. Derivative Instruments and Hedging Activities (continued)

 

The Company enters into forward swaps to protect itself against fluctuations in the swap rate at terms ranging between five to ten years associated with forecasted fixed rate borrowings. At the time the Company secures and locks an interest rate on an anticipated financing, it intends to simultaneously terminate the forward swap associated with that financing. At April 30, 2012, the Company had no forward swaps outstanding. The Company terminated a forward swap with a notional amount of $62,800,000 on February 1, 2011. This forward swap was not designated as a cash flow hedge. As such, the change in fair value of this swap was marked to market through earnings on a quarterly basis. Related to this forward swap, the Company recorded $229,000 for the three months ended April 30, 2011 as a reduction of interest expense.

In instances where the Company enters into separate derivative instruments effectively hedging the same debt for consecutive annual periods, the amount of notional is excluded from the following disclosure in an effort to provide information that enables the financial statement user to understand the Company’s volume of derivative activity. The following table presents the fair values and location in the Consolidated Balance Sheets of all derivative instruments.

 

 

      Fair Value of Derivative Instruments
April 30, 2012
 
      Asset Derivatives
(included in Other Assets)
     Liability Derivatives
(included in Accounts Payable
and Accrued Expenses)
 
     Current
Notional
     Fair Value      Current
Notional
     Fair Value  
     (in thousands)  

Derivatives Designated as Hedging Instruments

           

Interest rate caps

   $ —         $ —         $ —         $ —     

Interest rate swap agreements

     —           —           898,595         141,145   

TRS

     28,100         791         243,560         10,116   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives designated as hedging instruments

   $ 28,100       $ 791       $ 1,142,155       $ 151,261   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives Not Designated as Hedging Instruments

           

Interest rate caps

   $ 434,896       $ 17       $ —         $ —     

Interest rate swap agreements

     19,521         894         —           —     

TRS

     140,800         12,709         30,360         14,239   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives not designated as hedging instruments

   $ 595,217       $ 13,620       $ 30,360       $ 14,239   
  

 

 

    

 

 

    

 

 

    

 

 

 
     January 31, 2012  
     (in thousands)  

Derivatives Designated as Hedging Instruments

           

Interest rate caps

   $ —         $ —         $ —         $ —     

Interest rate swap agreements

     —           —           897,193         148,699   

TRS

     27,197         774         243,560         9,954   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives designated as hedging instruments

   $ 27,197       $ 774       $ 1,140,753       $ 158,653   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives Not Designated as Hedging Instruments

           

Interest rate caps

   $ 435,201       $ 13       $ —         $ —     

Interest rate swap agreements

     19,521         1,083         —           —     

TRS

     141,703         9,534         30,360         15,367   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives not designated as hedging instruments

   $ 596,425       $ 10,630       $ 30,360       $ 15,367   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

13


Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

E. Derivative Instruments and Hedging Activities (continued)

 

The following tables presents the impact of gains and losses related to derivative instruments designated as cash flow hedges included in the accumulated OCI section of the Consolidated Balance Sheets and in equity in loss of unconsolidated entities and interest expense in the Consolidated Statements of Operations:

 

 

          

Gain (Loss) Reclassified from

Accumulated OCI

 

Derivatives Designated as

Cash Flow Hedging Instruments

   Gain (Loss)
Recognized

in OCI
(Effective Portion)
   

Location on Consolidated Statements
of Operations

   Effective
Amount
    Ineffective
Amount
 
     (in thousands)  
Three Months Ended April 30, 2012          

Interest rate caps, interest rate swaps and Treasury options

   $ 8,725      Interest expense    $ (967   $ —     

Interest rate caps, interest rate swaps and Treasury options

     —        Equity in loss of unconsolidated entities      (88     2   
  

 

 

      

 

 

   

 

 

 

Total

   $ 8,725         $ (1,055   $ 2   
  

 

 

      

 

 

   

 

 

 

Three Months Ended April 30, 2011

         

Interest rate caps, interest rate swaps and Treasury options

   $ (2,039   Interest expense    $ (691   $ —     

 

Treasury options

     —        Equity in loss of unconsolidated entities      (88     —     
  

 

 

      

 

 

   

 

 

 

Total

   $ (2,039      $ (779   $ —     
  

 

 

      

 

 

   

 

 

 

The following table presents the impact of gains and losses in the Consolidated Statements of Operations related to derivative instruments:

 

     Net Gain (Loss) Recognized  
     Three Months Ended April 30,  
     2012     2011  
     (in thousands)  
Derivatives Designated as Fair Value Hedging Instruments     

TRS (1)

   $ (145   $ 1,482   

Derivatives Not Designated as Hedging Instruments

    

Interest rate caps and interest rate swaps

   $ (205   $ (196

TRS

     4,303        1,040   
  

 

 

   

 

 

 

Total

   $ 4,098      $ 844   
  

 

 

   

 

 

 

 

(1)

The net gain (loss) recognized in interest expense from the change in fair value of the underlying TRS borrowings was $145 and $(1,482) for the three months ended April 30, 2012 and 2011, respectively, offsetting the gain (loss) recognized on the TRS (see Note F – Fair Value Measurements).

 

14


Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

E. Derivative Instruments and Hedging Activities (continued)

 

Credit-risk-related Contingent Features

The principal credit risk to the Company through its interest rate risk management strategy is the potential inability of the financial institution from which the derivative financial instruments were purchased to cover its obligations. If a counterparty fails to fulfill its obligation under a derivative contract, the Company’s risk of loss approximates the fair value of the derivative. To mitigate this exposure, the Company generally purchases its derivative financial instruments from the financial institution that issues the related debt, from financial institutions with which the Company has other lending relationships, or from financial institutions with a minimum credit rating of AA at the time the Company enters into the transaction.

The Company has agreements with its derivative counterparties that contain a provision under which the derivative counterparty could terminate the derivative obligations if the Company defaults on its obligations under the Credit Facility and designated conditions are fulfilled. In instances where the Company’s subsidiaries have derivative obligations that are secured by a mortgage, the derivative obligations could be terminated if the indebtedness between the two parties is terminated, either by loan payoff or default of the indebtedness. In addition, the Company has certain derivative contracts which provide that if the Company’s credit rating falls below certain levels, it may trigger additional collateral to be posted with the counterparty up to the full amount of the liability position of the derivative contracts. Also, certain subsidiaries have agreements that contain provisions whereby the subsidiaries must maintain certain minimum financial ratios.

As of April 30, 2012, the aggregate fair value of all derivative instruments in a liability position, prior to the adjustment for nonperformance risk of $14,517,000, is $180,017,000. The Company had posted collateral consisting primarily of cash and notes receivable of $81,779,000 related to all derivative instruments. If all credit risk contingent features underlying these agreements had been triggered on April 30, 2012, the Company would have been required to post collateral of the full amount of the liability position.

F. Fair Value Measurements

The Company’s financial assets and liabilities subject to fair value measurements are interest rate caps, interest rate swap agreements, TRS and borrowings subject to TRS (see Note E—Derivative Instruments and Hedging Activities). The Company’s impairment of real estate and unconsolidated entities are also subject to fair value measurements (see Note K - Impairment of Real Estate, Impairment of Unconsolidated Entities and Write-Off of Abandoned Development Projects and Note L – Discontinued Operations and Gain on Disposition of Rental Properties).

Financial Instruments Measured at Fair Value on a Recurring Basis

The Company’s financial assets consist of interest rate caps, interest rate swap agreements and TRS with positive fair values that are included in other assets. The Company’s financial liabilities consists of interest rate swap agreements and TRS with negative fair values that are included in accounts payable, accrued expenses and other liabilities and borrowings subject to TRS included in mortgage debt and notes payable, nonrecourse. The Company records the redeemable noncontrolling interest related to Brooklyn Arena, LLC at redemption value, which approximates fair value.

 

15


Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

F. Fair Value Measurements (continued)

 

The following table presents information about the Company’s financial assets and liabilities and redeemable noncontrolling interest that were measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

 

XXXX,XX XXXX,XX XXXX,XX XXXX,XX
     Fair Value Measurements
April 30, 2012
 
     Level 1      Level 2     Level 3     Total  
     (in thousands)  

Interest rate caps

   $ —         $ 17      $ —        $ 17   

Interest rate swap agreements (positive fair value)

     —           894        —          894   

Interest rate swap agreements (negative fair value)

     —           (4,628     (136,517     (141,145

TRS (positive fair value)

     —           —          13,500        13,500   

TRS (negative fair value)

     —           —          (24,355     (24,355

Fair value adjustment to the borrowings subject to TRS

     —           —          9,325        9,325   

Redeemable noncontrolling interest

     —           —          (230,438     (230,438
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ —         $ (3,717   $ (368,485   $ (372,202
  

 

 

    

 

 

   

 

 

   

 

 

 
     January 31, 2012  
     (in thousands)  

Interest rate caps

   $ —         $ 13      $ —        $ 13   

Interest rate swap agreements (positive fair value)

     —           1,083        —          1,083   

Interest rate swap agreements (negative fair value)

     —           (5,396     (143,303     (148,699

TRS (positive fair value)

     —           —          10,308        10,308   

TRS (negative fair value)

     —           —          (25,321     (25,321

Fair value adjustment to the borrowings subject to TRS

     —           —          9,180        9,180   

Redeemable noncontrolling interest

     —           —          (229,149     (229,149
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ —         $ (4,300   $ (378,285   $ (382,585
  

 

 

    

 

 

   

 

 

   

 

 

 

The table below presents a reconciliation of all financial assets and liabilities and redeemable noncontrolling interest measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

 

     Fair Value Measurements  
     Redeemable
Noncontrolling
Interest
    Interest Rate
Swaps
    Net
TRS
    Fair value
adjustment
to the borrowings
subject to TRS
    Total TRS
Related
    Total  
     (in thousands)  

Three months ended April 30, 2012

            

Balance, February 1, 2012

   $ (229,149   $ (143,303   $ (15,013   $ 9,180      $ (5,833   $ (378,285

Loss attributable to redeemable noncontrolling interest

     1,691        —          —          —          —          1,691   

Total realized and unrealized gains (losses):

            

Included in earnings

     —          —          4,158        145        4,303        4,303   

Included in other comprehensive income

     —          6,786        —          —          —          6,786   

Included in additional paid-in capital

     (2,980     —          —          —          —          (2,980
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, April 30, 2012

   $ (230,438   $ (136,517   $ (10,855   $ 9,325      $ (1,530   $ (368,485
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three months ended April 30, 2011

            

Balance, February 1, 2011

   $ (226,829   $ (102,387   $ (30,034   $ 21,938      $ (8,096   $ (337,312

Loss attributable to redeemable noncontrolling interest

     666        —          —          —          —          666   

Total realized and unrealized gains (losses):

            

Included in earnings

     —          —          2,522        (1,482     1,040        1,040   

Included in other comprehensive income

     —          (1,750     —          —          —          (1,750

Included in additional paid-in capital

     (619     —          —          —          —          (619
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, April 30, 2011

   $ (226,782   $ (104,137   $ (27,512   $ 20,456      $ (7,056   $ (337,975
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

16


Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

F. Fair Value Measurements (continued)

 

The following table presents quantitative information about the significant unobservable inputs used to estimate the fair value of financial instruments measured on a recurring basis as of April 30, 2012.

 

     Quantitative Information about Level 3 Fair Value  Measurements  
     Fair Value
April 30, 2012
    Valuation
Technique
   Unobservable
Input
   Range of
Input Values
 
     (in thousands)                  

Credit valuation adjustment of interest rate swap

   $ 14,712      Potential future exposure    Credit spreads      2.72%(1) -4.25%   

TRS

   $ (10,855   Third party bond pricing    Bond quote      84.41-102.28 (1) 

Fair value adjustment to the borrowings subject to TRS

   $ 9,325      Third party bond pricing    Bond quote      84.41-100.79 (1) 

Redeemable noncontrolling interest

   $ (230,438   Discounted cash flows    Discount rate      10.3

 

(1)

This fair value measurement was developed by third party service providers, subject to the Company’s corroboration for reasonableness.

Third party service providers involved in fair value measurements are evaluated for competency and qualifications on an ongoing basis. Internally developed fair value measurements, including unobservable inputs, are evaluated for reasonableness based on current transactions and experience in the real estate and capital markets.

The Company does not deem the impact of changes in unobservable inputs used to determine the fair market value of the CVA, TRS and fair value adjustment to the borrowings subject to TRS to be significant; however, changes in the discount rate used to determine the fair market value of the redeemable noncontrolling interest could have a significant impact on its fair market value.

Fair Value of Other Financial Instruments

The carrying amount of notes and accounts receivable and accounts payable, accrued expenses and other liabilities approximates fair value based upon the short-term nature of the instruments. The Company estimates the fair value of its debt instruments by discounting future cash payments at interest rates that the Company believes approximate the current market. Estimated fair value is based upon market prices of public debt, available industry financing data, current treasury rates and recent financing transactions. The fair value of the Company’s debt instruments is classified as Level 2 in the fair value hierarchy.

The following table summarizes the fair value of nonrecourse mortgage debt and notes payable, bank revolving facility, senior and subordinated debt and nonrecourse mortgage debt and notes payable of land held for divestiture:

 

     April 30, 2012      January 31, 2012  
     Carrying Value      Fair Value      Carrying Value      Fair Value  
     (in thousands)      (in thousands)  

Fixed Rate Debt

   $ 4,622,503       $ 4,917,174       $ 4,458,214       $ 4,719,636   

Variable Rate Debt

     2,105,983         2,193,283         2,239,838         2,341,862   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,728,486       $ 7,110,457       $ 6,698,052       $ 7,061,498   
  

 

 

    

 

 

    

 

 

    

 

 

 

G. Stock-Based Compensation

During the three months ended April 30, 2012, the Company granted 281,828 stock options, 784,935 shares of restricted stock and 301,954 performance shares under the Company’s 1994 Stock Plan. The stock options had a grant-date fair value of $9.24, which was computed using the Black-Scholes option-pricing model with the following assumptions: expected term of 5.5 years, expected volatility of 74.1%, risk-free interest rate of 1.1%, and expected dividend yield of 0%. The exercise price of the options is $14.74, which was the closing price of the underlying Class A common stock on the date of grant. The restricted stock had a grant-date fair value of $14.74 per share, which was the closing price of the Class A common stock on the date of grant.

At April 30, 2012, there was $6,045,000 of unrecognized compensation cost related to stock options that is expected to be recognized over a weighted-average period of 2.91 years, $25,309,000 of unrecognized compensation cost related to restricted stock that is expected to be recognized over a weighted-average period of 3.09 years, and $4,352,000 of unrecognized compensation cost related to performance shares that is expected to be recognized over a weighted-average period of 3.67 years.

 

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Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

G. Stock-Based Compensation (continued)

 

The amount of stock-based compensation costs and related deferred income tax benefit recognized in the financial statements are as follows:

 

     Three Months Ended April 30,  
     2012     2011  
     (in thousands)  

Stock option costs

   $ 1,602      $ 189   

Restricted stock costs

     2,830        3,053   

Performance shares

     99        —     
  

 

 

   

 

 

 

Total stock-based compensation costs

     4,531        3,242   

Less amount capitalized into qualifying real estate projects

     (2,003     (431
  

 

 

   

 

 

 

Amount charged to operating expenses

     2,528        2,811   

Depreciation expense on capitalized stock-based compensation

     207        185   
  

 

 

   

 

 

 

Total stock-based compensation expense

   $ 2,735      $ 2,996   
  

 

 

   

 

 

 

Deferred income tax benefit

   $ 991      $ 1,118   
  

 

 

   

 

 

 

The amount of grant-date fair value expensed immediately for awards granted to retirement-eligible grantees during the three months ended April 30, 2012 and 2011 was $726,000 and $1,022,000, respectively. During the three months ended April 30, 2011, previously recorded stock option costs in the amount of $1,622,000, most of which was previously capitalized into real estate projects, were reversed to reflect actual forfeitures in excess of estimated forfeitures.

In connection with the vesting of restricted stock during the three months ended April 30, 2012 and 2011, the Company repurchased into treasury 78,844 shares and 70,906 shares respectively, of Class A common stock to satisfy the employees’ related minimum statutory tax withholding requirements. These shares were placed in treasury with an aggregate cost basis of $1,182,000 and $1,339,000, respectively.

H. Commercial Group Land Sales

On January 31, 2011, the Company closed on the sale of two parcels of land, with air rights, to Rock Ohio Caesars Cleveland, LLC for development of a casino in downtown Cleveland. The land is adjacent to the Company’s Tower City Center mixed-use complex. The sales price for one parcel, an approximate 6 acre land parcel and air rights (“Parcel #1”), was $45,000,000. The sales price for the second parcel, an approximate 10 acre land parcel and air rights (“Parcel #2”), was $40,000,000.

At January 31, 2011, the Company received a cash deposit of $8,550,000 on Parcel #1. During the three months ended April 30, 2011, the Company received an additional $33,950,000 of the Parcel #1 purchase price. With the receipt of this payment, the buyer’s initial and continuing investment on the sale of Parcel #1 was adequate for gain recognition under the full accrual method in accordance with accounting guidance for sales of real estate. As such, the entire sales price is included in revenues from real estate operations and the related cost of land is included in operating expenses, resulting in a gain on sale of $42,622,000 during the three months ended April 30, 2011. The final $2,500,000 of the Parcel #1 purchase price was received during the three months ended October 31, 2011.

As of January 31, 2012, the Company received total cash deposits of $7,000,000 of the Parcel #2 purchase price. The minimum initial investment related to Parcel #2 still had not been met and accordingly, the cash deposits were recorded as a deposit liability under the deposit method in accordance with accounting guidance for sales of real estate and included in accounts payable, accrued expenses and other liabilities at January 31, 2012.

During the three months ended April 30, 2012, the Company received cash proceeds of $33,000,000 representing the remaining Parcel #2 purchase price. With receipt of this payment, the buyer’s initial and continuing investment on the sale of Parcel #2 was adequate for gain recognition under the full accrual method in accordance with accounting guidance for sales of real estate. As such, the entire sales price is included in revenues from real estate operations and the related cost of land is included in operating expenses, resulting in a gain on sale of $36,484,000 during the three months ended April 30, 2012.

 

18


Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

I. Net Gain on Disposition of Partial Interests in Rental Properties

The net gain on disposition of partial interests in rental properties is comprised of the following:

 

     Three Months Ended April 30,  
     2012      2011  
     (in thousands)  

New York Retail Joint Venture

   $ —         $ 9,561   
  

 

 

    

 

 

 
   $ —         $ 9,561   
  

 

 

    

 

 

 

New York Retail Joint Venture

On March 29, 2011, the Company entered into joint venture agreements with an outside partner, an affiliated entity of Madison International Realty LLC. The outside partner invested in and received a 49% equity interest in 15 mature retail properties located in the New York City metropolitan area, 14 of which were formerly wholly-owned by the Company and one retail property that was owned 75% by the Company.

For its 49% equity interests, the outside partner invested cash and assumed debt of $244,952,000, representing 49% of the nonrecourse mortgage debt on the 15 properties. As of January 31, 2012, the Company received proceeds of $178,286,000, primarily in the form of a loan. Based on the net amount of cash received, the outside partner’s minimum initial investment requirement of 20% was not met. As such, the transaction did not qualify for full gain recognition under accounting guidance related to real estate sales. Therefore, the installment method of gain recognition was applied, resulting in a net gain on disposition of partial interest in rental properties of $9,561,000 during the three months ended April 30, 2011. As of April 30, 2012, the remaining gain of $114,465,000 continues to be deferred and is included in accounts payable, accrued expenses, and other liabilities. Transaction costs totaling $11,776,000, of which $5,779,000 relating to participation payments made to the ground lessors of two of the properties in accordance with the respective ground lease agreements did not qualify for deferral and were included in the calculation of the net gain on disposition of partial interests in rental properties recorded during the three months ended April 30, 2011. The 15 properties are adequately capitalized and do not contain the characteristics of a VIE. Based on this and the substantive participating rights held by the outside partner with regards to the properties, the Company concluded it appropriate to deconsolidate the entity and account for it under the equity method of accounting.

J. Income Taxes

Income tax expense for the three months ended April 30, 2012 and 2011 was $9,573,000 and $17,749,000, respectively. The difference in the recorded income tax expense versus the income tax expense computed at the statutory federal income tax rate is primarily attributable to state income taxes, utilization of state net operating losses, additional general business credits, changes to the valuation allowances associated with certain deferred tax assets, and various permanent differences between pre-tax GAAP income and taxable income.

The Company applies an estimated annual effective tax rate to its year-to-date earnings from operations to derive its tax provision for the quarter. Certain circumstances may arise which make it difficult for the Company to determine a reasonable estimate of its annual effective tax rate for the year. The Company’s projected marginal operating results, which include the gain related to the Commercial Group’s land sales as described in Note H, result in an effective tax rate that changes significantly with small variations in projected income or loss from operations or permanent differences and thus does not provide for a reliable estimate of the estimated annual effective tax rate. Therefore, in computing the Company’s income tax provision for the three months ending April 30, 2012 and 2011, the Company has excluded the gain on the Commercial Group’s land sales from its estimated annual effective tax rate calculation and has recognized the actual income tax expense related to the gain during the three months ended April 30, 2012 and 2011.

At January 31, 2012, the Company had a federal net operating loss carryforward for tax purposes of $170,233,000 that will expire in the years ending January 31, 2026 through January 31, 2032, a charitable contribution deduction carryforward of $30,401,000 that will expire in the years ending January 31, 2013 through January 31, 2017, General Business Credit carryovers of $20,212,000 that will expire in the years ending January 31, 2013 through January 31, 2032, and an alternative minimum tax (“AMT”) credit carryforward of $27,452,000 that is available until used to reduce federal tax to the AMT amount.

 

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Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

J. Income Taxes (continued)

 

The Company’s policy is to consider a variety of tax-deferral strategies, including tax deferred exchanges, when evaluating its future tax position. The Company has a full valuation allowance against the deferred tax asset associated with its charitable contributions. The Company has a valuation allowance against its general business credits, other than those general business credits which are eligible to be utilized to reduce future AMT liabilities. The Company has a valuation allowance against certain of its state net operating losses and state bonus depreciation deferred assets. These valuation allowances exist because management believes it is more likely than not that the Company will not realize these benefits.

The Company applies the “with-and-without” methodology for recognizing excess tax benefits from the deduction of stock-based compensation. The net operating loss available for the tax return, as is noted in the paragraph above, is greater than the net operating loss available for the tax provision due to excess deductions from stock-based compensation reported on the return, as well as the impact of adjustments to the net operating loss under the accounting guidance on accounting for uncertainty in income taxes. As of January 31, 2012, the Company has not recorded a net deferred tax asset of approximately $17,265,000 from excess stock-based compensation deductions taken on the tax return for which a benefit has not yet been recognized in the Company’s tax provision.

K. Impairment of Real Estate, Impairment of Unconsolidated Entities and Write-Off of Abandoned Development Projects

Impairment of Real Estate

The Company reviews its real estate portfolio, including land held for development and sale, for impairment whenever events or changes indicate that its carrying value may not be recoverable. In cases where the Company does not expect to recover its carrying costs, an impairment charge is recorded. During the three months ended April 30, 2012, the Company recorded an impairment of $1,381,000 related to an investment in a triple net lease retail property located in Portage, Michigan. During the three months ended April 30, 2011, the Company recorded an impairment of certain real estate assets of $4,835,000. This amount includes an impairment of real estate of $3,435,000 related to the Portage, Michigan triple net lease retail property investment and $1,400,000 related to Mill Creek, a land development project located in York County, South Carolina. These impairments represent write-downs to estimated fair value due to a change in events, such as a bona fide third-party purchase offer or changes in certain assumptions, including estimated holding periods and current market conditions and the impact of these assumptions to the properties’ estimated future cash flows, which represents Level 2 or Level 3 inputs.

The following table presents quantitative information about the significant unobservable inputs used to determine the fair value of the non-recurring impairment of real estate for the three months ended April 30, 2012:

 

     Quantitative Information about Level 3 Fair Value  Measurements
     Fair Value
April 30, 2012
     Valuation
Technique
   Unobservable
Input
   Range
of Input Values
     (in thousands)                 

Impairment of real estate

   $ 4,400       Indicative Bid    Indicative Bid    N/A(1)

 

(1)

This fair value measurement was developed by a third party source, subject to the Company’s corroboration for reasonableness.

Impairment of Unconsolidated Entities

The Company reviews its portfolio of unconsolidated entities for other-than-temporary impairments whenever events or changes indicate that its carrying value in the investments may be in excess of fair value. An equity method investment’s value is impaired if management’s estimate of its fair value is less than the carrying value and the difference is deemed to be other-than-temporary. In order to arrive at the estimates of fair value, the Company uses varying assumptions that may include comparable sale prices, market discount rates, market capitalization rates and estimated future discounted cash flows specific to the geographic region and property type, which are considered to be Level 3 inputs. For newly opened properties, assumptions also include the timing of initial lease up at the property. In the event the initial lease up assumptions differ from actual results, estimated future discounted cash flows may vary resulting in impairment charges in future periods. The Company recorded no impairments of unconsolidated entities during both the three months ended April 30, 2012 or 2011.

Write-Off of Abandoned Development Projects

On a quarterly basis, the Company reviews each project under development to determine whether it is probable the project will be developed. If management determines that the project will not be developed, project costs are written off as an abandoned development project cost. The Company abandons certain projects under development for a number of reasons, including, but not limited to, changes in local market conditions, increases in construction or financing costs or third party challenges related to entitlements or public financing. The Company wrote off abandoned development projects of $447,000 and $157,000 during the three months ended April 30, 2012 and 2011, respectively.

 

20


Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

L. Discontinued Operations and Gain on Disposition of Rental Properties

The following table lists rental properties included in discontinued operations:

 

Property

   Location      Square Feet/
Number of  Rooms
   Period
Disposed
   Three Months Ended
            4/30/2012    4/30/2011

Commercial Group:

              

Quebec Square

     Denver, Colorado       739,000 square feet    Q1-2012    Yes    Yes

Ritz-Carlton hotel

     Cleveland, Ohio       206 rooms    Q4-2011    —      Yes

250 Huron

     Cleveland, Ohio       119,000 square feet    Q4-2011    —      Yes

Waterfront Station – East 4th & West 4th Buildings

     Washington, D.C.       631,000 square feet    Q2-2011    —      Yes

Charleston Marriott hotel

     Charleston, West Virginia       352 rooms    Q1-2011    —      Yes

The following table summarizes the operating results related to discontinued operations:

 

     Three Months Ended April 30,  
     2012     2011  
     (in thousands)  

Revenues from real estate operations

   $ 324      $ 13,994   

Expenses

    

Operating expenses

     154        8,246   

Depreciation and amortization

     —          2,538   
  

 

 

   

 

 

 
     154        10,784   
  

 

 

   

 

 

 

Interest expense

     (108     (1,859

Amortization of mortgage procurement costs

     —          (567

Gain on disposition of rental properties

     8,879        10,431   
  

 

 

   

 

 

 

Earnings before income taxes

     8,941        11,215   
  

 

 

   

 

 

 

Income tax expense

    

Current

     511        578   

Deferred

     3,019        3,921   
  

 

 

   

 

 

 
     3,530        4,499   
  

 

 

   

 

 

 

Earnings from discontinued operations

     5,411        6,716   

Noncontrolling interest

    

Gain on disposition of rental properties

     965        393   

Operating earnings from rental properties

     8        1,335   
  

 

 

   

 

 

 
     973        1,728   
  

 

 

   

 

 

 

Earnings from discontinued operations attributable to Forest City Enterprises, Inc.

   $ 4,438      $ 4,988   
  

 

 

   

 

 

 

The following table summarizes the pre-tax gain on disposition of rental properties:

 

     Three Months Ended April 30,  
     2012      2011  
     (in thousands)  

Quebec Square (Specialty Retail Center)

   $ 8,879       $ —     

Charleston Marriott (Hotel)

     —           10,431   
  

 

 

    

 

 

 

Total

   $ 8,879       $ 10,431   
  

 

 

    

 

 

 

 

21


Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

M. Earnings Per Share

The Company’s restricted stock is considered a participating security pursuant to the two-class method for computing basic earnings per share (“EPS”). The Class A Common Units, which are reflected as noncontrolling interests in the Consolidated Balance Sheets, are considered convertible participating securities as they are entitled to participate in any dividends paid to the Company’s common shareholders. The Class A Common Units are included in the computation of basic EPS using the two-class method and are included in the computation of diluted EPS using the if-converted method. The Class A common stock issuable in connection with a put or conversion of the 2014 Senior Notes, 2016 Senior Notes, 2018 Senior Notes and Series A preferred stock are included in the computation of diluted EPS using the if-converted method.

The reconciliation of the amounts used in the basic and diluted EPS computations is shown in the following table.

 

     Three Months Ended April 30,  
     2012     2011  

Numerators (in thousands)

    

Earnings from continuing operations attributable to Forest City Enterprises, Inc.

   $ 18,314      $ 41,355   

Dividends on preferred stock

     (3,850     (3,850

Undistributed earnings allocated to participating securities

     (468     (1,165
  

 

 

   

 

 

 

Earnings from continuing operations attributable to Forest City Enterprises, Inc. common shareholders—Basic

     13,996        36,340   

Undistributed earnings allocated to participating securities

     468        1,165   

Interest on convertible debt

     1,110        1,798   

Preferred distribution on Class A Common Units

     —          358   
  

 

 

   

 

 

 

Earnings from continuing operations attributable to Forest City Enterprises, Inc. common shareholders—Diluted

   $ 15,574      $ 39,661   
  

 

 

   

 

 

 

Net earnings attributable to Forest City Enterprises, Inc.

   $ 22,752      $ 46,343   

Dividends on preferred stock

     (3,850     (3,850

Undistributed earnings allocated to participating securities

     (611     (1,320
  

 

 

   

 

 

 

Net earnings attributable to Forest City Enterprises, Inc. common shareholders—Basic

     18,291        41,173   

Undistributed earnings allocated to participating securities

     611        1,320   

Interest on convertible debt

     1,110        1,798   

Preferred distribution on Class A Common Units

     —          358   
  

 

 

   

 

 

 

Net earnings attributable to Forest City Enterprises, Inc. common shareholders—Diluted

   $ 20,012      $ 44,649   
  

 

 

   

 

 

 

Denominators

    

Weighted average shares outstanding—Basic

     169,206,594        165,498,904   

Effect of stock options and restricted stock

     937,272        1,054,102   

Effect of convertible debt

     13,755,158        20,225,204   

Effect of convertible Class A Common Units

     3,646,755        3,646,755   
  

 

 

   

 

 

 

Weighted average shares outstanding—Diluted (1)

     187,545,779        190,424,965   
  

 

 

   

 

 

 

Earnings Per Share

    

Earnings from continuing operations attributable to Forest City Enterprises, Inc. common shareholders—Basic

   $ 0.08      $ 0.22   

Earnings from continuing operations attributable to Forest City Enterprises, Inc. common shareholders—Diluted

   $ 0.08      $ 0.21   

Net earnings attributable to Forest City Enterprises, Inc. common shareholders—Basic

   $ 0.11      $ 0.25   

Net earnings attributable to Forest City Enterprises, Inc. common shareholders—Diluted

   $ 0.11      $ 0.23   

 

(1)

Weighted-average options, restricted stock and performance shares of 4,485,328 and 3,443,125 for the three months ended April 30, 2012 and 2011, respectively, were not included in the computation of diluted EPS because their effect is anti-dilutive under the treasury stock method. Weighted-average shares issuable upon the conversion of the 2018 and 2016 Senior Notes of 19,744,345, for the three months ended April 30, 2012 were not included in the computation of diluted EPS because their effect is anti-dilutive under the if-converted method. Weighted-average shares issuable upon conversion of preferred stock of 14,550,257 for the three months ended April 30, 2012 and 2011 were not included in the computation of diluted EPS because their effect is anti-dilutive under the if-converted method.

 

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Forest City Enterprises, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

N. Segment Information

The Company operates through three strategic business units and five reportable segments. The three strategic business units/reportable segments are the Commercial Group, Residential Group and Land Development Group (“Real Estate Groups”). The Commercial Group, the Company’s 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, the Board of Directors of the Company approved a strategic decision by senior management to reposition or divest significant portions of the Company’s Land Development Group and is actively reviewing alternatives to do so. The remaining two reportable segments are Corporate Activities and The Nets, a member of the NBA in which the Company accounts for its investment on the equity method of accounting. The following tables summarize financial data for the Company’s five reportable segments. All amounts are presented in thousands.

 

 

     April 30,
2012
    January 31,
2012
 
     Identifiable Assets  

Commercial Group

   $ 7,983,068      $ 7,970,069   

Residential Group

     2,021,987        2,022,135   

Land Development Group

     363,015        352,248   

The Nets(1)

     (5,794     (3,836

Corporate Activities

     168,960        163,667   
  

 

 

   

 

 

 
   $ 10,531,236      $ 10,504,283   
  

 

 

   

 

 

 

 

     Three Months Ended April 30,      Three Months Ended April 30,  
     2012      2011      2012      2011  
     Revenues from Real Estate
Operations
     Operating Expenses  

Commercial Group

   $ 179,191       $ 196,334       $ 93,988       $ 97,539   

Commercial Group Land Sales

     40,000         46,252         3,516         2,521   

Residential Group

     65,305         53,504         44,939         36,777   

Land Development Group

     12,156         8,090         11,677         9,225   

The Nets

     —           —           —           —     

Corporate Activities

     —           —           12,731         14,627   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 296,652       $ 304,180       $ 166,851       $ 160,689   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Depreciation and Amortization
Expense
     Interest Expense  

Commercial Group

   $ 39,534       $ 41,995       $ 38,822       $ 45,224   

Residential Group

     12,863         13,445         4,348         6,214   

Land Development Group

     107         60         1,751         824   

The Nets

     —           —           —           —     

Corporate Activities

     329         353         13,595         13,919   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 52,833       $ 55,853       $ 58,516       $ 66,181   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Interest and Other Income      Capital Expenditures  

Commercial Group

   $ 3,799       $ 6,741       $ 170,139       $ 114,625   

Residential Group

     4,475         5,876         25,937         53,040   

Land Development Group

     2,360         2,841         42         13   

The Nets

     —           —           —           —     

Corporate Activities

     45         49         236         20   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,679       $ 15,507       $ 196,354       $ 167,698   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

The identifiable assets represent losses in excess of the Company’s investment basis in The Nets.

 

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Forest City Enterprises, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

N. Segment Information (continued)

 

The Company uses a measure defined as Earnings Before Depreciation, Amortization and Deferred Taxes (“EBDT”) to report its operating results. EBDT is a non-GAAP measure and is defined as net earnings excluding the following items at the Company’s 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 in the Consolidated Statements of Operations; vi) impairment of real estate (net of tax); vii) extraordinary items (net of tax); and viii) cumulative or retrospective effect of change in accounting principle (net of tax); and ix) revisions of prior period financial statements.

The Company believes that, although its business has many facets such as development, acquisitions, disposals, and property management, the core of its business is the recurring operations of its portfolio of real estate assets. The Company’s Chief Executive Officer, the chief operating decision maker, uses EBDT, as presented, to assess performance of its portfolio of real estate assets by operating segment because it provides information on the financial performance of the core real estate portfolio operations. EBDT measures the profitability of a real estate segment’s operations of collecting rent, paying operating expenses and servicing its debt.

Reconciliation of EBDT to Net Earnings (Loss) by Segment:

 

Three Months Ended April 30, 2012

   Commercial
Group
    Residential
Group
    Land
Development
Group
    The Nets     Corporate
Activities
    Total  

EBDT

   $ 98,226      $ 32,779      $ 1,090      $ (6,958   $ (22,705   $ 102,432   

Depreciation and amortization – Real Estate Groups

     (49,178 )      (21,131 )      (108 )      —          —          (70,417 ) 

Amortization of mortgage procurement costs – Real Estate Groups

     (2,839 )      (758 )      (26 )      —          —          (3,623 ) 

Straight-line rent adjustment

     4,914        (82 )      —          —          —          4,832   

Impairment of real estate

     (1,381 )      —          —          —          —          (1,381 ) 

Discontinued operations:

            

Straight-line rent adjustment

     3        —          —          —          —          3   

Gain on disposition of rental properties

     7,914        —          —          —          —          7,914   

Income tax benefit (expense):

            

Deferred income taxes

     —          —          —          —          (11,463 )      (11,463 ) 

Current income taxes attributable to above dispositions

     —          —          —          —          (5,545 )      (5,545 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to Forest City Enterprises, Inc.

   $ 57,659      $ 10,808      $ 956      $ (6,958   $ (39,713   $ 22,752   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Preferred dividends

     —          —          —          —          (3,850 )      (3,850 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to Forest City Enterprises, Inc. common shareholders

   $ 57,659      $ 10,808      $ 956      $ (6,958   $ (43,563   $ 18,902   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Three Months Ended April 30, 2011

   Commercial
Group
    Residential
Group
    Land
Development
Group
    The Nets     Corporate
Activities
    Total  

EBDT

   $ 115,279      $ 26,851      $ 1,106      $ (304   $ (15,556   $ 127,376   

Depreciation and amortization – Real Estate Groups

     (48,804     (18,313     (86     —          —          (67,203

Amortization of mortgage procurement costs – Real Estate Groups

     (2,469     (840     (61     —          —          (3,370

Straight-line rent adjustment

     2,051        (163     —          —          —          1,888   

Preference payment

     (585     —          —          —          —          (585

Gain on disposition of partial interests in rental properties

     9,561        —          —          —          —          9,561   

Gain on disposition of unconsolidated entities

     —          12,567        —          —          —          12,567   

Impairment of real estate

     (3,435     —          (1,400     —          —          (4,835

Allowance for projects under development revision (See Note A)

     (1,400     (600     —          —          —          (2,000

Discontinued operations:

            

Depreciation and amortization – Real Estate Groups .

     (1,626     —          —          —          —          (1,626

Amortization of mortgage procurement costs – Real Estate Groups

     (262     —          —          —          —          (262

Straight-line rent adjustment

     336        —          —          —          —          336   

Gain on disposition of rental properties

     10,038        —          —          —          —          10,038   

Income tax benefit (expense):

            

Deferred income taxes .

     —          —          —          —          (4,037     (4,037

Current income taxes attributable to above dispositions

     —          —          —          —          (31,505     (31,505
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to Forest City Enterprises, Inc.

   $ 78,684      $ 19,502      $ (441   $ (304   $ (51,098   $ 46,343   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Preferred dividends

     —          —          —          —          (3,850     (3,850
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to Forest City Enterprises, Inc. common shareholders

   $ 78,684      $ 19,502      $ (441   $ (304   $ (54,948   $ 42,493   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Forest City Enterprises, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

O. Preferred Stock

The Company declared and paid Series A preferred stock dividends of $3,850,000 during both the three months ended April 30, 2012 and 2011. Undeclared Series A preferred stock dividends were $1,925,000 at April 30, 2012. Effective May 1, 2012, the Company’s Board of Directors declared cash dividends on the outstanding shares of Series A preferred stock of approximately $3,850,000 for the period from March 15, 2012 to June 14, 2012 to shareholders of record at the close of business on June 1, 2012, which will be paid on June 15, 2012.

 

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Table of Contents

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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Table of Contents
   

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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Table of Contents

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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Table of Contents

Net Operating Income by Product Type

Full Consolidation (dollars in thousands)

 

LOGO

 

(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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Table of Contents

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   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

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