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

CLEVELAND, Dec. 8, 2011 /PRNewswire/ -- Forest City Enterprises, Inc. (NYSE: FCEA and FCEB), today announced EBDT, net earnings/loss and revenues for the three and nine months ended October 31, 2011.

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EBDT

Third-quarter 2011 EBDT (earnings before depreciation, amortization and deferred taxes) was $77.5 million, compared with $90.7 million in the third quarter of 2010. Year-to-date EBDT was $275.6 million, compared with $266.7 million for the first nine months of 2010.

On a fully diluted, per-share basis, third-quarter 2011 EBDT was $0.37, compared with $0.46 for the third quarter of 2010. Year-to-date per-share EBDT was $1.34, compared with $1.37 for the first nine months of 2010.

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 and Loss

The third-quarter 2011 net loss attributable to Forest City Enterprises, Inc. was $38.0 million, compared with a net loss of $46.8 million in the third quarter of 2010. For the nine months ended October 31, 2011, net earnings attributable to Forest City Enterprises, Inc. were $17.7 million compared with $60.5 million for the same period in 2010.

After preferred dividends, the third-quarter 2011 net loss attributable to Forest City Enterprises, Inc. common shareholders was $41.9 million, or $0.25 per share, compared with a net loss of $50.6 million, or $0.33 per share in the third quarter of 2010. For the nine months ended October 31, 2011, net earnings attributable to Forest City Enterprises, Inc. common shareholders were $6.1 million, or $0.03 per share, compared with $52.5 million or $0.33 per share, for same period in 2010 (per share amounts are on a fully diluted basis).

The company regularly reviews its portfolio of real estate, including real estate held by unconsolidated entities, for impairments whenever events or changes indicate that an asset’s carrying value may be in excess of fair value. Impairment is a GAAP accounting treatment that impacts net earnings, but does not impact EBDT or cash flow. The following assets accounted for the majority of impairments in the third quarter.

• The Village at Gulfstream Park, a specialty retail center in Hallandale Beach, Florida, opened in the first quarter of 2010. Lease up of the center, which is anchored by Gulfstream Park thoroughbred race track and casino, took place during very difficult economic conditions, resulting in a longer lease-up period and higher rent concessions than projected. Major national tenants, particularly hard goods retailers, have reported strong sales, but fashion retailers have struggled and the company is actively remerchandising the center to match the demand of the marketplace. The third quarter impairment on the equity-method investment was $34.6 million, reducing the company’s net investment in the property to near zero.
• 250 Huron, an office building in Cleveland, was vacated by its single tenant, which had occupied the entire building. Efforts to re-lease the space were unsuccessful and the company determined that it no longer intended to hold the property long term. This change in the estimated holding period resulted in an impairment charge of $10.3 million in the third quarter, taking the carrying value of the asset well below the outstanding balance on the nonrecourse mortgage.

Revenues

Third-quarter 2011 consolidated revenues were $261.2 million compared with $287.0 million for the comparable period last year. Revenues for the nine months ended October 31, 2011, were $822.8 million compared with $850.0 million for the comparable period in 2010.

Review of Results

(Exhibits illustrating factors impacting both third-quarter and year-to-date 2011 EBDT results, compared with results for the comparable periods in 2010, are available on the Investors page of the company’s web site, www.forestcity.net, and are included in the company’s third-quarter 2011 Supplemental Package furnished to the Securities and Exchange Commission.)

Third-Quarter EBDT

Third-quarter 2011 total EBDT of $77.5 million was impacted by the following factors:

Pre-tax EBDT from the company’s combined Commercial and Residential Segments (also referred to as the rental properties portfolio), decreased $14.9 million compared with the third quarter of 2010, primarily due to reduced EBDT from properties sold of $9.0 million, lower EBDT of $4.3 million due to previously anticipated vacancies at two Brooklyn office properties, increased write-offs of abandoned development projects of $4.0 million, decreased EBDT from the change in fair market value of derivatives between the comparable periods which were marked to market through interest expense of $3.3 million, and reduced EBDT from new property openings of $3.3 million (primarily due to lease-up losses at 8 Spruce Street and Westchester’s Ridge Hill). These decreases in the portfolio were partially offset by increased gains on early extinguishment of nonrecourse mortgage debt of $11.4 million, primarily related to buying out a loan on a mixed-use development project in Las Vegas at a discount.

The company’s Land Segment provided a pre-tax EBDT increase of $3.4 million, primarily due to a gain on early extinguishment of nonrecourse mortgage debt of $1.9 million, and increased sales of $1.5 million, compared with the same period in 2010.

The Nets provided a pre-tax EBDT decrease of $10.9 million, as expected, due to the increase in the company’s allocated share of losses.

Corporate pre-tax EBDT decreased $3.2 million, primarily due to fees associated with strategic planning and process improvement initiatives. Finally, EBDT for the third quarter was favorably impacted by a larger tax benefit of $12.4 million compared to the third quarter of 2010.

Year-to-date EBDT

EBDT for the nine months ended October 31, 2011 was $275.6 million. In addition to the factors described above under “Third-Quarter EBDT,” year-to-date results were impacted by:

• Increased EBDT from the rental properties portfolio of $40.7 million, primarily related to the first-quarter 2011 sale of land and air rights to Rock Ohio Caesars Cleveland, LLC, for the development of a casino in downtown Cleveland.
• Decreased EBDT from the Nets of $34.6 million, primarily due to the nonrecurring 2010 gain on disposition of partial interest in the team.
• Decreased EBDT in the company’s Corporate Segment of $20.2 million, primarily related to the 2011 loss on early extinguishment of debt on the exchange of a portion of our Senior Notes for Class A common stock of $10.8 million, and the nonrecurring 2010 gain on early extinguishment of debt related to the exchange of Senior Notes of $8.2 million.

NOI, Occupancies and Rent

Overall comparable property net operating income (NOI) decreased 1.5 percent during the third quarter of 2011, compared with the same period a year ago. Comparable property NOI for the quarter increased 12.0 percent in apartments and decreased 1.5 percent in retail and 7.6 percent in office. For the year to date, total comparable property NOI is up 0.3 percent with increases of 6.7 percent in apartments and 1.1 percent in retail. Comp NOI in office is down 3.1 percent, year to date, primarily due to the previously referenced anticipated vacancies in Brooklyn.

Comparable property NOI, defined as NOI from properties operated in the three and nine months ended October 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 using the full-consolidation method.

At October 31, 2011, comparable retail occupancies were 91.2 percent, compared with 90.6 percent at October 31, 2010, and comparable regional mall sales averaged $440 per square foot on a rolling 12-month basis. Year-to-date comparable mall sales in the company’s retail portfolio increased 7.3 percent, compared with the same period in 2010. Comparable office occupancies were 90.5 percent at October 31, 2011, compared with 91.2 percent for the same period last year.

In the residential portfolio, comparable average occupancies for the nine months ended October 31, 2011, were 94.7 percent, compared with 93.6 percent last year. Year-to-date comparable residential net rental income (defined as gross rent less vacancies and concessions) increased to 92.0 percent, compared with 89.6 percent in the same period in 2010.

Commentary

“The company’s third-quarter results met our expectations as we continue to see solid fundamentals in our core markets and product types, despite ongoing concerns about high unemployment and lingering economic uncertainty,” said David J. LaRue, Forest City president and chief executive officer. ”Our portfolio’s performance was paced by multifamily, which had a double-digit percentage increase in comp NOI, as well as increased occupancy and net rental income. This was partially offset by a decrease in retail during the quarter, primarily related to vacancies at a number of retail centers, along with rent concessions and vacancies at The Avenue at Tower City in Cleveland and The Village at Gulfstream Park, and the timing of an unanticipated vacancy at East River Plaza in Manhattan, for which we have strong interest from additional prospective tenants. Office was down as anticipated due to the timing of lease expirations at two of our Brooklyn office buildings. Notably, a significant percentage of that office space has now been re-leased and will begin contributing to results in future periods.

“Despite the retail comp NOI decline for the quarter, we are pleased with the overall momentum of our regional malls, which have shown comparable mall increases in sales per square foot on a rolling 12-month basis for each of the past four quarters. Year to date, sales at our comparable malls are up 7.3 percent.

“We are also pleased with the progress of our pipeline projects. During the quarter, we took advantage of entitled opportunities in our core markets and large, mixed-use projects, together with strong fundamentals in multifamily, to start construction on Botanica Eastbridge, a second under-construction multifamily project at Stapleton in Denver, and to move forward with The Continental, an adaptive reuse apartment project at our Mercantile Place development in Dallas.

“In our New York core market, the lease-up of 8 Spruce Street continues at a strong pace, a reflection of a unique product and a very strong rental submarket in lower Manhattan. At Westchester’s Ridge Hill in Yonkers, additional openings and lease commitments are evidence of momentum. Community, media and shopper reaction confirm the project’s quality and superior location, as well as the demographic strength of the service area. Finally, in Brooklyn, the Barclays Center arena is on track to deliver next year, and planning is underway for the first residential tower at Atlantic Yards.”      

Openings and Projects Under Construction

Lease-up continues at the Frank Gehry-designed 8 Spruce Street in lower Manhattan. As of the end of November, 550 leases had been executed, representing 61 percent of the total units at completion, with rents consistent with pro-forma for the units leased to date. The company currently has certificates of occupancy for 689 units, and more than 525 units are already occupied while build-out continues for the remaining units on the upper-most floors. The building continues to receive much national and international acclaim for its architectural beauty, and as a symbol of the rebirth of the lower Manhattan rental residential market in the wake of the 9/11 terrorist attacks a decade ago.

Westchester’s Ridge Hill in Yonkers celebrated a “brand” opening event in late October, with the opening of 12 additional restaurant and retail tenants, including The Cheesecake Factory, Gap, H&M, L.L. Bean, Old Navy, Orvis, Sephora, Whole Foods, Yard House, Charming Charlie, Sur La Table and Desigual. They join National Amusements’ Cinema de Lux, Dick’s Sporting Goods and REI, which opened earlier in the year, as well as WESTMED Medical Group, the project’s anchor office tenant. Additionally, Guitar Center is expected to open this month in time for holiday shopping. The openings and related celebrations generated significant shopper traffic and considerable positive publicity for the center. In early December, the company announced signed leases with LA Fitness, T.J.Maxx, Pandora and Francesca’s Collection, with anticipated openings in 2012. Anchor Lord  & Taylor is expected to open its 80,000-square-foot full-line store in March 2012. The center is currently 56 percent leased.

At the end of the third quarter, the company had eight projects under construction at a total project cost of $1.3 billion at Forest City’s pro-rata share ($1.9 billion at full consolidation). In addition to Westchester’s Ridge Hill, referenced above, the under-construction pipeline includes the following:

Work continues at Barclays Center at Atlantic Yards, and the arena is on schedule for opening in September 2012. More than 90 percent of steel erection has been completed and installation of the roof deck has begun. Interior build-out is underway on all levels and the structure is expected to be fully enclosed and water tight in the first quarter of 2012. Approximately 56 percent of forecasted contractually obligated revenues for the arena are currently under contract.

In Washington, D.C., Foundry Lofts, a 170-unit, adaptive reuse, 80/20 apartment property at The Yards is nearly complete. Pre-leasing began in August and as of the end of November there were commitments for more than half of the units. First tenant move-ins occurred in the last week of November as interior build-out continues for the property’s penthouse units. Two restaurant tenants have executed leases for street-level space and are expected to open in the first quarter of 2012.

Also at The Yards, construction continues on Boilermaker Shops, an adaptive reuse property that will include 41,000 square feet of ground-level retail and mezzanine office space. Six restaurant tenants have already committed to locate at the property, and the mezzanine office space is fully leased. The property is currently 73 percent leased. Boilermaker Shops is expected to open in the third quarter of 2012.

The rapid lease-up and market acceptance to date of these two D.C. projects – Foundry Lofts and Boilermaker Shops – demonstrate the overall quality and superior location of The Yards, where the company has substantial additional future entitlement, as well as the strength of the overall D.C. market. They are also examples of the company’s strategy of focusing on activating existing entitlement at its large, mixed-use projects in core markets to drive future growth.

Forest City is also activating existing entitlement in its Denver core market, where, in the third quarter, construction began on two apartment communities at the Stapleton mixed-use redevelopment project. The first is the 85-unit first phase of The Aster Town Center apartment community (formerly Novella). The project is expected to ultimately include 220 units after completion of future phases. Notably, the flexible zoning at Stapleton will allow the company to deliver the first phase, from concept to first move-ins, within 18 months, in order to meet demand for rental housing at Stapleton. Completion is expected in the third quarter of 2012.

The second new apartment community under construction at Stapleton is the 118-unit Botanica Eastbridge, which is expected to be completed in the fourth quarter of 2012. Both Botanica Eastbridge and The Aster Town Center will be fully integrated into the Stapleton lifestyle, which features walkable neighborhoods built around mixed-use town centers, as well as ample parks and recreation facilities, green space and other amenities.

Also at Stapleton, the long-awaited new interchange off of Interstate 70 opened in late October, ahead of schedule. The interchange will substantially enhance access to existing retail at Stapleton and will open hundreds of acres of land north of I-70 to potential new commercial and office development, as well as additional future residential neighborhoods. The interchange was achieved through a public private partnership led by the City of Denver, and funding included federal stimulus dollars and City of Denver bonds, as well as contributions from Forest City and the Park Creek Metropolitan District.

In September, the company closed on long-term, fixed-rate financing with the Federal Housing Authority for the redevelopment of the Continental Building in downtown Dallas. The building, originally constructed in 1951 as part of the historic Mercantile Bank project, will be converted to a 203-unit rental apartment community, with anticipated completion in the first quarter of 2013. The Continental Building will join three other Forest City apartment properties – the Merc, the Element and the Wilson – as part of the larger Mercantile Place on Main development, which also features street-level retail and restaurants and is adjacent to Main Street Gardens, a city park.

Other Updates and Events

In October, Forest City announced the closing of an agreement with the U.S. Air Force for the development and management of 2,185 family homes at four U.S. Air Force bases in the Southeast, bringing Forest City's military housing portfolio to more than 14,000 homes. Forest City will manage an initial development period valued at $308.1 million and will also earn an on-going fee as a part of its 50-year property management responsibility. The bases, collectively known as the Southern Group, are Joint Base Charleston in S.C.; Shaw Air Force Base in Sumter, S.C.; Keesler Air Force Base in Biloxi, Miss.; and Arnold Air Force Base in Tullahoma, Tenn. Construction activity has begun at all four bases.  

Liquidity and Financing Activity

As part of its strategy to further de-lever and enhance its balance sheet and overall debt metrics, the company carefully monitors liquidity and debt maturities.  At October 31, 2011, the company had $281.4 million ($229.7 million at full consolidation) in cash on its balance sheet, and $375.8 million of available capacity on its revolving line of credit.

Since January 31, 2011, the company has addressed, through closed loans and committed financings, $964.0 million at full consolidation ($899.3 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 2011. Additionally, the company addressed $1.7 billion ($1.2 billion at pro-rata) of loans maturing in future years. In total, since January 31, 2011, the company has reduced its debt by approximately $1.9 billion (approximately $880 million at pro-rata), primarily through standard amortization, asset dispositions, loan paydowns, joint ventures and property-level recapitalizations, which were partially offset by construction draws and refinancings which totaled  approximately $165 million (approximately $180 million at pro-rata).

In financing its real estate assets, the company pursues a strategy of exclusively using nonrecourse mortgage debt at the property level.  As of October 31, 2011, the company's weighted-average cost of nonrecourse debt increased to 5.21 percent from 5.07 percent at October 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 5.69 percent at October 31, 2011 from 6.00 percent at October 31, 2010. The proportion of fixed-rate debt increased to 82 percent at October 31, 2011 from 70 percent at October 31, 2010. Variable-rate mortgage debt increased from 2.91 percent at October 31, 2010, to 3.07 percent at October 31, 2011.

Outlook

“We are pleased overall with the year-to-date performance of our rental properties portfolio, and in particular the residential multifamily component,” said LaRue.  “We continue to see solid fundamentals in our core markets and products.  These positives in our business and industry overall are in contrast to the slow pace of economic growth and high unemployment, conditions that leads us to remain cautious in our outlook, even as we feel confident in the underlying strength of our business.

“Our primary strategic direction going forward is to focus on our core markets and products, and drive operational excellence and profitable growth from the portfolio, while we selectively activate existing entitlements to enhance additional future growth. We will also continue to de-risk the business, both by delivering and opening our major pipeline projects, and by working to further improve our balance sheet and overall debt metrics.”

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 three months and nine months ended October 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.