Forest City Reports Fiscal 2011 Fourth-Quarter and Full-Year Results

CLEVELAND, Ohio, March 29, 2012 /PRNewswire/ -- Forest City Enterprises, Inc. (NYSE: FCEA and FCEB) today announced EBDT, net earnings and revenues for the fourth quarter and full year ended January 31, 2012.

(Logo: http://photos.prnewswire.com/prnh/20080515/FRSTCTYLOGO )

EBDT

EBDT (Earnings Before Depreciation, Amortization and Deferred Taxes) for the full year ended January 31, 2012, was $334.4 million, a new record for the company and an 8 percent increase compared with last year's $309.9 million. EBDT for the fourth quarter was $58.8 million, a 36 percent increase compared with last year's fourth-quarter EBDT of $43.1 million.  

On a fully diluted, per-share basis, full-year 2011 EBDT was $1.61, compared with $1.59 per share for fiscal 2010.  Per-share EBDT for the fourth quarter of 2011 was $0.28, compared with $0.23 per share in the fourth quarter of 2010.  

Per-share data, for both EBDT and for Net Earnings/Loss (below), reflect the "if-converted" effect of convertible senior notes issued in 2011 and convertible preferred stock issued in 2010.  

For an explanation of the EBDT and EBDT per share variances, see the section titled "Review and Discussion of Results" in this news release.  EBDT and EBDT per share are non-Generally Accepted Accounting Principle (GAAP) measures. A reconciliation of net earnings/loss (the most directly comparable GAAP measure to EBDT) to EBDT is provided in the Financial Highlights table in this news release.

Net Earnings/Loss

For the full year of 2011, the net loss attributable to Forest City Enterprises, Inc., was $86.5 million, or $0.52 per share, compared with net earnings of $58.0 million, or $0.34 per share, in 2010.  For the fourth quarter of 2011, the net loss attributable to Forest City Enterprises, Inc. was $105.4 million, or $0.63 per share, compared with a net loss of $1.8 million, or $0.01 per share in the fourth quarter of 2010.  

After preferred dividends, the fourth-quarter 2011 net loss attributable to Forest City Enterprises, Inc. common shareholders was $109.2 million, or $0.65 per share, compared with a net loss of $5.7 million, or $0.04 per share in the fourth quarter of 2010.  For the year ended January 31, 2012, the net loss attributable to Forest City Enterprises, Inc. common shareholders was $101.9 million, or $0.61 per share, compared with net earnings of $46.2 million or $0.30 per share, for the same period in 2010. (All per share amounts are on a fully diluted basis).

The year-over-year variance in net earnings was primarily driven by decreased gains on property sales and joint ventures in 2011 compared with the prior year, and by higher 2011 impairments, primarily related to the decision to strategically reposition the company's land business through sale or other disposition.  

Revenues

Revenues for the year ended January 31, 2012 were $1.09 billion, compared with prior-year revenues of $1.12 billion. Fourth-quarter consolidated revenues were $281.2 million compared with $280.1 million last year.  

Supplemental Package and Form 10-K Filing

The company expects to furnish its 2011 Supplemental Package to the SEC after the close of business today, March 29, 2012.  The Supplemental Package is also currently available on the company’s website, www.forestcity.net, under the Investors tab and by selecting Financial Reports, then Supplemental Packages.  The company expects to file its 2011 Annual Report on Form 10-K on Monday, April 2, 2012, at the close of business.

As part of its annual review process, the Securities and Exchange Commission Division of Corporate Finance requested additional information regarding an allowance for projects under development in the company’s financial statements.  Based on discussions and correspondence with the SEC, we agreed to revise our financial statements in future periodic reports.

The impact of the prior accounting treatment was an understatement of operating expenses of $1 million ($612,000 after tax) for the year ended January 31, 2011, an overstatement of operating expenses of $6 million (approximately $3.7 million after tax) for the year ended January 31, 2010, and an understatement of retained earnings of approximately $11 million as of January 31, 2009.  The company determined that the impact of the revision was not material to any annual or interim periods. All results reported in this press release and the accompanying tables reflect the revision.

Commentary

"We achieved record total EBDT in 2011, propelled by the strength of our portfolio, particularly our residential and retail businesses, where our comp portfolios outperformed industry averages for the year," said David J. LaRue, Forest City president and chief executive officer. "Our results also benefited from major transactions such as our sale of land and air rights to the Cleveland casino developer. Overall, 2011 was a year of solid progress and positive momentum for Forest City.

"We also entered a period of important transition as three major projects – 8 Spruce Street, Westchester's Ridge Hill and, later this year, the Barclays Center arena – move from our under-construction pipeline to our operating portfolio. The transition of these properties, at a total cost of $1.6 billion at our pro-rata share, will dramatically decrease the total cost of projects under construction and meaningfully improve our risk profile. Just as important, as these properties come on line and stabilize, we believe they will also contribute significantly to future income and net asset value.

"In 2012, we are also transitioning to a new, four-year strategic plan.  The plan is designed to drive ongoing value creation by focusing on our core markets and our core apartment, retail and office products; building a strong, sustaining capital structure by continuing to improve our balance sheet; and fueling future growth, both from within the portfolio and from new development, primarily by activating existing entitlement in our large, urban mixed-use projects in core markets.

"The major themes of our new strategic plan can already be seen in a range of recent actions. For example, as we announced in February, we are in the process of strategically repositioning our land business through sale or other disposition as we focus on our core rental properties.  In addition, during fiscal 2011, we reduced total debt by more than $1.4 billion, at full consolidation, further strengthening our financial foundation.  Finally, within the past twelve months, we've taken advantage of strong demand for rental housing to commence new apartment projects in Washington, D.C., Denver, and Dallas."

Review of Results

Exhibits illustrating factors impacting both fourth-quarter and full-year 2011 EBDT results, compared with results for the comparable periods in 2010, are available on the Investor Relations page of the Company's web site: www.forestcity.net, and are included in the company's year-end 2011 Supplemental Package furnished to the Securities and Exchange Commission.

Full-Year EBDT

For the year ended January 31, 2012, total EBDT was $334.4 million, up from $309.9 million in 2010.

The Commercial and Residential Segments combined provided a pre-tax EBDT increase of $26.3 million, compared with the prior year, primarily related to the 2011 sale of land and air rights to Rock Ohio Caesars Cleveland, LLC of $42.6 million, increased gains on early extinguishment of nonrecourse mortgage debt of $11.5 million, decreased interest expense on the mature portfolio of $8.6 million, and increased net operating income from the mature portfolio of $8.0 million.

These increases in the portfolio were partially offset by reduced EBDT from properties sold of $27.1 million, reduced EBDT from new property openings of $5.1 million, primarily due to anticipated lease-up losses at 8 Spruce Street and Westchester's Ridge Hill (partially offset by the ramp-up of other new property openings), and reduced EBDT from subsidized senior housing of $3.9 million, primarily due to the treatment of HUD reserves.

The Land Segment provided a pre-tax EBDT increase of $6.7 million, primarily due to increased sales activity of $4.8 million compared with the previous comparable period, and the 2011 gain on early extinguishment of nonrecourse mortgage debt of $1.9 million.

The Nets provided a pre-tax EBDT decrease of $46.2 million, primarily due to the nonrecurring 2010 gain on disposition of partial interest of $31.4 million and the increase in the company's allocated share of losses of $14.8 million.  As previously disclosed, during the second quarter of 2011, entities controlled by Mikhail Prokhorov reached a $60 million capped commitment to fund team losses prior to the opening of the Barclays Center arena, resulting in Forest City receiving a larger share of interim losses.

In the Corporate Segment, pre-tax EBDT increased $14.3 million, primarily due to decreased losses on early extinguishment of debt of $12.7 million on exchanges of portions of the company's senior notes. Finally, EBDT for the year was favorably impacted by a larger tax benefit of $23.4 million, compared with the prior year.

Fourth-Quarter EBDT

In the fourth quarter of 2011, total EBDT was $58.8 million, compared with $43.1 million in the fourth quarter of 2010.

In addition to factors impacting results for the full year and described above under "Full-Year EBDT," results for the quarter ending January 31, 2012 were favorably impacted by reduced write-offs of abandoned development projects of $7.5 million.  Results for the quarter were negatively impacted by decreased income recognized from state and federal Historic Preservation and New Market tax credits of $7.8 million, and decreased EBDT from the change in fair market value of derivatives between the comparable periods which were marked to market through interest expense of $4.7 million.  

Complete results for the full year and fourth quarter of 2011 are included in the tables accompanying this press release and in the company's 2011 Supplemental Package, furnished to the SEC and available on the company's web site.  

NOI, Occupancies and Rent

In the fourth quarter of 2011, comparable property net operating income (NOI) increased 4.5 percent compared with the prior year, with increases of 11.9 percent in apartments, 4.7 percent in retail and 0.5 percent in office. For the full year 2011, overall comparable property NOI  increased 1.4 percent, with increases of 7.3 percent in apartments and 2.6 percent in retail, and a decrease of 2.6 percent in office.

Comparable property NOI, defined as NOI from properties operated in the three months and year ended January 31, 2012 and 2011, is a non-GAAP financial measure and is based on the pro-rata consolidation method, also a non-GAAP financial measure. Included in this release is a schedule that presents comparable property NOI using the full consolidation method.

At January 31, 2012, comparable occupancies in the office portfolio increased to 91.0 percent from 89.5 percent at January 31, 2011.  In the retail portfolio, comparable occupancies were 90.9 percent, down from 91.2 percent for the prior year.  

In the residential portfolio, comparable average occupancies were 94.7 percent, compared with 93.8 percent for the prior year, and comparable property net rental income (defined as total potential rent, less vacancies and concessions) ended the year at 92.2 percent, compared with 90.0 percent at January 31, 2011.  

For the year, leasing spreads increased 9 percent in the company's comparable regional malls and 8 percent in the office portfolio.   Regional mall sales averaged $443 per square foot on a rolling 12-month basis, while comparable regional mall sales increased 6.5 percent, compared with results for the prior year.

Debt Maturities, Financing Activity and Liquidity

In total, during fiscal year 2011, the company reduced its debt by approximately $1.4 billion (approximately $479 million at pro-rata), primarily through standard amortization, asset dispositions, loan paydowns, joint ventures and property-level recapitalizations, offset primarily by construction loan draws.

In financing its real estate assets, the company pursues a strategy of using nonrecourse mortgage debt at the property level.  As of January 31, 2012, the company's weighted-average cost of nonrecourse debt decreased to 5.05 percent from 5.07 percent at January 31, 2011, primarily due to lower rates on fixed-rate financings. Fixed-rate mortgage debt, which is inclusive of interest rate swaps, decreased to 5.68 percent at January 31, 2012 from 5.97 percent for the prior year-end. The proportion of fixed-rate debt increased to 76 percent at January 31, 2012 from 71 percent at January 31, 2011. Variable-rate mortgage debt increased from 2.87 percent at the end of fiscal 2010, to 3.03 percent at January 31, 2012.

At January 31, 2012, the Company had $268.9 million ($217.5 million at full consolidation) in cash on its balance sheet and $380.6 million of available capacity on its revolving line of credit.  

Openings and Projects Under Construction

During 2011, Forest City began phased openings at both 8 Spruce Street in Manhattan and Westchester's Ridge Hill in Yonkers, New York, and opened Foundry Lofts in Washington D.C. These projects, as well as other, more recent project starts are described below.

Lease-up continues at 8 Spruce Street in lower Manhattan. As of March 12, 655 leases had been executed, representing 73 percent of the total 899 units at completion, with rents at or above pro-forma for the units leased to date. More than 590 units are already occupied.  

At Westchester's Ridge Hill, new tenant leases executed during the fourth quarter included retailers Victoria's Secret, The Limited, White House Black Market, Bath & Body Works, and Vera Bradley.  A mid-April opening has been set for anchor Lord  & Taylor's 80,000-square-foot full-line store. The center is currently 59 percent leased.

In Washington, D.C., Foundry Lofts, a 170-unit, adaptive reuse, 80/20 apartment property at The Yards is nearly complete, with interior finish work taking place on the final units.  Leasing began in the third quarter of 2011 and the building is currently 79 percent leased.  The first of two street-level restaurants is already open and the second is expected to open this summer.

Construction at the Barclays Center arena at Atlantic Yards is on schedule for opening in September 2012. More than 95 percent of steel erection has been completed, interior build-out is actively underway, and the structure is expected to be fully enclosed and water tight in the first quarter of 2012. Approximately 64 percent of forecasted contractually obligated revenues for the arena are currently under contract.

At the end of the fourth quarter, the company had projects under construction representing a total cost of $1.0 billion ($434.8 million at the company's pro-rata share).  In addition to the Barclays Center arena, these included:

• The Aster Town Center apartment community at Stapleton in Denver.  The project is expected to include 220 units after completion of future phases. The first 85-unit phase is expected to open in the first quarter of 2012.
• Botanica Eastbridge, a 118-unit apartment community, also at Stapleton in Denver, is expected to open in the second quarter of 2012.  
• Boilermaker Shops, an adaptive reuse property that will include 40,000 square feet of ground-level retail and mezzanine office space at The Yards in Washington, D.C. The project is expected to open in the third quarter of 2012 and is 74 percent leased.
• The Continental Building a 203-unit adaptive-reuse, apartment community in downtown Dallas at the company's Mercantile Place on Main development.  Completion is expected in the first quarter of 2013.

Year-End Summary and Outlook

"We're pleased with our overall results and with the solid performance of our portfolio in 2011," said LaRue.  "We also began to bring our large pipeline properties on line during the year and made important progress on key strategic issues, including debt reduction.  At the same time, we've been able to take advantage of growing demand – particularly for rental apartments – to start new projects in core markets that will contribute to future growth.

"With our recent decision to strategically reposition our land business, we took an important step to further focus our business on core rental properties in strong core markets. As we implement our new strategic plan, we will strive to sharpen that focus, as well as improve our balance sheet metrics and selectively take advantage of new development opportunities, primarily by activating existing entitlement.  

"All of these actions reflect our ongoing commitment to value creation.  To give investors greater visibility to that value, we also continue to enhance the transparency of our disclosure, including providing a schedule of net asset value components, which we introduced with our third quarter results.  The schedule, updated to reflect fourth-quarter results, is included in our Supplemental Package.

"In conclusion, we see improving economic conditions overall, together with solid real estate fundamentals in our core markets.  While we continue to monitor conditions closely, we are optimistic about the opportunity to increase future value for shareholders, tenants, associates and the communities in which we live and work."    

Corporate Description

Forest City Enterprises, Inc. is an NYSE-listed national real estate company with $10.5 billion in total assets. The company is principally engaged in the ownership, development, management and acquisition of commercial and residential real estate and land throughout the United States. For more information, visit www.forestcity.net.

Supplemental Package

Please refer to the Investor Relations section of the company's website at www.forestcity.net for a Supplemental Package, which the company will also furnish to the Securities and Exchange Commission ("SEC") on Form 8-K. This Supplemental Package includes operating and financial information for the year ended January 31, 2012, with reconciliations of non-GAAP financial measures, such as EBDT, comparable NOI and results prepared using the pro-rata consolidation method, to their most directly comparable GAAP financial measures.

EBDT

The company uses Earnings Before Depreciation, Amortization and Deferred Taxes ("EBDT"), along with net earnings, to report its operating results. This non-GAAP measure is not a measure of operating results or cash flows from operations as defined by GAAP and may not be directly comparable to similarly titled measures reported by other companies.

The company believes that EBDT provides additional information about its core operations and, along with net earnings, is necessary to understand its operating results. EBDT is used by the chief operating decision maker and management in assessing operating performance and to consider capital requirements and allocation of resources by segment and on a consolidated basis. The company believes EBDT is important to investors because it provides another method for the investor to measure its long-term operating performance, as net earnings can vary from year to year due to property dispositions, acquisitions and other factors that have a short-term impact.

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, amortization of mortgage procurement costs; iv) deferred income taxes; v) preferred payment classified as noncontrolling interest expense on the company's Consolidated Statements 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) revision of prior period financial statements.

EBDT is reconciled to net earnings (loss), the most comparable financial measure calculated in accordance with GAAP, in the table titled Financial Highlights below and in the company's Supplemental Package, which the company will also furnish to the SEC on Form 8-K. The adjustment to recognize rental revenues and rental expenses on the straight-line method is excluded because it is management's opinion that rental revenues and expenses should be recognized when due from the tenants or due to the landlord. The company excludes depreciation and amortization expense related to real estate operations from EBDT because it believes the values of its properties, in general, have appreciated over time in excess of their original cost. Deferred income taxes, which are the result of timing differences of certain net expense items deducted in a future year for federal income tax purposes, are excluded until the year in which they are reflected in the company's current tax provision. The impairment of real estate is excluded from EBDT because it varies from year to year based on factors unrelated to the company's overall financial performance and is related to the ultimate gain on dispositions of operating properties.

Pro-Rata Consolidation Method

This press release contains certain financial measures prepared in accordance with GAAP under the full consolidation accounting method and certain financial measures prepared in accordance with the pro-rata consolidation method (non-GAAP). The company presents certain financial amounts under the pro-rata method because it believes this information is useful to investors as this method reflects the manner in which the company operates its business. In line with industry practice, the company has made a large number of investments in which its economic ownership is less than 100 percent as a means of procuring opportunities and sharing risk. Under the pro-rata consolidation method, the company presents its investments proportionate to its economic share of ownership. Under GAAP, the full consolidation method is used to report partnership assets and liabilities consolidated at 100 percent if deemed to be under its control or if the company is deemed to be the primary beneficiary of the variable interest entities ("VIE"), even if its ownership is not 100 percent. The company provides reconciliations from the full consolidation method to the pro-rata consolidation method in the exhibits below and throughout its Supplemental Package, which the company will also furnish to the SEC on Form 8-K.

Safe Harbor Language

Statements made in this news release that state the company's or management's intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements. The company's actual results could differ materially from those expressed or implied in such forward-looking statements due to various risks, uncertainties and other factors. Risks and factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, the impact of current lending and capital market conditions on its liquidity, ability to finance or refinance projects and repay its debt, the impact of the current economic environment on its ownership, development and management of its real estate portfolio, general real estate investment and development risks, vacancies in its properties, the strategic decision to reposition or divest portions of the company's land business, further downturns in the housing market, competition, illiquidity of real estate investments, bankruptcy or defaults of tenants, anchor store consolidations or closings, international activities, the impact of terrorist acts, risks associated with an investment in a professional sports team, its substantial debt leverage and the ability to obtain and service debt, the impact of restrictions imposed by its credit facility and senior debt, exposure to hedging agreements, the level and volatility of interest rates, the continued availability of tax-exempt government financing, the impact of credit rating downgrades, effects of uninsured or underinsured losses, effects of a downgrade or failure of its insurance carriers, environmental liabilities, conflicts of interest, risks associated with the sale of tax credits, risks associated with developing and managing properties in partnership with others, the ability to maintain effective internal controls, compliance with governmental regulations, increased legislative and regulatory scrutiny of the financial services industry, volatility in the market price of its publicly traded securities, inflation risks, litigation risks, cybersecurity risks and cyber incidents, as well as other risks listed from time to time in the company's SEC filings, including but not limited to, the company's annual and quarterly reports.

SOURCE Forest City Enterprises, Inc.