Forest City Reports Fiscal 2011 Second-Quarter and Year-to-Date Results

CLEVELAND, Ohio, Sept. 7, 2011 /PRNewswire/ -- Forest City Enterprises, Inc. (NYSE: FCE.A and FCE.B), today announced EBDT, net earnings and revenues for the second quarter and six months ended July 31, 2011.

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EBDT

Second-quarter EBDT (earnings before depreciation, amortization and deferred taxes) was $70.7 million, compared with 2010 second-quarter EBDT of $105.6 million. The primary driver of the quarter-over-quarter variance was the second quarter 2010 pre-tax gain of $31.4 million related to the disposition of a partial interest in the Nets basketball team, with no comparable event in 2011.

On a fully diluted, per share basis, second-quarter 2011 EBDT was $0.35, compared with 2010 second-quarter EBDT per share of $0.54. Total EBDT for the six-months ended July 31, 2011, was $198.1 million, or $0.98 per fully diluted share, compared with last year’s $176.0 million, or $0.91 per share.

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

Net Earnings

Second-quarter net earnings attributable to Forest City Enterprises, Inc. were $8.1 million, compared with a $122.8 million in the second quarter of 2010. The net earnings variance was driven primarily by the timing of asset dispositions and joint ventures between the comparable periods.

Net earnings for the six months ended July 31, 2011, were $55.7 million, compared with $107.3 million for the same period in 2010. As with the quarterly net earnings results, the year-over-year net earnings variance was primarily driven by higher 2010 gains on asset dispositions and joint ventures, compared with 2011.

After preferred dividends, net earnings attributable to Forest City Enterprises, Inc. common shareholders were $4.3 million, or $0.02 per share, and $48.0 million, or $0.29 per share, for the three and six months ended July 31, 2011, respectively.  Prior year net earnings attributable to Forest City Enterprises, Inc. common shareholders were $118.7 million, or $0.62 per share, and $103.2 million, or $0.57 per share, for the three and six months ended July 31, 2010, respectively.  All per share amounts are on a fully diluted basis.

Revenues

Second-quarter 2011 consolidated revenues were $253.2 million compared with $294.2 million last year. First half 2011 revenues were $561.6 million, compared with $563.0 million for the six months ended July 31, 2010.  

Review of Results

(Exhibits illustrating factors impacting both second-quarter and year-to-date 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 second-quarter 2011 Supplemental Package furnished to the Securities and Exchange Commission.)

Second-Quarter EBDT

Total EBDT for the three months ended July 31, 2011 was $70.7 million, compared with $105.6 million for the three months ended July 31, 2010. As referenced earlier, the primary driver of the variance in quarter-over-quarter EBDT was the second quarter 2010 pre-tax gain of $31.4 million related to the disposition of a partial interest in the Nets basketball team.

For the 2011 second quarter, EBDT from Forest City’s combined Commercial and Residential Segments (also referred to as the company’s rental properties portfolio) was flat compared with the same period in 2010. Positive factors impacting EBDT from the portfolio included increased EBDT of $7.3 million in the fair market value of certain derivatives which were marked to market through interest expense (as these derivatives did not qualify for hedge accounting), a $5.3 million gain on early extinguishment of debt related to the early retirement of an Urban Development Action Grant, and increased comparable property net operating income of $3.7 million.

These gains were offset by decreased EBDT from asset dispositions and joint ventures of $5.3 million, increased write-offs of abandoned projects of $4.5 million, decreased income of $3.0 million from the sale of state and federal Historic Preservation and New Market tax credits, and decreased EBDT of $1.8 million from new properties, primarily due to lease-up losses at 8 Spruce Street, which opened its first phase in the first quarter of 2011, and Presidio Landmark, which opened in the third quarter of 2010.

In the company’s other reporting segments, EBDT results in the Land Segment decreased $2.4 million, compared with the second quarter of 2010. EBDT results from the Nets Segment decreased $27.7 million, compared with the same period in 2010, primarily due to the nonrecurring 2010 gain on disposition of partial interest of $31.4 million, partially offset by the decrease in Forest City’s allocated share of team losses of $3.7 million.

Corporate pre-tax EBDT decreased $10.1 million, primarily due to an inducement payment of $10.8 million to certain note holders related to the early retirement of a portion of the company’s Senior Notes in exchange for Class A common stock, which was accounted for as loss on early extinguishment of debt.

Finally, EBDT between the comparable periods was favorably impacted by an increased tax benefit of $5.4 million.

Year-to-date EBDT

Total EBDT for the six months ended July 31, 2011 increased by $22.1 million, or 12.5 percent, to $198.1 million, compared with $176.0 million for the six months ended July 31, 2010.

In addition to the factors described above under “Second-Quarter EBDT,” year-to-date results were favorably impacted by the 2011 first quarter sale of land and air rights to Rock Ohio Caesars Cleveland, LLC, for $42.6 million for development of a Cleveland casino adjacent to Tower City Center.

NOI, Occupancies and Rent

Overall comparable property net operating income (NOI) increased 2.5 percent during the second quarter compared with the same period a year ago. Comp NOI increased across all of the company’s rental property types with increases of 1.6 percent in retail, 3.1 percent in office, and 3.1 percent in apartments.  

Comparable property NOI, defined as NOI from properties opened and operated in the three and six months ended July 31, 2011 and 2010, 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 on the full-consolidation method.

At July 31, 2011, comparable retail occupancies were 90.3 percent, compared with 90.2 percent at July 31, 2010, and regional mall sales averaged $418 per square foot on a rolling 12-month basis. Year-to-date comparable mall sales in the company’s retail portfolio increased 6.5 percent, compared with the same period in 2010. Comparable office occupancies decreased to 90.3 percent, compared with 90.9 percent last year.

In the residential portfolio, comparable average occupancies for the six months ended July 31, 2011, increased to 94.8 percent, compared with 93.0 percent last year. Year-to-date comparable residential net rental income (defined as gross potential rent less vacancies and concessions) increased to 91.9 percent, compared with 89.0 percent in the same period in 2010.

Commentary

“Our portfolio continued to show strength in the second quarter, despite the overhang of economic uncertainty, high unemployment and market volatility,” said David J. LaRue, Forest City president and chief executive officer. “Our residential portfolio had increased comp NOI, occupancy and net rental income, compared with the same period in 2010, as we continue to see solid fundamentals in multifamily, particularly in our core markets. Our retail portfolio continues to improve, with gains in comp NOI, comparable occupancy and year-to-date comparable mall sales. In office, quarter-over-quarter occupancy was down modestly on the timing of lease expirations, but comp NOI was up due to improved operating performance in our life science office properties.

“During the quarter, we also made important progress in our ongoing effort to improve our balance sheet and overall debt metrics. In particular, the recapitalization and modified financing for 8 Spruce Street and DKLB BKLN, which we announced in early July, reduced our pro-rata share of the debt on these projects by more than $285 million, while also extending loan maturities for both properties. In addition, our successful offering of $350 million of Convertible Senior Notes, which closed July 19, took advantage of a window of opportunity in the debt markets to secure capital at an attractive rate and term. We have used, and continue to use, the proceeds from that offering to address higher-rate, nearer-term maturities, including selectively retiring debt at a discount.

“We’re pleased with the overall progress of our under-construction pipeline, particularly the remarkable pace of lease-up at our 8 Spruce Street project in Manhattan. We also continue to take advantage of entitled opportunities at our large, mixed-use projects. These include the 220-unit Novella apartments at Stapleton in Denver, for which we secured construction financing and began preliminary site work in early August, and the first residential building at Atlantic Yards in Brooklyn, for which we filed for building permits in late August.”

Openings and Projects Under Construction

During the second quarter, Forest City continued lease-up of 8 Spruce Street, a 903-unit residential tower in Manhattan, and began the initial phased opening of Westchester’s Ridge Hill, a mixed-use retail center in Yonkers, New York.

The pace of lease up at the Frank Gehry-designed 8 Spruce Street has been noteworthy and a testament to the quality of the property and strength of the lower Manhattan rental submarket. The leasing office opened February 18 and the first tenant move-ins occurred the week of March 14.  As of August 30, more than 450 leases have been executed, or approximately half of the total units in the building at completion, at rents at or above pro-forma for the units leased to date. More than 350 units are already occupied, and build-out continues for units on the upper floors.

At Westchester’s Ridge Hill, tenants Cinema De Lux and REI opened during the quarter, as did the WESTMED Medical Group, the project’s anchor office tenant. Additional tenant openings are anticipated before year end, leading up to the opening of anchor Lord & Taylor in February 2012. Progress continues in both construction and leasing, and the center is currently 52 percent leased.

At the end of the second quarter, the company had four projects under construction at a total project cost of $1.7 billion at Forest City’s pro-rata share ($1.8 billion at full consolidation). In addition to 8 Spruce Street and Westchester’s Ridge Hill, referenced above, the under-construction pipeline includes the following:

Work continues at Barclays Center at Atlantic Yards, and an official opening date of September 28, 2012 has been set for the arena. Approximately 56 percent of forecasted contractually obligated revenues for the arena are currently under contract.

In Washington, D.C., Foundry Lofts, the first residential building at The Yards mixed-use project, is nearing completion. This adaptive reuse of a former Navy Yard industrial building has 170 loft-style apartments. Initial leasing began August 15 and early interest has been strong. Initial move-ins are anticipated in November. Two restaurant tenants have executed leases and are expected to open in the building’s street-level retail space in the first quarter of 2012.

After the close of the second quarter, the company secured construction financing and subsequently began construction of the 85-unit first phase of Novella Apartments at Stapleton in Denver. The new project is expected to include 220 units at full build-out, adding to the more than 500 apartment units already at Stapleton.

In Brooklyn, design and engineering work continue for the first residential building at Atlantic Yards, and the company recently applied for building permits. Finally, after the close of the second quarter, the company broke ground at The Yards in Washington, D.C. on Boilermaker Shop, an adaptive reuse project that will include a total of approximately 41,000 square feet of ground-level retail and mezzanine office space.    

Liquidity and Financing Activity

At July 31, 2011, the company had $456.2 million ($412.3 million at full consolidation) in cash on its balance sheet, and $260.7 million of available capacity on its revolving line of credit. These balances were favorably impacted by the proceeds from the company’s successful $350 million offering of Senior Notes in July, as well as by asset dispositions during the quarter.

Since January 31, 2011, the company has addressed, through closed loans and committed financings, $844.4 million at full consolidation ($702.9 million at its pro-rata share) of the $1.2 billion ($1.1 billion at pro-rata) of long-term debt maturities coming due in fiscal year 2011. Additionally, the company addressed $1.3 billion ($1.1 billion at pro-rata) of loans maturing in future years. In total, since January 31, 2011, the company has reduced the overall debt portfolio by $1.6 billion ($628.7 million at pro-rata) through asset dispositions, loan paydowns, joint ventures and property-level recapitalizations.

As of July 31, 2011, the company's weighted-average cost of nonrecourse debt increased to 5.26 percent from 5.12 percent at July 31, 2010, primarily due to an increased proportion of fixed rate mortgage debt that generally has a higher interest rate and longer duration. Fixed-rate mortgage debt, which is inclusive of interest rate swaps, decreased to 5.79 percent at July 31, 2011 from 6.09 percent at July 31, 2010. The proportion of fixed-rate debt increased to 81 percent at July 31, 2011 from 69 percent at July 31, 2010. Variable-rate mortgage debt decreased from 2.97 percent at July 31, 2010, to 2.94 percent at July 31, 2011.

Outlook

“We are mindful of the slow pace of economic recovery and the resulting market volatility,” said LaRue. “Accordingly, our outlook is cautious. Despite the uncertain economic conditions, we continue to see solid real estate fundamentals in our core markets and are pleased with the strength of our portfolio. We are focused on bringing our under-construction projects online as contributors to additional growth.

“As we have done for the past two years, and continued to do in the second quarter, we will maintain a primary focus on strengthening the balance sheet and improving our overall debt metrics. While there is more work to do, the progress we have made to date is noteworthy and has significantly strengthened our company. We have already begun to seed additional future growth, particularly in multifamily, by activating existing entitlements in our core markets and very selectively taking advantage of new opportunities.

“We are confident in the long-term outlook for our business and our country. We are grateful for the continuing support of our associates, investors, lenders, tenants, business partners, and the communities where we live and work.”

Corporate Description

Forest City Enterprises, Inc. is an NYSE-listed national real estate company with $10.7 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 three months and six months ended July 31, 2011, with reconciliations of non-GAAP financial measures, such as EBDT, comparable NOI and pro-rata financial statements, to their most directly comparable GAAP financial measures.

EBDT

The company uses an additional measure, along with net earnings, to report its operating results. This non-GAAP measure, referred to as Earnings Before Depreciation, Amortization and Deferred Taxes (“EBDT”), 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); and viii) cumulative or retrospective effect of change in accounting principle (net of tax).

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. The company's EBDT may not be directly comparable to similarly titled measures reported by other companies.

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, 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 our 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, 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.