Forest City Reports Fiscal 2013 Third-Quarter and Year-to-Date Results

CLEVELAND, Dec. 9, 2013 /PRNewswire/ -- Forest City Enterprises, Inc. (NYSE: FCEA and FCEB) today announced FFO, Operating FFO, net earnings/loss and revenues for the year to date and the third quarter ended October 31, 2013.

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FFO
Third-quarter FFO (funds from operations) was a loss of $19.0 million, compared with positive FFO of $79.6 million in the third quarter of 2012. On a fully diluted, per-share basis, third-quarter 2013 FFO was a loss of $0.10, compared with positive FFO of $0.37 per share in 2012. Year-to-date FFO was $112.8 million, or $0.55 per share, compared with $189.9 million, or $0.91 per share, for the first nine months of 2012.

The largest factor impacting the quarterly FFO variance was a 2013 non-cash impairment of non-depreciable real estate of $97.4 million, related to a development property in Las Vegas that the company has determined it does not intend to hold long term. Other factors impacting the quarter-over-quarter variance included increased write-offs of abandoned development projects of $26.1 million, $12.3 million in increased losses on extinguishment of debt related to redemption of the company's 7.375 percent Senior Notes due 2034 and remaining 6.50 percent Senior Notes due 2017, and $10.2 million of reduced capitalized interest on projects under construction as the company has reduced the size of its under-construction and development pipeline. 

Partially offsetting these factors in the third quarter were increased income tax benefits of $63.4 million compared with the same period in the prior year, a pre-tax FFO increase of $7.4 million from the Nets, primarily due to a decrease in allocated losses, reduced interest expense on the mature portfolio of $4.7 million, decreased corporate expenses of $4.5 million, which includes decreased corporate interest expense of $3.2 million as a result of the company's efforts to improve its balance sheet and debt metrics.

FFO and FFO per share are non-GAAP measures commonly used by publicly traded real estate companies. Included with this press release is a table reconciling net earnings (loss), the most comparable GAAP measure, to FFO.

Operating FFO
Third-quarter Operating FFO was $41.3 million, compared with $62.3 million in the third quarter of 2012. Year-to-date Operating FFO was $121.9 million, compared with $182.3 million for the first nine months of 2012. Factors impacting Operating FFO are illustrated in bridge diagrams included in the company's Third Quarter 2013 Supplemental Package furnished to the Securities and Exchange Commission (SEC) and available on the company's website, www.forestcity.net.

Operating FFO is a non-GAAP measure derived from FFO. The company believes Operating FFO provides investors with additional information about its core operations. Included with this press release is a table reconciling Operating FFO to FFO.

Net Earnings/Loss
Third-quarter net earnings attributable to Forest City Enterprises, Inc. were $153.3 million, compared with a net loss of $1.1 million in the third quarter of 2012. A primary factor impacting the positive net earnings variance for the quarter was the closing of joint ventures with QIC for a portfolio of seven of Forest City's regional retail malls. That closing resulted in a net gain on disposition of partial interest of $381.6 million. Net earnings for the nine months ended October 31, 2013, were $117.7 million, compared with a net loss of $22.0 million for the same period in 2012.

Third-quarter net earnings attributable to Forest City Enterprises, Inc. common shareholders were $153.3 million, or $0.67 per share, compared with a net loss of $18.8 million, or $0.11 per share, in the same period in 2012. For the first nine months of 2013, net earnings attributable to common shareholders were $117.5 million, or $0.57 per share, compared with a net loss of $47.5 million, or $0.28 per share for the first nine months of 2012. Per-share amounts are on a fully diluted basis.

Additional explanations of factors impacting FFO, Operating FFO and net earnings for the third quarter and first nine months of 2013 is included in the company's Third Quarter 2013 Supplemental Package furnished to the SEC and available on the company's website, www.forestcity.net.

Revenues
Third-quarter 2013 consolidated revenues from real estate operations were $266.2 million, compared with $272.8 million for the comparable period in 2012. For the first nine months of 2013, consolidated revenues from real estate operations were $853.9 million, compared with $791.7 million for the first nine months of 2012.

Commentary
"Our results in the third quarter directly reflect the ongoing execution of our strategies to focus on core markets where we have strong assets and entitled development opportunities, and improve our balance sheet and debt metrics to build a strong, sustaining capital structure," said David J. LaRue, Forest City president and chief executive officer. "Our FFO results for the quarter were negatively impacted by approximately $145 million of non-cash and other transactional factors.  These included a $97.4 million impairment of a development project in Las Vegas, $26.5 million of increased write-offs of abandoned development properties, $13.1 million of increased losses on extinguishment of debt, and $8.2 million of demolition costs at Ten MetroTech in Brooklyn.  Absent those items, and net of the tax impact, quarterly FFO would have been in line with consensus estimates.

"A major event for Forest City in the third quarter was the closing of our joint ventures with QIC for a portfolio of seven of our regional retail malls.  This new strategic capital partnership is a great opportunity to work with an experienced global investor to enhance and further invest in these retail malls.  The closing was also a major liquidity event, generating approximately $340 million, the majority of which we have used in our ongoing deleveraging, with the remainder to be used to fund expansion, renovation and other reinvestment in these centers.

"Our operating results continue to demonstrate strength in the mature portfolio, particularly in apartments, where comparable property net operating income was up ahead of peer averages. Retail comp NOI was up modestly, trailing peer averages due to ongoing repositioning and renovation projects at a number of centers.  Office comp NOI was down, driven by vacancy at One Pierrepont Plaza in Brooklyn.  We continued to see steady sales growth on a rolling 12-month basis in our regional malls during the quarter, as well as higher average monthly rents in our comparable apartments. New leases in both our office and retail portfolios were also up over prior rents on a rolling 12-month basis. Comp occupancies also increased across all our major property types, compared with the third quarter of 2012.

"During the quarter, we continued to execute on our deleveraging strategy, including redemption of our 2034 Senior Notes, our remaining 2017 Notes, and, after the end of the quarter, our remaining 2014 Notes.  We were gratified to see our ongoing efforts to improve our balance sheet and debt metrics acknowledged with ratings upgrades from both Moody's and Standard & Poor's during the third quarter. We also continued the disposition of non-core properties, with two asset sales completed in Pittsburgh, including the last hotel in our portfolio.

Atlantic Yards
"As our investors are aware, we have been actively committed to Atlantic Yards in Brooklyn for a decade, even as the project has been delayed by numerous lawsuits from opponents and the impact of the recession.  To date, we and our minority partners have invested equity of approximately $545 million, with total costs of approximately $770 million, including debt. This significant investment, made while overcoming multiple unforeseen obstacles, reflects Forest City's unwavering commitment to this project over the past 10 years, and includes development costs, interest carry and other costs. In addition to our current investment, we are committed to invest in future project costs, including construction of the permanent rail yard, the foundations and a platform above the rail yard, land acquisition and air rights.   

"In October, we announced a memorandum of understanding with the Greenland Group to create a joint venture to continue the development of Atlantic Yards in Brooklyn.  We are excited about the potential opportunity this joint venture presents to accelerate vertical development at the project, including delivery of affordable housing. We hope to reach a definitive agreement with Greenland in the fourth quarter, but cannot give assurances that the transaction will occur. If the joint venture closes, there is a strong possibility the project will convert from full consolidation to equity-method accounting treatment on our books.  The change in accounting treatment would require us to record our investment in the project at the lesser of fair value or our current carrying cost, likely resulting in a non-cash impairment in the range of $250 million to $350 million, as early as our fourth quarter, to more closely reflect current market values. The likely impairment relates only to land and other costs to date, and not to Barclays Center and B2, which are not part of the contemplated joint venture with Greenland Group.

"If we are able to finalize our strategic partnership, the Greenland Group will invest with us, in proportion to their acquired ownership in future project costs, including a capital contribution for certain costs to date, and their share of the equity required for future vertical development. We believe creating a joint venture with the Greenland Group would further strengthen our ability to take this important project to the next level. It would also align with our strategy of creating partnerships to activate our pipeline, generate liquidity and reduce risk."

Yearend Change
"As a reminder to investors, Forest City is completing the transition from a January 31 fiscal yearend to a calendar yearend and we will report results for an 11-month year ending December 31, 2013.  Beginning in 2014, we will report on calendar quarters and a full, 12-month calendar year."

NOI, Occupancies and Rent
Overall comparable property NOI decreased 0.1 percent during the third quarter, compared with the same period in 2012, with increases of 5.3 percent in apartments and 0.5 percent in retail, and a decrease of 4.0 percent in office.

Comparable property NOI, defined as NOI from stabilized properties operated in the three months ended October 31, 2013 and 2012, 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 are schedules that present comparable property NOI on the full-consolidation method and a reconciliation of NOI to net earnings (loss).

Comparable office occupancies increased to 92.6 percent at October 31, 2013, compared with 92.0 percent last year. On a rolling 12-month basis, rent per square foot in new office leases increased 5.6 percent over expiring leases.

At October 31, 2013, comparable retail occupancies were 92.4 percent, up from 92.0 percent in 2012. Sales in the company's regional malls averaged $482 per square foot on a rolling 12-month basis, up from $465 per square foot for the same period in 2012, and up from $480 per square foot in the second quarter of 2013. Year-to-date comparable sales in the company's regional malls increased 1.6 percent, compared with results for the comparable period in 2012. In the third quarter, new, same-space leases in the company's regional malls increased 15.2 percent over prior rents on a rolling 12-month basis.

In the residential portfolio, comparable average occupancies year to date were 94.8 percent, up from 94.5 percent for the comparable period last year. For the first nine months of 2013, average monthly residential rents for the company's comparable apartments rose to $1,296, a 3.8 percent increase compared with $1,249 for the comparable period in 2012. Comparable average rents in the company's core markets were $1,692, a 4.5 percent increase from $1,619 for the same period in 2012.

Debt Maturities, Financing Activity and Liquidity
Since January 31, 2013, the company has addressed, through closed loans and committed financings, $832.6 million ($1.0 billion at pro-rata) of the $835.6 million ($1.0 billion at pro-rata) of long-term debt maturities coming due in fiscal year 2013.  Additionally, since January 31, 2013, the company addressed $1.5 billion ($1.0 billion at pro-rata) of loans maturing in future years.

In financing its real estate assets, the company uses nonrecourse mortgage debt at the property level and seeks to fix interest rates on its mortgage debt through long-term financings in order to take advantage of historically low interest rates in the current environment. At October 31, 2013, the company's overall weighted-average cost of debt decreased to 4.81 percent, compared with 5.10 percent at October 31, 2012. Fixed-rate debt represented 80 percent of total debt at October 31, 2013. The company's weighted-average life of its debt increased to 8.1 years at October 31, 2013, from 6.9 years at October 31, 2012.

At the end of the third quarter, the company had $249.2 million at the company's pro-rata share ($217.2 million at full consolidation) in cash on its balance sheet and $365.0 million of available capacity on its bank revolving credit facility.

Project Openings and Under Construction
During the third quarter, the company began phased opening of two new apartment projects: 1111 Stratford, a 128-unit community in Stratford, Connecticut, and Aster Conservatory Green at Stapleton in Denver, a 352-unit community. To date, a total of 151 units have been delivered between the two projects and the company has executed leases for 65 of those units.  Also in the third quarter, the company completed Lumber Shed, a 32,000-square-foot, adaptive reuse office building with street-level retail at The Yards in Washington, D.C.  The office component of Lumber Shed will become the new location of Forest City's Washington, D.C. office.  Overall, the property is 80 percent leased.

At the end of the third quarter, Forest City had six projects under construction at a total cost of $320.1 million at the company's pro-rata share ($405.6 million at full consolidation). All six of the projects under construction are apartment communities. They are:

• B2 BKLYN at Atlantic Yards, a 363-unit property being built using a modular construction process in partnership with Skanska USA.  Half of B2's units will be reserved for low, moderate and middle income households. Delivery of the first modules is expected this month, and the project is expected to be completed in the fourth quarter of 2014.

• 2175 Market Street in San Francisco, an 88-unit apartment community that is expected to be completed in the third quarter of 2014.

• Twelve12, a 218-unit apartment project at The Yards in Washington, D.C., that includes 88,000 square feet of street-level retail.  The project is expected to open in the third quarter of 2014 and 92 percent of the retail component is currently leased.

• 3700M, a 381-unit apartment community in Dallas that is expected to open in the third quarter of 2014.

• Radian (formerly 120 Kingston), a 240-unit apartment community in Boston.  Completion is anticipated in the second quarter of 2014.

• Winchester Lofts, a 158-unit adaptive reuse of a historic industrial building in New Haven, Connecticut. The project is expected to be completed in the third quarter of 2014.

Outlook
"As we have stated previously, 2013 is a transformational year for Forest City.  As we continue to execute on our strategic plan, the decisions we make will create near-term volatility as we reshape the business," said LaRue. "Nonetheless, we are encouraged by the performance of our mature portfolio, the future value-creation opportunities in our development pipeline, and the strength of the markets on which we are focused.  There is more to be done, including the stabilization of both Ridge Hill and Barclays Center, and we remain confident in our strategic direction and in our ability to sustain and grow long-term value for our shareholders." 

Corporate Description
Forest City Enterprises, Inc. is an NYSE-listed national real estate company with $9.3 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 SEC on Form 8-K. This Supplemental Package includes operating and financial information for the three and nine months ended October 31, 2013 and 2012, with reconciliations of non-GAAP financial measures, such as FFO, Operating FFO, NOI, comparable NOI and results prepared using the pro-rata consolidation method, to their most directly comparable GAAP financial measures.

FFO
The company uses FFO, along with net earnings (loss) to report its operating results. The majority of the company's peers in the publicly traded real estate industry are Real Estate Investment Trusts ("REITs") and report operations using FFO as defined by the National Association of Real Estate Investment Trusts ("NAREIT"). FFO provides supplemental information about the company's operations. Although FFO is not presented in accordance with GAAP, the company believes it is necessary to understand its business and operating results, along with net earnings, the most comparable GAAP measure.

FFO is defined by NAREIT as net earnings excluding the following items, at the company's proportionate share: i) gain (loss) on disposition of rental properties, divisions and other investments (net of tax); ii) non-cash charges for real estate depreciation and amortization; iii) impairment of depreciable real estate (net of tax); iv) extraordinary items (net of tax); and v) cumulative or retrospective effect of change in accounting principle (net of tax). Net earnings (loss), the most comparable financial measure calculated in accordance with GAAP, is reconciled to FFO in the table titled Reconciliation of Net Earnings (Loss) to FFO below and in the company's Supplemental Package, which the company will also furnish to the SEC on Form 8-K.

Operating FFO
Operating FFO is defined as FFO, as defined by NAREIT, adjusted to exclude: i) activity related to land held for divestiture (including impairment charges); ii) impairment of non-depreciable real estate; iii) write-offs of abandoned development projects; iv) income recognized on state and federal historic and other tax credits; v) gains or losses from extinguishment of debt; vi) change in fair market value of nondesignated hedges; vii) gains or losses on change in control of interests; viii) the adjustment to recognize rental revenues and rental expense using the straight-line method; ix) participation payments to ground lessors on refinancing of properties; x) other transactional items; xi) the Nets pre-tax FFO; and xii) income taxes on FFO. The company believes its presentation of FFO and Operating FFO provides important supplemental information to its investors. Operating FFO 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.

NOI
NOI, a non-GAAP measure, is defined as revenues (excluding straight-line rent adjustments) less operating expenses (including depreciation and amortization for non-real estate groups) plus interest income, equity in earnings (loss) of unconsolidated entities (excluding gain (loss) on disposition, gain (loss) on land held for divestiture activity and impairment of unconsolidated entities), interest expense, gain (loss) on extinguishment of debt and depreciation and amortization of unconsolidated entities. The company believes NOI provides management, as well as investors, with additional information about the company's core business operations and, along with earnings, is necessary to understand the business and operating results.  NOI may not be directly comparable to similarly-titled measures reported by other companies.

Comparable NOI
In addition to NOI, the company uses comparable NOI as a metric to evaluate performance of its operating rental property portfolio, specifically for multi-family, office and retail properties. This measure provides a same-store comparison of operating results of all stabilized properties that are open and operating in both periods presented. Write-offs of abandoned development projects, development costs and unallocated management and service company overhead, net of tax credit income, are not directly attributable to an operating property and are considered non-comparable NOI. In addition, certain income and expense items at the property level, such as lease termination income, real estate tax assessments or rebates and participation payments as a result of refinancing transactions and NOI impacts of changes in ownership percentages, are removed from comparable NOI and are included in non-comparable NOI. Other properties and activities such as Arena, hotels, subsidized senior housing, military housing, the Nets, corporate activities and land are not evaluated on a same-store basis and the NOI from these properties and activities are considered non-comparable NOI.

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 commercial real estate portfolio, general real estate investment and development risks, using modular construction as a new construction methodology and investing in a facility to produce modular units, 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 of owning and operating an arena, 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, changes in federal, state or local tax laws, 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.

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