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(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Date File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
Indicate the number of shares outstanding, including unvested restricted stock, of each of the
issuer’s classes of common stock, as of the latest practicable date.
(Increase) decrease in land held for development or sale(5)(6)
$
(15,057
)
$
1,320
Decrease in notes and accounts receivable (1)(2)(3)
3,248
4,064
Increase (decrease) in other assets (1)(2)(3)(4)
1,246
(19,909
)
Increase in restricted cash (3)
-
(363
)
Increase in accounts payable and accrued expenses(1)(2)(3)(4)(6)
16,148
34,607
Total effect on operating activities
$
5,585
$
19,719
Investing Activities
Increase in projects under development (2)(5)(6)(7)
$
(4,965
)
$
(100,878
)
(Increase) decrease in completed rental properties (2)(3)(4)(5)
(1,879
)
25
Increase in restricted cash (3)
-
(244
)
Proceeds from disposition of a property (1)
20,853
-
Decrease in investments in and advances to affiliates (2)(3)
-
27,685
Total effect on investing activities
$
14,009
$
(73,412
)
Financing Activities
(Decrease) increase in nonrecourse mortgage debt (1)(2)(3)
$
(22,010
)
$
51,970
Increase in additional paid-in capital (7)
2,416
1,732
Dividends declared but not yet paid
-
(9
)
Total effect on financing activities
$
(19,594
)
$
53,693
(1)
Disposition of Grand Avenue, a specialty retail center in the Commercial Group,
including assumption of nonrecourse mortgage debt by the buyer, during the three months
ended April 30, 2009.
(2)
Change to full consolidation method of accounting from equity method due to the
occurrence of a triggering event as described in FIN No. 46(R), “Consolidation of Variable
Interest Entities,” for Shops at Wiregrass, a retail development project in the Commercial
Group, during the three months ended April 30, 2008.
(3)
Change to full consolidation method of accounting from equity method due to the
acquisition of a partner’s interest in Village Center apartment community in the
Residential Group during the three months ended April 30, 2008.
(4)
Finalization of the preliminary purchase price allocation during the three months ended
April 30, 2008 for Commerce Court and Colorado Studios, two office buildings in the
Commercial Group.
(5)
Commercial Group and Residential Group outlots reclassified prior to sale from projects
under development or completed rental properties to land held for sale.
(6)
Increase or decrease in construction payables included in accounts payable and accrued
expenses.
(7)
Capitalization of stock-based compensation granted to employees directly involved with
the acquisition, development and construction of real estate.
The accompanying notes are an integral part of these consolidated financial statements.
The interim consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q and should be read in conjunction with the consolidated financial
statements and related notes included in the Company’s annual report on Form 10-K for the year
ended January 31, 2009, including the Report of Independent Registered Public Accounting Firm. The
results of interim periods are not necessarily indicative of results for the full year or any
subsequent period. In the opinion of management, all adjustments considered necessary for a fair
statement of financial position, results of operations and cash flows at the dates and for the
periods presented have been included. Effective February 1, 2009, the Company adopted Financial
Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. APB 14-1, “Accounting for
Convertible Debt Instruments That May be Settled in Cash Upon Conversion (Including Partial Cash
Settlement)” (“FSP APB 14-1”). This standard required
the Company to adjust the prior year
financial statements to show retrospective application upon adoption.
Adoption of FSP APB 14-1
FSP APB 14-1 requires the liability and equity components of convertible debt instruments that may
be settled in cash upon conversion (including partial cash settlement) to be separately accounted
for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. This statement
changed the accounting treatment for the Company’s 3.625% Puttable Equity-Linked Senior Notes (“the
Notes”) due October 2011, which were issued in October 2006. FSP APB 14-1 requires the initial debt
proceeds from the sale of a company’s convertible debt instrument to be allocated between a
liability component and an equity component. This allocation is based upon what the assumed
interest rate would have been on the date of issuance if the Company had issued similar
nonconvertible debt. The resulting debt discount will be amortized over the debt instrument’s
expected life as additional non-cash interest expense. Due to the increase in interest expense,
the Company recorded additional capitalized interest based on its qualifying expenditures on its
development projects. Deferred financing costs decreased related to the reallocation of the
original issuance costs between the debt instrument and equity component and the gain recognized
from the purchase of $15,000,000, in principal, of the Notes during the three months ended October31, 2008 was adjusted to reflect the requirements of gain recognition under FSP APB 14-1 (refer to
Note D – Senior and Subordinate Debt).
The following tables reflect the Company’s as reported amounts along with the as adjusted amounts
as a result of the retrospective adoption of FSP APB 14-1:
Net loss attributable to Forest City Enterprises, Inc.
(40,269
)
(133
)
(40,402
)
Net loss attributable to Forest City Enterprises, Inc. per share - basic and diluted
(0.39
)
0.00
(0.39
)
(1)
Adjusted to reflect the impact of discontinued operations in accordance with SFAS No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”)
(refer to Note I).
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
A. Accounting Policies (continued)
Noncontrolling Interest
In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 160,
“Noncontrolling Interests in Consolidated Financial Statements, an Amendment of Accounting Research
Bulletin No. 51” (“SFAS No. 160”). A noncontrolling interest, previously referred to as minority
interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a
parent. The objective of this statement is to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides in its consolidated
financial statements. The Company adopted SFAS No. 160 on February 1, 2009 and adjusted its
January 31, 2009 Consolidated Balance Sheet to reflect noncontrolling interest as a component of
total equity. Included in the balance sheet reclass was $58,247,000 of accumulated deficit
noncontrolling interest resulting from deficit restoration obligations of noncontrolling partners,
previously recorded as a component of investments in and advances to affiliates. In addition, the
Company reclassed noncontrolling interest on its Consolidated Statement of Operations for the three
months ended April 30, 2008.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company to make estimates and
assumptions in certain circumstances that affect amounts reported in the accompanying consolidated
financial statements and related notes. Some of the critical estimates made by the Company include,
but are not limited to, estimates of useful lives for long-lived assets, reserves for collection on
accounts and notes receivable and other investments, impairment of real estate,
other-than-temporary impairments on its equity method investments and the computation of expected
losses on Variable Interest Entities (“VIEs”). As a result of the nature of estimates made by the
Company, actual results could differ.
Reclassification
Certain prior year amounts in the accompanying consolidated financial statements have been
reclassified to conform to the current year’s presentation.
Restricted Cash
Restricted cash represents legally restricted deposits with financial institutions for taxes and
insurance, security deposits, capital replacement, improvement and operating reserves, bond funds,
development escrows, construction escrows and collateral on total rate of return swaps, as well as
certain restricted deposits with qualified intermediaries related to like-kind exchanges.
Capitalized Software Costs
Costs related to software developed or obtained for internal use are capitalized pursuant to
Statement of Position No. 98-1 “Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use,” and amortized using the straight-line method over their estimated useful life,
which is primarily three years. The Company capitalizes significant costs incurred in the
acquisition or development of software for internal use, including the costs of the software,
materials, consultants, interest and payroll and payroll-related costs for employees directly
involved in developing internal-use computer software once final selection of the software is made.
Costs incurred prior to the final selection of software, costs not qualifying for capitalization
and routine maintenance costs are charged to expense as incurred.
At April 30 and January 31, 2009, the Company has capitalized software costs of $13,919,000 and
$16,997,000, respectively, net of accumulated amortization of $26,205,000 and $23,302,000,
respectively. Total amortization of capitalized software costs amounted to $3,156,000 and
$3,016,000 for the three months ended April 30, 2009 and 2008, respectively.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
A. Accounting Policies (continued)
Military Housing Fee Revenues
Revenues for development fees related to the Company’s military housing projects are earned based
on a contractual percentage of the actual development costs incurred by the military housing
projects and are recognized on a monthly basis as the costs are incurred. The Company also
recognizes additional development incentive fees based upon successful completion of certain
criteria, such as incentives to realize development cost savings, encourage small and local
business participation, comply with specified safety standards and other project management
incentives as specified in the development agreements. Revenues of $2,868,000 and $22,464,000 were
recognized during the three months ended April 30, 2009 and 2008, respectively, related to base
development and development incentive fees, which were recorded in revenues from real estate
operations in the Consolidated Statements of Operations.
Revenues
related to construction management fees are earned based on the cost
of each military housing construction
contract. The Company also recognized certain construction incentive fees based upon successful
completion of certain criteria as set forth in the construction contracts. Revenues of $2,850,000
and $3,262,000 were recognized during the three months ended April 30, 2009 and 2008, respectively,
related to the base construction and incentive fees, which were recorded in revenues from real
estate operations in the Consolidated Statements of Operations.
Property management and asset management fee revenues are earned based on a contractual percentage
of the annual net rental income and annual operating income, respectively, that is generated by the
military housing privatization projects as defined in the agreements. The Company also recognizes
certain property management incentive fees based upon successful completion of certain criteria as
set forth in the property management agreements. Property management and asset management fees of
$4,042,000 and $3,467,000 were recognized during the three months ended April 30, 2009 and 2008,
respectively, which were recorded in revenues from real estate operations in the Consolidated
Statements of Operations.
Historic and New Market Tax Credit Entities
The Company has certain investments in properties that have received, or the Company believes are
entitled to receive, historic rehabilitation tax credits on qualifying expenditures under Internal
Revenue Code (“IRC”) section 47 and new market tax credits on qualifying investments in designated
community development entities (“CDEs”) under IRC section 45D, as well as various state credit
programs. The Company typically enters into these investments with sophisticated financial
investors. In exchange for the financial investor’s initial contribution into the investment, the
financial investor is entitled to substantially all of the benefits derived from the tax credit,
but generally has no material interest in the underlying economics of the property. Typically,
these arrangements have put/call provisions (which range up to 7 years) whereby the Company may be
obligated (or entitled) to repurchase the financial investor’s interest. The Company has
consolidated each of these properties in its consolidated financial statements, and has reflected
these investor contributions as accounts payable and accrued expenses in its Consolidated Balance
Sheets.
The Company guarantees the financial investor that in the event of a subsequent recapture by a
taxing authority due to the Company’s noncompliance with applicable tax credit guidelines that it
will indemnify the financial investor for any recaptured tax credits. The Company initially
records a liability for the cash received from the financial investor. The Company generally
records income upon completion and certification of the qualifying development expenditures for
historic tax credits and upon certification of the qualifying investments in designated CDEs for
new market tax credits resulting in an adjustment of the liability at each balance sheet date to
the amount that would be paid to the financial investor based upon the tax credit compliance
regulations, which range from 0 to 7 years. During the three months ended April 30, 2009 and 2008,
the Company recognized income related to tax credits of $3,155,000 and $1,491,000, respectively,
which were recorded in interest and other income in its Consolidated Statements of Operations.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
A. Accounting Policies (continued)
Termination Benefits
During the three months ended April 30, 2009 and the three months ended January 31, 2009,
management initiated involuntary employee separations in various areas of the Company’s workforce
to reduce costs, which was communicated to all employees. The Company provided outplacement
services to all terminated employees and severance payments based on years of service and certain
other defined criteria. In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit
or Disposal Activities”, the Company recorded a pre-tax charge for total estimated termination
costs (outplacement and severance) of $8,720,000 during the three months ended April 30, 2009 and
$8,651,000 during the three months ended January 31, 2009, which is included in operating expenses
in the Consolidated Statements of Operations. The expense is included in the Corporate Activities
segment. The Company made payments of $5,291,000 related to the termination costs recorded during
the three months ended January 31, 2009. The following table summarizes the activity in the
accrued severance balance for termination costs:
Net unrealized gains or losses on securities are included in accumulated other comprehensive income
(loss) (“OCI”) and represent the difference between the market value of investments in unaffiliated
companies that are available-for-sale at the balance sheet date and the Company’s cost. Another
component of accumulated OCI is foreign currency translation adjustments related to the Company’s
London, England operations whose functional currency is the British pound. The assets and
liabilities related to these operations are translated into U.S. dollars at current exchange rates;
revenues and expenses are translated at average exchange rates. Also included in accumulated OCI
is the Company’s portion of the unrealized gains and losses on the effective portions of derivative
instruments designated and qualifying as cash flow hedges. The following table summarizes the
components of accumulated OCI included within the Company’s Consolidated Balance Sheets.
Accounting for Derivative Instruments and Hedging Activities
In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging
Activities” (“SFAS No. 161”). SFAS No. 161 amends and expands the disclosure requirements of SFAS
No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), with the
intent to provide users of financial statements with an enhanced understanding of how derivative
instruments and hedging activities affect an entity’s financial position, financial performance and
cash flows. These
disclosure requirements include a tabular summary of the fair values of derivative instruments and
their gains and losses, disclosure of derivative features that are credit risk related to provide
more information regarding an entity’s liquidity and cross-referencing within footnotes to make it
easier for financial statement users to locate important information about derivative instruments.
SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The Company adopted the financial statement disclosures required
by SFAS No. 161 on February 1, 2009.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
A. Accounting Policies (continued)
Risk Management Objective of Using Derivatives
The Company maintains an overall interest rate risk management strategy that incorporates the use
of derivative instruments to minimize significant unplanned decreases in earnings and cash flows
that may be caused by interest rate volatility. Derivative instruments that are used as part of the
Company’s strategy include interest rate swaps and option contracts that have indices related to
the pricing of specific balance sheet liabilities. The Company enters into interest rate swaps to
convert certain floating-rate debt to fixed-rate long-term debt, and vice-versa, depending on
market conditions or forward starting swaps to hedge the changes in benchmark interest rates on
forecasted financings. Option products utilized include interest rate caps, floors, interest rate
swaptions and Treasury options. The use of these option products is consistent with the Company’s
risk management objective to reduce or eliminate exposure to variability in future cash flows
primarily attributable to changes in benchmark rates relating to forecasted financings, and the
variability in cash flows attributable to increases relating to interest payments on its
floating-rate debt. The caps and floors have typical durations ranging from one to three years
while the Treasury options are for periods of five to ten years. The Company also enters into
interest rate swap agreements for hedging purposes for periods that are generally one to ten years.
The Company does not have any Treasury options outstanding at April 30, 2009.
Derivatives are reported in the Consolidated Balance Sheets at their fair value. On the date that
the Company enters into a derivative contract, it typically designates the derivative as a hedge of
a forecasted transaction or the variability of cash flows that are to be paid in connection with a
recognized or forecasted liability (a “cash flow hedge”), or to convert certain fixed-rate
long-term debt to variable-rate debt (a “fair value hedge”). The effective portion of the change in
fair value of a derivative that is designated and qualifies as a cash flow hedge is recorded in OCI
until
the hedged transaction affects earnings. The
ineffective portion of all hedges is immediately recognized in the Consolidated Statements of
Operations. Nondesignated hedges are either specifically nondesignated by management or do not
meet the strict hedge accounting requirements of SFAS No. 133. Changes in the fair value of
derivatives not designated in hedging relationships are recorded directly to earnings in the
Consolidated Statements of Operations.
Cash
Flow Hedges of Interest Rate Risk
The Company has entered into forward swaps to protect itself against fluctuations in the swap rate
at terms ranging between five to ten years associated with forecasted fixed rate borrowings. At
the time the Company secures and locks an interest rate on an anticipated financing, it intends to
simultaneously terminate the forward hedge associated with that financing. At April 30, 2009, the
Company had one forward swap designated and qualified as a cash flow hedge under SFAS No. 133 with
a notional amount of $69,325,000 related to a fully consolidated property that expires during the
current year ending January 31, 2010. The Company’s portion of unrealized loss on the effective
portion of this hedge has been recorded in accumulated OCI. To the extent effective, amounts
recorded in accumulated OCI will be amortized as either an increase or decrease to interest expense
in the same periods as the interest payments on the financing.
The net losses of derivatives recorded in accumulated OCI are expected to be reclassified into
earnings in the same period in which the hedged forecasted transactions affect earnings. As of
April 30, 2009, the Company expects that within the next twelve months it will reclassify amounts
recorded in accumulated OCI into earnings as interest expense of approximately $29,088,000, net of
tax. However, the actual amount reclassified could vary due to future changes in fair value of
these derivatives.
Fair Value Hedges of Interest Rate Risk
From time to time, the Company and/or certain of its joint ventures (the “Joint Ventures”) enter
into total rate of return swaps (“TRS”) on various tax-exempt fixed-rate borrowings generally held by the Company and/or within
the Joint Ventures. The TRS convert these borrowings from a fixed rate to a variable rate and
provide an efficient financing product to lower the cost of capital. In exchange for a fixed rate,
the TRS require that the Company and/or the Joint Ventures pay a variable rate, generally
equivalent to the Security Industry and Financial Markets Association (“SIFMA”) rate. At April 30,2009, the SIFMA rate is 0.63%. Additionally, the Company and/or the Joint Ventures have guaranteed
the fair value of the underlying borrowing. Any fluctuation in the value of the guarantee would be
offset by the fluctuation in the value of the underlying borrowing, resulting in no financial
impact to the Company and/or the Joint Ventures. At April 30, 2009, the aggregate notional amount
of TRS that are designated as fair value hedging instruments under
SFAS No. 133, in which the
Company and/or the consolidated Joint Ventures have an interest, is $516,195,000 (which includes the
TRS on the $20,400,000 redevelopment bonds (refer to Note D – Senior and Subordinated Debt)). The
Company believes the economic return and related risk associated with a TRS is generally comparable
to that of nonrecourse variable-rate mortgage debt. The underlying TRS borrowings are subject to a
fair value adjustment (refer to Note F – Fair Value Measurements).
Nondesignated
Hedges of Interest Rate Risk
At April 30, 2009, the Company had one other forward swap outstanding with a notional amount of
$120,000,000 that expires during the current year ending January 31, 2010 and does not qualify as a
cash flow hedge under the provisions of SFAS No. 133 because it relates to an unconsolidated
property. The change in fair value of this swap is marked to market through earnings on a quarterly
basis. For the three months ended April 30, 2009 and 2008, the Company recorded $655,000 and
$12,000, respectively, as a reduction of interest expense related to this forward swap in its
Consolidated Statements of Operations. During the year ended January 31, 2009, the Company
purchased an interest rate floor in order to mitigate the interest rate risk on this forward swap
should interest rates fall below a certain level.
Derivatives Designated as Hedging Instruments
Under SFAS No. 133:
Interest rate caps, floors and swaptions
$
567,333
$
1,185
$
-
$
-
Interest rate swap agreements
-
-
1,219,417
140,612
(1)
TRS
-
-
516,195
51,221
Total derivatives designated as hedging instruments
under SFAS No. 133
$
567,333
$
1,185
$
1,735,612
$
191,833
Derivatives Not Designated as Hedging Instruments
Under SFAS No. 133:
Interest rate caps, floors and swaptions
$
1,447,813
$
702
(2)
$
-
$
-
Interest rate swap agreements
21,176
2,441
120,000
24,601
TRS
55,755
1,280
40,559
12,670
Total derivatives not designated as hedging instruments
under SFAS No. 133
$
1,524,744
$
4,423
$
160,559
$
37,271
(1)
$983 of the fair value
applies to $300,000 of notional excluded from the associated current notional amount that is covered by
other interest rate swaps for the three months ended April 30, 2009. These swaps are active
as of April 30, 2009; however, their effective periods are subsequent to this date.
(2)
$197 of the fair value
applies to $1,247,334 of notional excluded from the associated current notional amount that is covered by
other interest rate caps for the three months ended April 30, 2009. These caps are active
as of April 30, 2009; however, their effective periods are subsequent to this date.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
A. Accounting Policies (continued)
The following table presents the impact of gains and losses related to derivative instruments
designated as cash flow hedges included in the accumulated OCI section of the Consolidated Balance
Sheets, and in equity in loss of unconsolidated entities and interest expense in the Consolidated
Statements of Operations for the three months ended April 30, 2009:
Loss Reclassified from
Accumulated OCI
(Effective Portion)
Loss Recognized in
Interest Expense on
Derivatives Designated as Hedging
Loss
Location on
Derivatives (Ineffective
Instruments Under SFAS No. 133
Recognized
Consolidated
Portion and Amounts
Cash Flow Hedging
in OCI
Statements of
Excluded from
Relationships(1)
(Effective Portion)
Operations
Amount
Effectiveness Testing)
(in thousands)
Interest rate caps, floors and
swaptions
$
(135
)
Interest expense
$
(115
)
$
-
Treasury options
-
Interest expense
(140
)
-
Treasury options
-
Equity in loss of unconsolidated entities
(41
)
-
Interest rate swap agreements
(7,913
)
Interest expense
(12,293
)
(82
)
Total
$
(8,048
)
$
(12,589
)
$
(82
)
(1)
Gains and losses on terminated hedges included in accumulated OCI are being
reclassified into interest expense over the original life of the hedged transactions as the
transactions are still more likely than not to occur and would not be reflected in the
previous table related to the fair value of designated derivatives (see Note F – Fair
Value Measurements).
The following table presents the impact of gains and losses related to derivative instruments
designated as fair value hedges included in interest expense in the Consolidated Statements of
Operations for the three months ended April 30, 2009:
Derivatives Designated as Hedging
Instruments Under SFAS No. 133
Gain
Fair Value Hedging Relationships
Recognized(1)
(in thousands)
TRS
$
8,119
(1)
The loss recognized in interest expense in the Consolidated Statements of Operations
from the change in fair value of the underlying TRS borrowings for the three months ended
April 30, 2009 was $8,119, offsetting the gain recognized on
the TRS. (see Note F –
Fair Value Measurements).
The following table presents the impact of gains and losses related to derivative instruments not
designated as hedging instruments included in interest expense in the Consolidated Statements of
Operations for the three months ended April 30, 2009:
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
A. Accounting Policies (continued)
Credit-risk-related Contingent Features
The principal credit risk to the Company through its interest rate risk management strategy is the
potential inability of the financial institution from which the derivative financial instruments
were purchased to cover all of its obligations. If a counterparty fails to fulfill its performance
obligations under a derivative contract, the Company’s risk of loss approximates the fair value of
the derivative. To mitigate this exposure, the Company generally purchases its derivative financial
instruments from either the institution that holds the debt or from institutions with a minimum A-
credit rating.
The Company has agreements with its derivative counterparties that contain a provision, under which
the derivative counterparty could terminate the
derivative obligations if the Company defaults on
its obligations under the bank revolving credit facility and
designated conditions have passed. In instances where subsidiaries of
the Company have derivative obligations that are secured by a
mortgage, the derivative obligations could be terminated if the
indebtedness between the two parties is terminated, either by loan
payoff or default of the indebtedness.
In addition, one of the Company’s derivative contracts provides that if the Company’s
credit rating were to fall below certain levels, it may trigger additional collateral to be
posted with the counterparty up to the full amount of the liability position of the derivative
contracts. Also, certain subsidiaries of the Company have agreements with certain of its derivative counterparties that
contain provisions whereby the subsidiaries of the Company must maintain certain minimum financial ratios.
As of April 30, 2009, the aggregate fair value of all derivative instruments in a liability
position, which excludes any adjustment for nonperformance risk is $251,612,000, for which the
Company had posted collateral of $90,483,000. If all credit risk contingent features underlying
these agreements had been triggered on April 30, 2009,
due to the payoff of related debt obligations by termination of
default,
the Company would have been required to post
collateral of the full amount of the liability position referred to above, or $251,612,000.
Variable Interest Entities
In accordance with FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable
Interest Entities” (“FIN No. 46 (R)”), the Company consolidates a variable interest entity (“VIE”)
in which it has a variable interest (or a combination of variable interests) that will absorb a
majority of the entity’s expected losses, receive a majority of the entity’s expected residual
returns, or both, based on an assessment performed at the time the Company becomes involved with
the entity. VIEs are entities in which the equity investors do not have a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support. The Company reconsiders this assessment only if the
entity’s governing documents or the contractual arrangements among the parties involved change in a
manner that changes the characteristics or adequacy of the entity’s equity investment at risk, some
or all of the equity investment is returned to the investors and other parties become exposed to
expected losses of the entity, the entity undertakes additional activities or acquires additional
assets beyond those that were anticipated at inception or at the last reconsideration date that
increase its expected losses, or the entity receives an additional equity investment that is at
risk, or curtails or modifies its activities in a way that decreases its expected losses. The
Company may be subject to additional losses to the extent of any financial support that it
voluntarily provides in the future. Additionally, if different estimates are applied in determining
future cash flows, and how the cash flows are funded, it may have otherwise concluded on the
consolidation method of an entity.
The determination of the consolidation method for each entity can change as reconsideration events
occur. Expected results after the formation of an entity can vary, which could cause a change in
the allocation to the partners. In addition, if the Company sells a property, sell its interest in
a joint venture or enters into a new joint venture, the number of VIEs it is involved with could
vary between quarters.
As of April 30, 2009, the Company determined that it was the primary beneficiary under FIN No. 46
(R) of 35 VIEs representing 23 properties (21 VIEs representing 10 properties in the Residential
Group, 12 VIEs representing 11 properties in the Commercial Group and 2 VIEs/properties in the Land
Development Group). The creditors of the consolidated VIEs do not have recourse to the Company’s
general credit. As of April 30, 2009, the Company held variable interests in 41 VIEs for which it
is not the primary beneficiary. The maximum exposure to loss as a result of its involvement with
these unconsolidated VIEs is limited to the Company’s recorded investments in those VIEs totaling
approximately $99,000,000 at April 30, 2009. The Company’s VIEs consist of joint ventures that are
engaged, directly or indirectly, in the ownership, development and management of office buildings,
regional malls, specialty retail centers, apartment communities, military housing, supported-living
communities, land development and The Nets.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
A. Accounting Policies (continued)
The carrying value of real estate, nonrecourse mortgage debt and noncontrolling interest of VIEs
for which the Company is the primary beneficiary are as follows:
In addition to the VIEs described above, the Company has also determined that it is the primary
beneficiary of a VIE which holds collateralized borrowings of $29,000,000 (see Note D - Senior and
Subordinated Debt) as of April 30, 2009.
New Accounting Standards
In addition to FSP APB 14-1, SFAS No. 160 and SFAS No. 161 noted above, the following accounting
standards were also adopted on February 1, 2009:
SFAS No. 157 “Fair Value Measurements” (“SFAS No. 157”) defines fair value, establishes a framework
for measuring fair value in accordance with generally accepted accounting principles and expands
disclosures about the use of fair value measurements. SFAS No. 157 does not require new fair value
measurements, but applies to accounting pronouncements that require or permit fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. In
February 2008, the FASB issued two Staff Positions on SFAS No. 157: (1) FSP No. FAS 157-1,
“Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13” (“FSP FAS 157-1”) and (2) FSP No. FAS 157-2, “Effective Date of FASB Statement No.
157” (“FSP FAS 157-2”). FSP FAS 157-1 excludes SFAS No. 13, “Accounting for Leases” (“SFAS No. 13”)
and other accounting pronouncements that address fair value measurements for purposes of lease
classification or measurement under SFAS No. 13 from SFAS No. 157’s scope. FSP FAS 157-2 delays the
effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), to fiscal years beginning after November 15, 2008 and interim periods
within those fiscal years. The Company adopted this statement for its financial assets and
liabilities on February 1, 2008 (see Note J - Fair Value Measurements) and for its nonfinancial
assets and liabilities on February 1, 2009.
In October 2008, FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset
When the Market for That Asset is Not Active” (“FSP FAS No. 157-3”), which clarifies the
application of SFAS No. 157. FSP FAS No. 157-3 provides guidance in determining the fair value of a
financial asset when the market for that financial asset is not active. The adoption of this
standard as of October 31, 2008 did not have a material impact on the Company’s consolidated
financial statements.
In November 2008, the FASB issued EITF No. 08-6, “Equity Method Accounting Considerations” (“EITF
08-6”), which clarifies accounting and impairment considerations involving equity method
investments after the effective date of both SFAS 141 (R) and SFAS 160. EITF 08-6 provides
clarification of how business combination and noncontrolling interest accounting will impact equity
method investments. EITF 08-6 is effective for fiscal years, and interim reporting periods within
those fiscal years, beginning on or after December 15, 2008 and early adoption is prohibited. The
adoption of EITF No. 08-6 on February 1, 2009 did not have a material impact on the Company’s
consolidated financial statements.
In June 2008, the FASB issued FSP EITF No. 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). This new
standard requires that nonvested share-based payment awards that contain non-forfeitable rights to
dividends or dividend equivalents be treated as participating securities in the computation of
earnings per share pursuant to the two-class method. FSP EITF 03-6-1 will be applied
retrospectively to all periods presented for fiscal years beginning after December 15, 2008. The
adoption of FSP EITF 03-6-1 on February 1, 2009 did not have a material impact on the Company’s
consolidated financial statements.
In June 2008, the FASB ratified EITF Issue 07-5, “Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). Paragraph 11(a) of SFAS No. 133
specifies that a contract that would otherwise meet the definition of a derivative but is both (a)
indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of
financial position would not be considered a derivative financial instrument. EITF 07-5 provides a
new two-step model to be applied in determining whether a financial instrument or an embedded
feature is indexed to an issuer’s own stock and thus able to
qualify for the SFAS No. 133 paragraph 11(a) scope exception. EITF 07-5 is effective for the first
annual reporting period beginning after December 15, 2008. The adoption of EITF 07-5 by the Company
on February 1, 2009 did not have a material impact on its consolidated financial statements.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
A. Accounting Policies (continued)
In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible
Assets.” This FSP amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,
“Goodwill and Other Intangible Assets”. This FSP allows the Company to use its historical
experience in renewing or extending the useful life of intangible assets. This FSP is effective
for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years
and shall be applied prospectively to intangible assets acquired after the effective date. The
adoption of this FSP on February 1, 2009 did not have a material impact on the Company’s
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No.
141(R)”). SFAS No. 141(R) provides greater consistency in the accounting and financial reporting
of business combinations. SFAS No. 141(R) requires the acquiring entity in a business combination
to recognize all assets acquired and liabilities assumed in the transaction, establishes the
acquisition-date fair value as the measurement objective for all assets acquired and liabilities
assumed and requires the acquirer to disclose the nature and financial effect of the business
combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008. In
February 2009, the FASB voted to issue FSP FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination that Arise from Contingencies” (“FSP FAS 141(R)-1”).
FSP FAS 141(R)-1 amends the provisions related to the initial recognition and measurement,
subsequent measurement and disclosure of assets and liabilities arising from contingencies in a
business combination under SFAS No. 141(R). FSP FAS 141(R)-1 requires that such contingencies be
recognized at fair value on the acquisition date if fair value can be reasonably estimated during
the allocation period. Otherwise, companies would typically account for the acquired contingencies
in accordance with SFAS No. 5, “Accounting for Contingencies”. The adoption of SFAS No. 141(R) and
FSP FAS 141(R)-1 on February 1, 2009 did not have a material impact on the Company’s consolidated
financial statements.
The following new accounting standards will be adopted on their respective required effective date:
In April 2009, the FASB issued FSP SFAS No. 107-1 and Accounting Principles Board (“APB”) 28-1,
“Interim Disclosures about Fair Value of Financial Instruments” (“FSP No. SFAS 107-1 and APB
28-1”). FSP No. SFAS 107-1 and APB 28-1 amends SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments” and APB No. 28, “Interim Financial Reporting” to require disclosure about
the fair value of financial instruments at interim reporting periods. The statement is effective
for interim reporting periods ending after June 15, 2009. The Company does not expect adoption of
FSP No. SFAS 107-1 and APB 28-1 to have a material impact on its consolidated financial statement
disclosures.
In April 2009, FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly” (“FSP FAS No. 157-4”), which further clarifies the application of SFAS No. 157 and
of FSP FAS No. 157-3. FSP FAS No. 157-4 provides additional guidance in determining the fair value
of an asset or liability when the volume and level of activity for the asset or liability have
significantly decreased. The statement is effective for interim and annual reporting periods ending
after June 15, 2009, and shall be applied prospectively. The Company does not expect adoption of
FSP FAS No. 157-4 to have a material impact on its consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles” (“SFAS No. 162”), which is intended to improve financial reporting by identifying a
consistent framework or hierarchy for selecting accounting principles to be used in preparing
financial statements that are presented in conformity with GAAP for nongovernmental entities. SFAS
No. 162 is effective 60 days following the Securities and Exchange Commission’s (“SEC”) approval of
the Public Company Accounting Oversight Board amendment to AU Section 411, “The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles.”The Company does not expect
adoption of SFAS No. 162 to have a material impact on its consolidated financial statements.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
B. Investments in and Advances to Affiliates
Included in investments in and advances to affiliates are unconsolidated investments in entities
that the Company does not control and/or is not deemed to be the primary beneficiary, and which are
accounted for under the equity method of accounting, as well as advances to partners and other
affiliates.
Following is a reconciliation of members’ and partners’ equity to the Company’s carrying value in
the accompanying Consolidated Balance Sheets:
Classic Residence by Hyatt (Supported-Living Apartments)
(Yonkers, New York)
$
4,892
$
-
Apartment Communities:
Millender Center
(Detroit, Michigan)
4,252
-
Metropolitan Lofts
(Los Angeles, California)
1,039
-
Residences at University Park
(Cambridge, Massachusetts)
855
-
Two land development projects
262
-
Total impairment of unconsolidated entities
$
11,300
$
-
Company’s portion of impairment of unconsolidated entities
$
9,560
$
-
(2)
Upon disposition, investments accounted for on the equity method
are not classified as discontinued operations under the provisions of
SFAS No. 144; therefore, gains or losses on the sale of equity method
properties are reported in continuing operations when sold. The
following table shows the detail of gain on disposition of rental
properties that were held by equity method investments, which is
included in equity in earnings (loss) of unconsolidated entities in the
Consolidated Statements of Operations.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
B.
Investments in and Advances to Affiliates (continued)
For the three months ended April 30, 2009 and 2008, Nets Sports and Entertainment, LLC (“NSE”), an
equity method investment which owns The Nets and certain real estate in Brooklyn, New York for the
proposed sports and entertainment arena, was deemed a significant
subsidiary. Summarized statements of operations
information for NSE is as follows:
At April 30 and January 31, 2009, the Company’s bank revolving credit facility provides for maximum
borrowings of $750,000,000 and matures in March 2010. The credit facility bears interest at the
Company’s option at either a LIBOR-based rate plus 2.50% (3.06% and 2.98% at April 30 and January31, 2009, respectively), or a Prime-based rate plus 1.50%. The Company has historically elected the
LIBOR-based rate option. The credit facility restricts the Company’s ability to purchase, acquire,
redeem or retire any of its capital stock, and prohibits the Company from paying any dividends on
its capital stock through the maturity date. The credit facility allows certain actions by the
Company or its subsidiaries, such as default in paying debt service or allowing foreclosure on an
encumbered real estate asset, only to the extent such actions do not have a material adverse
effect, as defined in the agreement, on the Company. Of the available borrowings, up to
$100,000,000 may be used for letters of credit or surety bonds. The credit facility also contains
certain financial covenants, including maintenance of certain debt service and cash flow coverage
ratios, and specified levels of net worth (as defined in the credit facility). At April 30, 2009,
the Company was in compliance with all of these financial covenants.
The Company is continuing to negotiate with its lenders to extend the revolving credit facility.
While the ultimate outcome of the extension is unknown, the Company anticipates an extension will
result in a reduced commitment from the lenders, increased borrowing costs and modifications to the
financial covenants. In the event an extension is not at a level to support the Company’s operating
cash flows, the Company would continue a plan to raise capital through the sale of assets,
admitting other joint venture equity partners into some of the Company’s properties, curtailing
capital expenditures and/or raising additional funds in a public or private equity offering.
The available credit on the bank revolving credit facility at April 30 and January 31, 2009 were as
follows:
During
the period from May 1, 2009 to June 5, 2009, the Company has repaid $350,417,000 of the
outstanding borrowings under the bank revolving credit facility at April 30, 2009, primarily with
the net proceeds received from the May 2009 public common stock offering (see Note N – Subsequent Event).
3.625% Puttable Equity-Linked Senior Notes due 2011
$
250,295
$
248,154
Other Senior Notes:
7.625% Senior Notes due 2015
300,000
300,000
6.500% Senior Notes due 2017
150,000
150,000
7.375% Senior Notes due 2034
100,000
100,000
Total Senior Notes
800,295
798,154
Subordinated Debt:
Redevelopment Bonds due 2010
17,635
18,910
Subordinate Tax Revenue Bonds due 2013
29,000
29,000
Total Subordinated Debt
46,635
47,910
Total Senior and Subordinated Debt
$
846,930
$
846,064
Puttable Equity-Linked Senior Notes
On October 10, 2006, the Company issued $287,500,000 of 3.625% puttable equity-linked senior notes
due October 15, 2011 in a private placement. The notes were issued at par and accrued interest is
payable semi-annually in arrears on April 15 and October 15 of each year, which began on April 15,2007. The Company may not redeem these notes prior to maturity. The notes are unsecured
unsubordinated obligations and rank equally with all other unsecured and unsubordinated
indebtedness. During the year ended January 31, 2009, the Company purchased on the open market
$15,000,000 in principal of its puttable equity-linked senior notes.
There was $272,500,000, of principal, outstanding at April 30 and
January 31, 2009.
Holders may put their notes to the Company at their option on any day prior to the close of
business on the scheduled trading day immediately preceding July 15, 2011 only under the following
circumstances: (1) during the five business-day period after any five consecutive trading-day
period (the “measurement period”) in which the trading price per note for each day of that
measurement period was less than 98% of the product of the last reported sale price of the
Company’s Class A common stock and the put value rate (as defined) on each such day; (2) during any
fiscal quarter after the fiscal quarter ending January 31, 2007, if the last reported sale price of
the Company’s Class A common stock for 20 or more trading days in a period of 30 consecutive
trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds
130% of the applicable put value price in effect on the last trading day of the immediately
preceding fiscal quarter; or (3) upon the occurrence of specified corporate events as set forth in
the applicable indenture. On and after July 15, 2011 until the close of business on the scheduled
trading day immediately preceding the maturity date, holders may put their notes to the Company at
any time, regardless of the foregoing circumstances. In addition, upon a designated event, as
defined, holders may require the Company to purchase for cash all or a portion of their notes for
100% of the principal amount of the notes plus accrued and unpaid interest, if any, as set forth in
the applicable indenture. At April 30, 2009, none of the aforementioned circumstances have been
met.
If a note is put to the Company, a holder would receive (i) cash equal to the lesser of the
principal amount of the note or the put value and (ii) to the extent the put value exceeds the
principal amount of the note, shares of the Company’s Class A common stock, cash, or a combination
of Class A common stock and cash, at the Company’s option. The initial put value rate was 15.0631
shares of Class A common stock per $1,000 principal amount of notes (equivalent to a put value
price of $66.39 per share of Class A common stock). The put value rate will be subject to
adjustment in some events but will not be adjusted for accrued interest. In addition, if a
“fundamental change,” as defined, occurs prior to the maturity date, the Company will in some cases
increase the put value rate for a holder that elects to put their notes.
Concurrent with the issuance of the notes, the Company purchased a call option on its Class A
common stock in a private transaction. The purchased call option allows the Company to receive
shares of its Class A common stock and/or cash from counterparties equal to the amounts of Class A
common stock and/or cash related to the excess put value that it would pay to the holders of the
notes if put to the Company. These purchased call options will terminate upon the earlier of the
maturity dates of the notes or the first day all of the
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
D.
Senior and Subordinated Debt (continued)
notes are no longer outstanding due to a put or otherwise. The purchased call options, which cost
an aggregate $45,885,000 ($28,155,000 net of the related tax benefit), were recorded net of tax as
a reduction of shareholders’ equity through additional paid-in capital during the year ended
January 31, 2007. In a separate transaction, the Company sold warrants to issue shares of the
Company’s Class A common stock at an exercise price of $74.35 per share in a private transaction.
If the average price of the Company’s Class A common stock during a defined period ending on or
about the respective settlement dates exceeds the exercise price of the warrants, the warrants will
be settled in shares of the Company’s Class A common stock. Proceeds received from the issuance of
the warrants totaled approximately $28,923,000 and were recorded as an addition to shareholders’
equity through additional paid-in capital during the year ended January 31, 2007.
The effect of the adoption of FSP APB 14-1 (see the “Adoption of FSP APB 14-1” section of Note A)
on the carrying amounts of the Company’s debt and equity balances as of April 30 and January 31,2009 is as follows:
Outstanding principal amount of the puttable equity-linked senior notes
$
272,500
$
272,500
Unamortized discount
(22,205
)
(24,346
)
Net carrying amount of the puttable equity-linked senior notes
$
250,295
$
248,154
The unamortized discount will be amortized as additional interest expense through October 15, 2011.
The effective interest rate for the liability component of the puttable equity-linked senior notes
was 7.51% for both the three months ended April 30, 2009 and 2008. The Company recorded non-cash
interest expense of $2,141,000 and $2,200,000 for the three months ended April 30, 2009 and 2008,
respectively. The Company recorded contractual interest expense of $2,470,000 and $2,605,000 for
the three months ended April 30, 2009 and 2008, respectively.
Other Senior Notes
On May 19, 2003, the Company issued $300,000,000 of 7.625% senior notes due June 1, 2015 in a
public offering. Accrued interest is payable semi-annually on December 1 and June 1. These senior
notes may be redeemed by the Company at any time on or after June 1, 2008 at a redemption price of
103.813% beginning June 1, 2008 and systematically reduced to 100% in the years thereafter.
On January 25, 2005, the Company issued $150,000,000 of 6.500% senior notes due February 1, 2017 in
a public offering. Accrued interest is payable semi-annually on February 1 and August 1. These
senior notes may be redeemed by the Company at any time on or after February 1, 2010 at a
redemption price of 103.250% beginning February 1, 2010 and systematically reduced to 100% in the
years thereafter.
On February 10, 2004, the Company issued $100,000,000 of 7.375% senior notes due February 1, 2034
in a public offering. Accrued interest is payable quarterly on February 1, May 1, August 1, and
November 1. These senior notes may be redeemed by the Company, in whole or in part, at any time at
a redemption price equal to 100% of the principal amount plus accrued interest.
The Company’s senior notes are unsecured senior obligations and rank equally with all existing and
future unsecured indebtedness; however, they are effectively subordinated to all existing and
future secured indebtedness and other liabilities of the Company’s subsidiaries to the extent of
the value of the collateral securing such other debt, including the bank revolving credit facility.
The indentures governing the senior notes contain covenants providing, among other things,
limitations on incurring additional debt and payment of dividends.
Subordinated Debt
In November 2000, the Company issued $20,400,000 of redevelopment bonds in a private placement. The
bonds bear a fixed interest rate of 8.25% and are due September 15, 2010. The Company entered into
a TRS for the benefit of these bonds that expires on September 15, 2009. Under this TRS, the
Company receives a rate of 8.25% and pays the SIFMA rate plus a spread (0.90% through the
expiration date). Interest is payable semi-annually on March 15 and September 15. This debt is
unsecured and subordinated to the senior notes and the bank revolving credit facility.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
D.
Senior and Subordinated Debt (continued)
The TRS, accounted for as a derivative, is required to be marked to fair value at the end of each
reporting period. As stated in the “Accounting for Derivative Instruments and Hedging Activities”
section of Note A, any fluctuation in the value of the TRS would be offset by the fluctuation in
the value of the underlying borrowings. At April 30 and January 31, 2009, the fair value of the TRS
was $(2,765,000) and $(1,490,000), respectively, recorded in accounts payable and accrued expenses;
therefore, the fair value of the bonds was reduced by the same amount to $17,635,000 and
$18,910,000, respectively (refer to Note F – Fair Value Measurements).
In May 2003, the Company purchased $29,000,000 of subordinate tax revenue bonds that were
contemporaneously transferred to a custodian, which in turn issued custodial receipts that
represent ownership in the bonds to unrelated third parties. The bonds bear a fixed interest rate
of 7.875%. The Company evaluated the transfer pursuant to the provisions of SFAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”
(“SFAS No. 140”), and has determined that the transfer does not qualify for sale accounting
treatment principally because the Company has guaranteed the payment of principal and interest in
the unlikely event that there is insufficient tax revenue to support the bonds when the custodial
receipts are subject to mandatory tender on December 1, 2013. As such, the Company is the primary
beneficiary of this VIE and the book value (which approximated amortized costs) of the bonds was
recorded as a collateralized borrowing reported as senior and subordinated debt and as
held-to-maturity securities reported as other assets in the Consolidated Balance Sheets.
E.
Financing Arrangements
Collateralized Borrowings
On July 13, 2005, the Park Creek Metropolitan District (the “District”) issued $65,000,000 Senior
Subordinate Limited Property Tax Supported Revenue Refunding and Improvement Bonds, Series 2005
(the “Senior Subordinate Bonds”) and Stapleton Land II, LLC, a consolidated subsidiary, entered
into an agreement whereby it will receive a 1% fee on the Senior Subordinate Bonds in exchange for
providing certain credit enhancement. The Company recorded $132,000 and $160,000 of interest income
related to this arrangement in the Consolidated Statements of Operations for the three months ended
April 30, 2009 and 2008, respectively. The counterparty to the credit enhancement arrangement also
owns the underlying Senior Subordinate Bonds and can exercise its rights requiring payment from
Stapleton Land II, LLC upon an event of default of the Senior Subordinate Bonds, a refunding of the
Senior Subordinate Bonds, or failure of Stapleton Land II, LLC to post required collateral. The
Senior Subordinated Bonds were remarketed on April 16, 2009 with proceeds from the issuance of
$86,000,000 of Park Creek Metropolitan District Senior Limited Property Tax Supported Revenue
Refunding and Improvement Bonds Series 2009. The agreement described above expired with the
remarketing of the Senior Subordinate Bonds on April 16, 2009.
On August 16, 2005, the District issued $58,000,000 Junior Subordinated Limited Property Tax
Supported Revenue Bonds, Series 2005 (the “Junior Subordinated Bonds”). The Junior Subordinated
Bonds initially were to pay a variable rate of interest. Upon issuance, the Junior Subordinated
Bonds were purchased by a third party and the sales proceeds were deposited with a trustee pursuant
to the terms of the Series 2005 Investment Agreement. Under the terms of the Series 2005
Investment Agreement, after March 1, 2006, the District may elect to withdraw funds from the
trustee for reimbursement for certain qualified infrastructure and interest expenditures
(“Qualifying Expenditures”). In the event that funds from the trustee are used for Qualifying
Expenditures, a corresponding amount of the Junior Subordinated Bonds converts to an 8.5% fixed
rate and matures in December 2037 (“Converted Bonds”). On August 16, 2005, Stapleton Land, LLC, a
consolidated subsidiary, entered into a Forward Delivery Placement Agreement (“FDA”) whereby
Stapleton Land, LLC was entitled and obligated to purchase the converted fixed rate Junior
Subordinated Bonds through June 2, 2008. The District withdrew $58,000,000 of funds from the
trustee for reimbursement of certain Qualifying Expenditures by June 2, 2008. Therefore, a
corresponding amount of the Junior Subordinated Bonds became Converted Bonds and was acquired by
Stapleton Land, LLC under the terms of the FDA. Stapleton Land, LLC immediately transferred the
Converted Bonds to investment banks and the Company simultaneously entered into a TRS with a
notional amount of $58,000,000. The Company receives a fixed rate of 8.5% and pay SIFMA plus a
spread on the TRS related to the Converted Bonds. The Company determined that the sale of the
Converted Bonds to the investment banks and simultaneous execution of the TRS did not surrender
control; therefore, the Converted Bonds have been recorded as a secured borrowing in the
Consolidated Balance Sheets. During the year ended January 31, 2009, one of the Company’s
consolidated subsidiaries purchased $10,000,000 of the Converted Bonds from one of the investment
banks. Simultaneous with the purchase, a $10,000,000 TRS contract was terminated and the
corresponding amount of the secured borrowing was removed from the Consolidated Balance Sheets. On
April 16, 2009, an additional $5,000,000 of the Converted Bonds were purchased by one of the
Company’s consolidated subsidiaries, and a corresponding amount of a related TRS was terminated and
corresponding secured borrowings removed from the Consolidated Balance Sheets. The fair value of
the Converted Bonds recorded in other assets in the Consolidated Balance Sheets was $58,000,000 at
both April 30 and January 31, 2009. The outstanding TRS contracts on the $43,000,000 and
$48,000,000 of secured borrowings related to the Converted Bonds at April 30 and January 31, 2009,
respectively, were supported by collateral consisting of certain notes receivable owned by the
Company aggregating $18,023,000. The Company recorded net interest income of $842,000 and $838,000
and related to the TRS in the Consolidated Statements of Operations for the three months ended
April 30, 2009 and 2008, respectively.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
E.
Financing Arrangements (continued)
Other Structured Financing Arrangements
In May 2004, Lehman Brothers, Inc. (“Lehman”) purchased $200,000,000 in tax increment revenue bonds
issued by the Denver Urban Renewal Authority (“DURA”), with a fixed-rate coupon of 8.0% and
maturity date of October 1, 2024, which were used to fund the infrastructure costs associated with
phase II of the Stapleton development project. The DURA bonds were transferred to a trust that
issued floating rate trust certificates. Stapleton Land, LLC entered into an agreement with Lehman
to purchase the DURA bonds from the trust if they are not repurchased or remarketed between
June 1, 2007 and June 1, 2009. Stapleton Land, LLC is entitled to receive a fee upon removal of the
DURA bonds from the trust equal to the 8.0% coupon rate, less the SIFMA index, less all fees and
expenses due to Lehman (collectively, the “Fee”). On July 1, 2008, $100,000,000 of the DURA bonds
were remarketed. On July 15, 2008, Stapleton Land, LLC was paid $13,838,000 of the fee, which
represented the fee earned on the remarketed DURA bonds.
The Company has concluded that the trust described above is considered a qualified special purpose
entity pursuant to the provisions of SFAS No. 140 and thus is excluded from the scope of FIN No.
46(R). As a result, the DURA bonds and the activity of the trust have not been recorded in the
consolidated financial statements. The Fee has been accounted for as a derivative with changes in
fair value recorded through earnings. During the year ended January 31, 2009 Lehman filed for
bankruptcy. As a result, the Company reassessed the collectibility of the Fee during the third
quarter of 2008 and decreased the fair value to $-0-, resulting in an increase to operating
expenses in the Consolidated Statements of Operations of $13,816,000 for the year ended January 31,2009. The Company recorded interest income of $-0- and $1,170,000, related to the change in fair
value of the Fee in the Consolidated Statements of Operations at April 30, 2009 and 2008,
respectively.
Stapleton Land, LLC has committed to fund $24,500,000 to the District to be used for certain
infrastructure projects and has funded $16,232,000 of this commitment as of April 30, 2009.
F. Fair Value Measurements
The Company’s financial assets and liabilities subject to SFAS No. 157 are interest rate caps and
swaptions, interest rate swap agreements (including forward swaps), TRS and borrowings subject to
TRS (refer to the Accounting for Derivative Instruments and Hedging Activities section of Note A).
Fair Value Hierarchy
SFAS No. 157 specifies a hierarchy of valuation techniques based upon whether the inputs to those
valuation techniques reflect assumptions other market participants would use based upon market data
obtained from independent sources (also referred to as observable inputs). In accordance with SFAS
No. 157, the following summarizes the fair value hierarchy:
•
Level 1 – Quoted prices in active markets that are unadjusted and accessible at the
measurement date for identical, unrestricted assets or liabilities;
•
Level 2 – Quoted prices for identical assets and liabilities in markets that are not
active, quoted prices for similar assets and liabilities in active markets or financial
instruments for which significant observable inputs are available, either directly or
indirectly such as interest rates and yield curves that are observable at commonly quoted
intervals; and
•
Level 3 – Prices or valuations that require inputs that are unobservable.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair
value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value
measurement in its entirety falls has been determined based on the lowest level input that is
significant to the fair value measurement in its entirety. The Company’s assessment of the
significance of a particular input to the fair value measurement in its entirety requires judgment,
and considers factors specific to the asset or liability.
Measurement of Fair Value
The Company estimates the fair value of its hedging instruments, which includes the interest rate
caps, floors, swaptions, and interest rate swap agreements (including forward swaps), based on
interest rate market pricing models. Although the Company has determined that the significant
inputs used to value its hedging instruments fall within Level 2 of the fair value hierarchy, the
credit valuation adjustments associated with the Company’s counterparties and its own credit risk
utilize Level 3 inputs, such as estimates of
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
F.
Fair Value Measurements (continued)
current credit spreads to evaluate the likelihood of default by itself and its counterparties. As
of April 30, 2009, the Company has assessed the significance of the impact of the credit valuation
adjustments on the overall valuation of its hedging instruments positions and has determined that
the credit valuation adjustments are significant to the overall valuation of two interest rate
swaps, and are not significant to the overall valuation of all of its other hedging instruments. As
a result, the Company has determined that two interest rate swaps valuations are classified in
Level 3 of the fair value hierarchy and all of its other hedging instruments valuations are
classified in Level 2 of the fair value hierarchy.
The Company’s TRS have termination values equal to the difference between the fair value of the
underlying bonds and the bonds base (acquired) price times the stated par amount of the bonds.
Upon termination of the contract with the counterparty, the Company is entitled to receive the
termination value if the underlying fair value of the bonds is greater than the base price and is
obligated to pay the termination value if the underlying fair value of the bonds is less than the
base price. The underlying borrowings generally have call features at par and without prepayment
penalties. The call features of the underlying borrowings would result in a significant discount
factor to any value attributed to the exchange of cash flows in these contracts by another market
participant willing to purchase the Company’s positions. Therefore, the Company believes the
termination value of the TRS approximates the fair value another market participant would assign to
these contracts. The Company compares estimates of fair value to those provided by the respective
counterparties on a quarterly basis. The Company has determined its fair value estimate of TRS is
classified in Level 3 of the fair value hierarchy.
To determine the fair value of the underlying borrowings subject to TRS, the base price is
initially used as the estimate of fair value. The Company adjusts the fair value based upon
observable and unobservable measures such as the financial performance of the underlying
collateral; interest rate risk spreads for similar transactions and loan to value ratios. In the
absence of such evidence, management’s best estimate is used. At April 30, 2009, TRS borrowings
subject to fair value adjustments are approximately $516,195,000. The Company compares estimates of
fair value to those provided by the respective counterparties on a quarterly basis. The Company
has determined its fair value estimate of borrowings subject to TRS is classified in Level 3 of the
fair value hierarchy.
Items Measured at Fair Value on a Recurring Basis
The Company’s financial assets consists of interest rate caps and floors, interest rate swap
agreements with a positive fair value, and TRS with a positive fair value and are included in other
assets. The Company’s financial liabilities consists of interest rate swap agreements with a
negative fair value (which includes the forward swaps) and TRS with a negative fair value included
in accounts payable and accrued expenses and borrowings subject to TRS included in mortgage debt,
nonrecourse or senior and subordinated debt. The following table presents information about the
Company’s financial assets and liabilities that were measured at fair value on a recurring basis as
of April 30, 2009, and indicates the fair value hierarchy of the valuation techniques utilized by
the Company to determine such fair value.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
F.
Fair Value Measurements (continued)
The table below presents a reconciliation of all financial assets and liabilities measured at fair
value on a recurring basis using significant unobservable inputs (Level 3) during the three months
ended April 30, 2009.
During the three months ended April 30, 2009, the Company granted 298,172 stock options and 646,862
shares of restricted stock under the Company’s 1994 Stock Plan. The stock options had a grant-date
fair value of $4.56, which was computed using the Black-Scholes option-pricing model with the
following assumptions: expected term of 5.5 years, expected volatility of 65.9%, risk-free interest
rate of 2.02%, and expected dividend yield of 0%. The exercise price of the options is $7.80,
which was the closing price of the underlying stock on the date of grant. The restricted stock had
a grant-date fair value of $7.80 per share, which was the closing price of the stock on the date of
grant.
At April 30, 2009, there was $12,921,000 of unrecognized compensation cost related to stock options
that is expected to be recognized over a weighted-average period of 2.13 years, and there was
$17,359,000 of unrecognized compensation cost related to restricted stock that is expected to be
recognized over a weighted-average period of 2.89 years.
The amount of stock-based compensation costs and related deferred income tax benefit recognized in
the financial statements are as follows:
Less amount capitalized into qualifying real estate projects
(2,416
)
(1,732
)
Amount charged to operating expenses
2,267
2,737
Depreciation expense on capitalized stock-based compensation
104
61
Total stock-based compensation expense
$
2,371
$
2,798
Deferred income tax benefit
$
787
$
921
SFAS No. 123(R) “Share-Based Payment” requires the immediate recognition of stock-based
compensation costs for awards granted to retirement-eligible grantees. The amount of grant-date
fair value expensed immediately for awards granted to retirement-eligible grantees during the three
months ended April 30, 2009 and 2008 was $350,000 and $974,000, respectively.
In connection with the vesting of restricted stock during the three months ended April 30, 2009 and
2008, the Company repurchased into treasury 21,856 shares and 16,893 shares, respectively, of Class
A common stock to satisfy the employees’ related minimum statutory tax withholding requirements.
These shares were placed in treasury with an aggregate cost basis of $107,000 and $642,000,
respectively.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
H.
Income Taxes
Income tax benefit for the three months ended April 30, 2009 and 2008 was $(22,271,000) and
$(19,859,000), respectively. The difference in the income tax benefit reflected in the
Consolidated Statements of Operations versus the income tax benefit computed at the statutory
federal income tax rate is primarily attributable to state income taxes, cumulative effect of
changing our effective tax rate, additional state NOL’s and general business credits, changes to
the Company’s charitable contribution carryover, changes to the valuation allowances related to
charitable contributions and various permanent differences between pre-tax GAAP income and taxable
income.
At January 31, 2009, the Company had a federal net operating loss carryforward for tax purposes of
$113,458,000 (generated primarily from the impact on its net earnings of tax depreciation expense
from real estate properties and excess deductions from stock-based compensation) that will expire
in the years ending January 31, 2024 through January 31, 2029, a charitable contribution deduction
carryforward of $42,705,000 that will expire in the years ending January 31, 2010 through
January 31, 2014 ($5,650,575 expiring in the year ended January 31, 2010), general business credit
carryovers of $15,099,000 that will expire in the years ending January 31, 2010 through
January 31, 2029 ($36,253 expiring in the year ended January 31, 2010), and an alternative minimum
tax (“AMT”) credit carryforward of $28,501,000 that is available until used to reduce Federal tax
to the AMT amount.
The Company’s policy is to consider a variety of tax-deferral strategies, including tax deferred
exchanges, when evaluating its future tax position. The Company has a full valuation allowance
against the deferred tax asset associated with its charitable contributions. The company has a
valuation allowance against its general business credits, other than those general business credits
which are eligible to be utilized to reduce future AMT liabilities. These valuation allowances
exist because management believes at this time that it is more likely than not that the Company
will not realize these benefits.
The Company applies the “with-and-without” methodology for recognizing excess tax benefits from the
deduction of stock-based compensation. The net operating loss available for the tax return, as is
noted in the paragraph above, is significantly greater than the net operating loss available for
the tax provision due to excess deductions from stock-based compensation reported on the return, as
well as the impact of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109” (“FIN No. 48”) adjustments to the net operating loss.
The Company has not recorded a net deferred tax asset of approximately $17,096,000, as of January31, 2009, from excess stock-based compensation deductions for which a benefit has not yet been
recognized.
FIN No. 48
Unrecognized tax benefits represent those tax benefits related to tax positions that have been
taken or are expected to be taken in tax returns that are not recognized in the financial
statements because management has either concluded that it is not more likely than not that the tax
position will be sustained if audited by the appropriate taxing authority or the amount of the
benefit will be less than the amount taken or expected to be taken in its income tax returns.
As of April 30 and January 31, 2009, the Company had unrecognized tax benefits of $1,611,000 and
$1,481,000, respectively. The Company recognizes estimated interest payable on underpayments of
income taxes and estimated penalties that may result from the settlement of some uncertain tax
positions as components of income tax expense. As of April 30 and January 31, 2009, the Company
had approximately $496,000 and $463,000, respectively, of accrued interest related to uncertain
income tax positions. During the three months ended April 30, 2009 and 2008, $32,000 and $89,000,
respectively, of tax expense was booked relating to interest on
uncertain tax positions.
The total amount of unrecognized tax benefits that would affect the Company’s effective tax rate,
if recognized as of April 30, 2009 and 2008, is $145,000 and $348,000, respectively. Based upon
the Company’s assessment of the outcome of examinations that are in progress, the settlement of
liabilities, or as a result of the expiration of the statutes of limitation for certain
jurisdictions, it is reasonably possible that the related unrecognized tax benefits for tax
positions taken regarding previously filed tax returns will materially change from those recorded
at April 30, 2009. Included in the $1,611,000 of unrecognized benefits noted above, is $1,450,000
which, due to the reasons above, could significantly decrease during the next twelve months.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
I.
Discontinued Operations and Gain on Disposition of Rental Properties
Pursuant to the definition of a component of an entity in SFAS No. 144, all earnings of
discontinued operations sold or held for sale, assuming no significant continuing involvement, have
been reclassified in the Consolidated Statements of Operations for the three months ended
April 30, 2009 and 2008. The Company considers assets held for sale when the transaction has been
approved and there are no significant contingencies related to the sale that may prevent the
transaction from closing.
During the year ended January 31, 2008, the Company consummated an agreement to sell eight (seven
operating properties and one property that was under construction at the time of the agreement) and
lease four supported-living apartment properties to a third party. Pursuant to the agreement,
during the second quarter of 2007, six operating properties and the property under construction,
Sterling Glen of Roslyn located in Roslyn, New York, were sold. The seventh operating property,
Sterling Glen of Lynbrook, was operated by the purchaser under a short-term lease through the date
of sale, which occurred on May 20, 2008. The operating results of the property for the three months
ended April 30, 2008 is classified as discontinued operations.
The four remaining properties entered into long-term operating leases with the purchaser. On
January 30, 2009, terms of the purchase agreement for the sale of Sterling Glen of Rye Brook, whose
operating lease had a stated term of ten years, were amended and the property was sold. The
operating results of the property for the three months ended April 30, 2008 is classified as
discontinued operations. On January 31, 2009, another long-term operating lease with the purchaser
that had a stated term of ten years was cancelled and the operations of the property were
transferred back to the Company.
The two remaining properties have long-term operating leases with stated terms of five years with
various put and call provisions at a pre-determined purchase price that can be exercised beginning
in the second year of each lease at an amount that is in excess of the current carrying amount of
the properties. The Company is generally entitled to a fixed lease payment from the lessee over the
term of the lease in exchange for the operations of the properties, which will be retained by the
lessee. The Company has continued to consolidate the leased properties in its Consolidated Balance
Sheets as the criteria for sales accounting pursuant to the provisions of SFAS No. 66, “Accounting
for Sales of Real Estate,” have not been achieved. Further, the Company has concluded that the
leased properties have met the criteria as VIEs pursuant to FIN No. 46(R), and due to the Company’s
obligation to absorb a majority of expected losses, the leased properties are consolidated by the
Company at April 30, 2009. Additionally, these properties do not meet the qualifications of assets
held for sale under SFAS No. 144 as of April 30, 2009; therefore, these properties have not been
included in discontinued operations.
The following table lists the consolidated rental properties included in discontinued operations:
Impairment of Real Estate, Impairment of Unconsolidated Entities, Write-Off of Abandoned
Development Projects and Loss on Early Extinguishment of Debt
Impairment of Real Estate
The Company reviews its real estate portfolio, including land held for development or sale, for
impairment whenever events or changes indicate that its carrying value of the long-lived assets may
not be recoverable. In cases where the Company does not expect to recover its carrying costs, an
impairment charge is recorded in accordance with the provisions of SFAS No. 144. The Company
recorded an impairment of real estate of $1,124,000 for the three months ended April 30, 2009
related to a residential land sale and related development opportunity in Mamaroneck, New York. The
write down to the estimated fair value, less cost to sell, was determined based upon actual sales
negotiations and a bona fide purchase offer received from a third party. The Company recorded no
impairments of real estate during the three months ended April 30, 2008.
Impairment of Unconsolidated Entities
The Company reviews its portfolio of unconsolidated entities for other-than-temporary impairments
whenever events or changes indicate that its carrying value in the investments may not be
recoverable. In cases where the Company estimates that it does not expect the value in its equity
method investments to be recovered within 12 months, an impairment charge is recorded in accordance
with the provisions of APB No. 18, “The Equity Method of Accounting for Investments in Common
Stock,” as a reduction in the carrying value of the investment. The Company estimates the fair
value of its unconsolidated entities in accordance with SFAS No. 157. In order to arrive at the
estimates, the Company uses varying assumptions that may include comparable sale prices, market
discount rates, market capitalization rates and estimated future discounted cash flows specific to
the geographic region and property type, which are considered to be Level 3 inputs.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
J.
Impairment of Real Estate, Impairment of Unconsolidated Entities, Write-Off of Abandoned
Development Projects and Loss on Early Extinguishment of Debt (continued)
The following table summarizes the Company’s impairment of unconsolidated entities for the three
months ended April 30, 2009 and 2008, which are included in the Consolidated Statements of
Operations.
Classic Residence by Hyatt (Supported-Living Apartments)
(Yonkers, New York)
$
3,152
$
-
Apartment Communities
Millender Center
(Detroit, Michigan)
4,252
-
Metropolitan Lofts
(Los Angeles, California)
1,039
-
Residences at University Park
(Cambridge, Massachusetts)
855
-
Two land development projects
262
-
$
9,560
$
-
Write-Off of Abandoned Development Projects
The Company reviews, on a quarterly basis, each project under development to determine whether it
is probable the project will be developed. If it is determined by management that the project will
not be developed, project costs are written off to operating expenses as an abandoned development
project cost. The Company may abandon certain projects under development for a number of reasons,
including, but not limited to, changes in local market conditions, increases in construction or
financing costs or due to third party challenges related to entitlements or public financing. As a
result, the Company may fail to recover expenses already incurred in exploring development
opportunities. The Company recorded write-offs of abandoned development projects of $14,393,000 and
$26,692,000 for the three months ended April 30, 2009 and 2008, respectively, which were recorded
in operating expenses in the Consolidated Statement of Operations.
Loss on Early Extinguishment of Debt
For the three months ended April 30, 2009 and 2008, the Company recorded $-0- and $5,179,000,
respectively, as loss on early extinguishment of debt. For the three months ended April 30, 2008,
the loss primarily represents the impact of early extinguishment of nonrecourse mortgage debt at
Galleria at Sunset, a regional mall located in Henderson, Nevada, and 1251 S. Michigan and Sky55,
apartment communities located in Chicago, Illinois, in order to secure more favorable financing
terms. These charges were partially offset by a gain on the early extinguishment of the Urban
Development Action Grant loan at Post Office Plaza, an office building located in Cleveland, Ohio.
K.
Earnings per Share
Earnings per share has been computed under the provisions of SFAS No. 128 “Earnings Per Share.”
Pursuant to EITF No. 03-6 “Participating Securities and the Two-Class Method under FASB Statement
No. 128” (“EITF 03-6”), the Class A Common Units issued in exchange for Bruce C. Ratner’s
noncontrolling interest in the Forest City Ratner Company portfolio in November 2006, which are
reflected as noncontrolling interest in the Company’s Consolidated Balance Sheets, are considered
convertible participating securities as they are entitled to participate in any dividends paid to
the Company’s common shareholders. The Class A Common Units are included in the computation of
basic earnings per share using the two-class method and are included in the computation of diluted
earnings per share using the if-converted method. Under FSP EITF 03-6-1, which the Company adopted
effective February 1, 2009, the Company’s restricted stock is considered a participating security
pursuant to the two-class method for computing basic earnings per share.
The loss from continuing operations attributable to Forest City Enterprises, Inc. for the three
months ended April 30, 2009 and 2008 as well as the net loss attributable to Forest City
Enterprises, Inc. for the three months ended April 30, 2009 and 2008 were allocated solely to
holders of common stock as the participating security holders do not share in the losses in
accordance with EITF 03-6.
Loss from continuing operations attributable to Forest City Enterprises, Inc. - basic and diluted
$
(33,499
)
$
(40,790
)
Net loss attributable to Forest City Enterprises, Inc. - basic and diluted
$
(30,679
)
$
(40,402
)
Denominators
Weighted average shares outstanding - basic
102,911,485
102,613,817
Effect of stock options and restricted stock (1)(2)
-
-
Effect of convertible Class A Common Units (1)
-
-
Weighted average shares outstanding - diluted (3)(4)
102,911,485
102,613,817
Earnings Per Share
Loss from continuing operations attributable to Forest City Enterprises, Inc. - basic and diluted
$
(0.33
)
$
(0.39
)
Net loss attributable to Forest City Enterprises, Inc. - basic and diluted
$
(0.30
)
$
(0.39
)
(1)
Incremental shares from dilutive securities of 3,662,244 and 4,616,829 for the three
months ended April 30, 2009 and 2008, respectively, were not included in the computation of
diluted earnings per share because their effect is anti-dilutive due to the loss from
continuing operations.
(2)
Weighted-average options and restricted stock of 4,445,728 and 2,088,736 for the three
months ended April 30, 2009 and 2008, respectively, were not included in the computation of
diluted earnings per share because their effect is anti-dilutive.
(3)
For the three months ended April 30, 2009, weighted-average performance shares of
172,609 were not included in the computation of diluted earnings per share because the
performance criteria were not satisfied as of the end of the period.
(4)
The Puttable Equity-Linked Senior Notes issued in October 2006 can be put to the
Company by the holders under certain circumstances (see Note D – Senior and Subordinated
Debt). If the Company exercises its net share settlement option upon a put of the notes by
the holders, it will then issue shares of its Class A common stock. The effect of these
shares was not included in the computation of diluted earnings per share for the three
months ended April 30, 2009 and 2008 as the Company’s average stock price did not exceed
the put value price of the Puttable Equity-Linked Senior Notes. These notes will be
dilutive when the average stock price for the period exceeds $66.39. Additionally, the
Company sold a warrant with an exercise price of $74.35, which has also been excluded from
diluted earnings per share for the three months ended April 30, 2009 and 2008 as the
Company’s stock price did not exceed the exercise price.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
L. Segment Information
The Company operates through three strategic business units and five reportable segments,
determined in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and
Related Information.” The three strategic units/reportable segments are the Commercial Group,
Residential Group and Land Development Group (“Real Estate Groups”). The Commercial Group, the
Company’s largest business unit, owns, develops, acquires and operates regional malls,
specialty/urban retail centers, office and life science buildings, hotels and mixed-use projects.
The Residential Group owns, develops, acquires and operates residential rental properties,
including upscale and middle-market apartments and adaptive re-use developments. Additionally, the
Residential Group develops for-sale condominium projects and also owns interests in entities that
develop and manage military family housing. The Land Development Group acquires and sells both
land and developed lots to residential, commercial and industrial customers. It also owns and
develops land into master-planned communities and mixed-use projects. The remaining two reportable
segments are The Nets, a franchise of the National Basketball Association in which the Company
accounts for its investment on the equity method of accounting, and Corporate Activities. The
following tables summarize financial data for the Company’s five reportable segments. All amounts
are presented in thousands and all prior year amounts are “as
adjusted” as applicable.
The identifiable assets of ($280) and ($3,302) represent losses in excess of the
Company’s investment basis in The Nets at April 30 and January 31, 2009, respectively.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
L. Segment Information (continued)
The Company uses a measure defined as Earnings Before Depreciation, Amortization and Deferred Taxes
(“EBDT”) to report its operating results. EBDT is a non-GAAP measure and is defined as net earnings
excluding the following items: 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 and deferred income taxes; iv) preferred payment which
is classified as noncontrolling interest expense in the Company’s Consolidated Statements of
Operations; v) impairment of real estate (net of tax); vi) extraordinary items (net of tax); and
vii) cumulative or retrospective effect of change in accounting principle (net of tax).
The Company believes that, although its business has many facets such as development, acquisitions,
disposals, and property management, the core of its business is the recurring operations of its
portfolio of real estate assets. The Company’s Chief Executive Officer, the chief operating
decision maker, uses EBDT, as presented, to assess performance of its portfolio of real estate
assets by operating segment because it provides information on the financial performance of the
core real estate portfolio operations. EBDT measures the profitability of a real estate segment’s
operations of collecting rent, paying operating expenses and servicing its debt. The Company’s
segments adhere to the accounting policies described in Note A. Unlike the real estate segments,
EBDT for The Nets segment equals net earnings (loss). All amounts in the following tables are
represented in thousands.
Reconciliation of EBDT to Net Earnings (Loss) by Segment:
Depreciation and amortization – Real Estate Groups
(51,934
)
(18,137
)
(76
)
-
-
(70,147
)
Amortization of mortgage procurement costs – Real Estate Groups
(2,476
)
(647
)
(123
)
-
-
(3,246
)
Deferred taxes – Real Estate Groups
5,539
3,872
291
-
5,529
15,231
Straight-line rent adjustment
3,134
4
(1
)
-
-
3,137
Preference payment (1)
(936
)
-
-
-
-
(936
)
Gain on disposition of other investments, net of tax
-
-
-
-
92
92
Gain on disposition of unconsolidated entities, net of tax
541
-
-
-
-
541
Retrospective effect of FSP APB 14-1
1,594
291
79
-
(2,138
)
(174
)
Discontinued operations, net of tax: (2)
Depreciation and amortization – Real Estate Groups
(191
)
(472
)
-
-
-
(663
)
Amortization of mortgage procurement costs – Real Estate Groups
(6
)
(91
)
-
-
-
(97
)
Deferred taxes – Real Estate Groups
(8
)
(96
)
-
-
-
(104
)
Straight-line rent adjustment
10
-
-
-
-
10
Net earnings (loss) attributable to Forest City Enterprises, Inc.
$
(11,702
)
$
1,951
$
(516
)
$
(8,960
)
$
(21,175
)
$
(40,402
)
(1)
The preference payment of $585 and $936 for the three months ended April 30, 2009 and 2008,
respectively, represents one quarter’s share of the annual preferred payment in connection
with the issuance of Class A Common Units in exchange for Bruce C. Ratner’s noncontrolling
interest in the Forest City Ratner Company portfolio. See Note M – Class A Common Units for
more information.
(2)
See Note I for discontinued operations information.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
M.
Class A Common Units
Master Contribution Agreement
The Company and certain of its affiliates (the “FCE Entities”) entered into a Master Contribution
and Sale Agreement (the “Master Contribution Agreement”) with Bruce C. Ratner (“Mr. Ratner”), an
Executive Vice President and Director of the Company, and certain entities and individuals
affiliated with Mr. Ratner (the “BCR Entities”) on August 14, 2006. Pursuant to the Master
Contribution Agreement, on November 8, 2006, the Company issued Class A Common Units (“Units”) in a
jointly-owned limited liability company to the BCR Entities in exchange for their interests in a
total of 30 retail, office and residential operating properties, and certain service companies, all
in the greater New York City metropolitan area. The Company accounted for the issuance of the
Units in exchange for the noncontrolling interest under the purchase method of accounting. The
Units may be exchanged for one of the following forms of consideration at the Company’s sole
discretion: (i) an equal number of shares of the Company’s Class A common stock or, (ii) cash based
on a formula using the average closing price of the Class A common stock at the time of conversion
or, (iii) a combination of cash and shares of the Company’s Class A common stock. The Company has
no rights to redeem or repurchase the Units. The carrying value of the Units are included as
noncontrolling interest on the Consolidated Balance Sheets at April 30 and January 31, 2009, in
accordance with SFAS No. 160. Also pursuant to the Master Contribution Agreement, the Company and
Mr. Ratner agreed that certain projects under development would remain owned jointly until such
time as each individual project was completed and achieved “stabilization.” As each of the
development projects achieves stabilization, it is valued and the Company, in its discretion,
chooses among various options for the ownership of the project following stabilization consistent
with the Master Contribution Agreement. The development projects were not covered by the Tax
Protection Agreement that the parties entered into in connection with the Master Contribution
Agreement. The Tax Protection Agreement indemnified the BCR Entities included in the initial
closing against taxes payable by reason of any subsequent sale of certain operating properties.
New York Times and Twelve MetroTech Center
Two of the development projects, New York Times, an office building located in Manhattan, New York
and Twelve MetroTech Center, an office building located in Brooklyn, New York, recently achieved
stabilization. The Company elected to cause certain of its affiliates to acquire for cash the BCR
Entities’ interests in the two projects pursuant to agreements dated May 6, 2008 and May 12, 2008,
respectively. In accordance with the agreements, the applicable BCR Entities assigned and
transferred their interests in the two projects to affiliates of the Company and will receive
approximately $121,000,000 over a 15 year period. An affiliate of the Company has also agreed to
indemnify the applicable BCR Entity against taxes payable by it by reason of a subsequent sale or
other disposition of one of the projects. The tax indemnity provided by the affiliate of the
Company expires on December 31, 2014 and is similar to the indemnities provided for the operating
properties under the Tax Protection Agreement.
The consideration exchanged by the Company for the BCR Entities’ interest in the two development
projects has been accounted for under the purchase method of accounting. Pursuant to the
agreements, the BCR Entities received an initial cash amount of $49,249,000. The Company
calculated the net present value of the remaining payments over the 15 year period using a
discounted interest rate. This initial discounted amount of $56,495,000 was recorded in accounts
payable and accrued expenses on the Company’s Consolidated Balance Sheet and will be accreted up to
the total liability through interest expense over the next 15 years using the effective interest
method.
The following table summarizes the final allocation of the consideration exchanged for the BCR
Entities’ interests in the two projects (in thousands):
Completed rental properties (1)
$
102,378
Notes and accounts receivable, net (2)
132
Other assets (3)
12,513
Accounts payable and accrued expenses (4)
(9,279
)
Total purchase price allocated
$
105,744
Represents allocation for:
(1)
Land, building and tenant improvements associated with the underlying real
estate
(2)
Above market leases
(3)
In-place leases, tenant relationships and leasing commissions
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
M.
Class A Common Units (continued)
Exchange of Units
In July 2008, the BCR Entities exchanged 247,477 of the Units. The Company issued 128,477 shares
of its Class A common stock for 128,477 of the Units and paid cash of $3,501,000 for 119,000 Units.
The Company accounted for the exchange as a purchase of noncontrolling interest, resulting in a
reduction of noncontrolling interest of $12,624,000. The following table summarizes the components
of the exchange transaction (in thousands):
Reduction of completed rental properties
$
5,345
Reduction of cash and equivalents
3,501
Increase in Class A common stock - par value
42
Increase in additional paid-in capital
3,736
Total reduction of noncontrolling interest
$
12,624
Other Related Party Transactions
During the year ended January 31, 2009, in accordance with the parties prior understanding, the
Company redeemed Mr. Ratner’s noncontrolling interest in two entities in exchange for the Company’s
majority ownership interests in 17 single-tenant pharmacy properties and $9,043,000 in cash. This
transaction was accounted for in accordance with SFAS No. 141, “Business Combinations” as
acquisitions of the noncontrolling interest in the subsidiaries. The fair value of the
consideration paid was allocated to the acquired ownership interests, which approximated the fair
value of the 17 single-tenant pharmacy properties. This transaction resulted in a reduction of
noncontrolling interest of $14,503,000 and did not result in a gain or loss. The earnings of these
properties have not been reclassified to discontinued operations for the three months ended April30, 2008 as the results do not have a material impact on the Consolidated Statements of Operations.
N.
Subsequent Event
In
May 2009, the Company sold 52,325,000 of its Class A Common
Shares, which included shares to cover the underwriters’
over-allotment, in an underwritten public offering pursuant to an effective registration statement
at a public offering price of $6.60 per share. The Company received net proceeds of $330,417,000 after deducting
underwriting discounts and commissions. The Company used the net proceeds from the offering to
reduce its outstanding borrowings under its bank revolving credit facility.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations
(“MD&A”) of Forest City Enterprises, Inc. and subsidiaries should be read in conjunction with the
financial statements and the footnotes thereto contained in the annual report on Form 10-K for the
year ended January 31, 2009.
RESULTS OF OPERATIONS
We report our results of operations by each of our three strategic business units as we believe
this provides the most meaningful understanding of our financial performance. In addition to our
three strategic business units, we have two additional segments: The Nets and Corporate Activities.
Corporate Description
We principally engage in the ownership, development, management and acquisition of commercial and
residential real estate and land throughout the United States. We operate through three strategic
business units and five reportable segments. The Commercial Group, our largest business unit, owns,
develops, acquires and operates regional malls, specialty/urban retail centers, office and life
science buildings, hotels and mixed-use projects. The Residential Group owns, develops, acquires
and operates residential rental properties, including upscale and middle-market apartments and
adaptive re-use developments. Additionally, the Residential Group develops for-sale condominium
projects and also owns interests in entities that develop and manage military family housing.
New York City operations are part of the Commercial Group or Residential Group depending on the
nature of the operations. The Land Development Group acquires and sells both land and developed
lots to residential, commercial and industrial customers. It also owns and develops land into
master-planned communities and mixed-use projects.
Corporate Activities and The Nets, a franchise of the National Basketball Association (“NBA”) in
which we account for our investment on the equity method of accounting, are reportable segments of
the Company.
We have approximately $11.7 billion of assets in 27 states and the District of Columbia at
April 30, 2009. Our core markets include the New York City/Philadelphia metropolitan area, Denver,
Boston, Greater Washington D.C./Baltimore metropolitan area, Chicago and the state of California.
We have offices in Albuquerque, Boston, Chicago, Denver, London (England), Los Angeles,
New York City, San Francisco, Washington, D.C., and our corporate headquarters in Cleveland, Ohio.
Significant milestones occurring during the first quarter of 2009 included:
•
The disposition of Grand Avenue, a specialty retail center located in the Borough of
Queens, New York, which closed April 16, 2009. The property had a selling price of
approximately $33,500,000 and generated net proceeds of approximately $9,042,000;
•
Our selection by BlackRock, Inc. to assume retail management and leasing duties at the
Southlands, a 1,700,000 square foot mixed-use lifestyle center in southeast Denver, Colorado;
•
The land sale and related development opportunity located in Mamaroneck, New York, which
generated proceeds of $14,000,000;
•
Securing a $161,900,000 refinancing of a nonrecourse mortgage associated with our
Atlantic Yards project in Brooklyn, New York, of which $143,280,000 is recorded on a
consolidated entity and $18,620,000 on an unconsolidated entity;
•
The agreement with the City of Hallandale Beach, Florida, for up to $900,000 per year
for 15 years of tax-increment financing (TIF) for Village at Gulfstream, a 500,000 square
foot, high-end retail and entertainment destination currently under construction in
Hallandale Beach. We also announced 32 top-tier tenants for the center, which is expected
to open in the first quarter of 2010; and
•
Closing $141,516,000 in other nonrecourse mortgage financing transactions.
Subsequent to April 30, 2009, we announced the following significant milestones:
•
The completion of the sale of 52,325,000 of our Class A Common Shares, which included shares to cover the
underwriters’ over-allotment, in an underwritten public offering pursuant to an effective
registration statement at a public offering price of $6.60 per share. We received net proceeds of
$330,417,000 after deducting underwriting discounts and commissions;
•
The unanimous ruling (issued May 15, 2009) by the Appellate Supreme Court of the State of New York
Division, Second Judicial Department,
against opponents and upholding New York State’s right to use eminent domain given the
public benefits associated with our Brooklyn Atlantic Yards project. As a result, we intend to break
ground on the project this year, with the goal of having The Nets play basketball in a
new Barclays Center arena; and
•
Closing $100,654,000 in nonrecourse mortgage financing transactions, as well as
addressing another $66,000 of mortgage debt maturing during fiscal year ending January31, 2010 through signed lender commitments and/or automatic extensions.
Retrospective Adoption of New Accounting Standard
Effective February 1, 2009, we adopted Financial Accounting Standards Board (“FASB”) Staff Position
(“FSP”) No. APB 14-1, “Accounting for Convertible Debt Instruments That May be Settled in Cash Upon
Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). This standard required us to
restate the prior year financial statements to show retrospective application upon adoption. FSP
APB 14-1 requires the liability and equity components of convertible debt instruments that may be
settled in cash upon conversion (including partial cash settlement) to be separately accounted for
in a manner that reflects the issuer’s nonconvertible debt borrowing rate. This statement changed
the accounting treatment for our 3.625% Puttable Equity-Linked Senior Notes (“the Notes”) due
October 2011, which were issued in October 2006. FSP APB 14-1 requires the initial debt proceeds
from the sale of a company’s convertible debt instrument to be allocated between a liability
component and an equity component. This allocation is based upon what the assumed interest rate
would have been on the date of issuance if we had issued similar nonconvertible debt. The resulting
debt discount will be amortized over the debt instrument’s expected life as additional non-cash
interest expense. Due to the increase in interest expense, we recorded additional capitalized
interest based on our qualifying expenditures on our development projects. Deferred financing costs
decreased related to the reallocation of the original issuance costs between the debt instrument
and equity component and the gain recognized from the purchase of $15,000,000, in principal, of the
Notes during the three months ended October 31, 2008 was adjusted to reflect the requirements of
gain recognition under FSP APB 14-1 (see the “Senior and Subordinate Debt” section of the MD&A).
The following tables reflect our as reported amounts along with the as adjusted amounts as a result
of the retrospective adoption of FSP APB 14-1:
Net loss attributable to Forest City Enterprises, Inc.
(40,269
)
(133
)
(40,402
)
Net loss attributable to Forest City Enterprises, Inc. per share - basic and
diluted
(0.39
)
0.00
(0.39
)
(1)
Adjusted to reflect the impact of discontinued operations in accordance with SFAS No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”)
(refer to the “Discontinued Operations” section of the MD&A).
Net Loss Attributable to Forest City Enterprises, Inc.– Net loss attributable to Forest City
Enterprises, Inc. for the three months ended April 30, 2009 was $30,679,000 versus $40,402,000 for
the three months ended April 30, 2008. Although we have substantial recurring revenue sources from
our properties, we also enter into significant one-time transactions, which could create
substantial variances in net earnings (loss) between periods. This variance to the prior year is
primarily attributable to the following increases, which are net of tax and noncontrolling
interest:
•
$7,529,000 ($12,299,000, pre-tax) related to decreased write-offs of abandoned
development projects in 2009 compared to 2008, primarily due to the 2008 write-off of
Summit at Lehigh Valley, a Commercial development project with a housing component in
Allentown, Pennsylvania, which represented $13,069,000 ($21,513,000 pre-tax) of the total
decrease;
•
$3,003,000 ($4,906,000, pre-tax) in 2009 of decreased expenses related to the early
extinguishment of nonrecourse mortgage debt primarily at Galleria at Sunset, a regional
mall in Henderson, Nevada and at 1251 S. Michigan and Sky55, apartment communities in
Chicago, Illinois, in order to secure more favorable financing terms in 2008. These
changes were offset, in part, by a gain on the early extinguishment of the Urban
Development Action Grant loan at Post Office Plaza, an office building in Cleveland, Ohio;
•
$2,784,000 ($4,548,000, pre-tax) related to a gain on the disposition of Grand Avenue, a
specialty retail center in Queens, New York;
•
$1,968,000 ($2,792,000, pre-tax) related to the decreased share of losses from our
equity investment in the New Jersey Nets basketball team (see “The Nets” section of the
MD&A); and
•
$1,860,000 ($3,031,000, pre-tax) related to participation payments in 2008 on the
refinancing of 350 Massachusetts Avenue, an unconsolidated office building and Jackson
Building, a consolidated office building, both in Cambridge, Massachusetts.
These increases were partially offset by the following decreases, net of tax and noncontrolling
interest:
•
$5,853,000 ($9,560,000, pre-tax) related to the 2009 increase in impairment charges of
unconsolidated entities; and
•
$1,880,000 ($3,071,000, pre-tax) primarily related to an increase in corporate operating
expenses related to company-wide severance and outplacement costs offset by decreases in
compensation and related benefits, charitable contributions and additional decreases in
general corporate expenses.
Summary of Segment Operating Results – The following tables present a summary of revenues from real
estate operations, operating expenses, interest expense, equity in earnings (loss) of
unconsolidated entities and impairment of unconsolidated entities by segment for the three months
ended April 30, 2009 and 2008, respectively. See discussion of these amounts by segment in the
narratives following the tables.
Revenues from real estate operations – Revenues from real estate operations for the Commercial
Group, including the segment’s land sales, increased by $14,333,000, or 6.48%, for the three months
ended April 30, 2009 compared to the same period in the prior year. The variance to the prior year
is primarily attributable to the following increases:
•
$8,206,000 related to new property openings as noted in the table below;
•
$4,840,000 related to increases in occupancy at New York Times and Twelve MetroTech
Center, office buildings in Manhattan and Brooklyn, New York, respectively;
•
$2,980,000 related to increases in commercial outlot land sales primarily at Victoria
Gardens in Rancho Cucamonga, California and Short Pump Town Center in Richmond, Virginia,
which were partially offset by decreases in commercial outlot land sales at Saddle Rock
Village in Aurora, Colorado; and
•
$2,751,000 related to increased revenues earned on a construction contract with the New
York City School Construction Authority for the construction of a school at Beekman, a
development project in Manhattan, New York. This represents a reimbursement of costs which
is included in operating expenses discussed below.
These increases were partially offset by decreases of $4,444,000 that were generally due to
fluctuations in mature properties.
Operating and Interest Expenses – Operating expenses decreased $15,269,000, or 11.73%, for three
months ended April 30, 2009 compared to the same period in the prior year. The variance to the
prior year is primarily attributable to the following decreases:
•
$17,897,000 related to decreased write-offs of abandoned development projects in 2009
compared to 2008, which was primarily due to the 2008 write-off at Summit at Lehigh Valley;
and
•
$1,759,000 related to the 2008 participation payment on the refinancing at Jackson
Building, an office building in Cambridge, Massachusetts.
These decreases were partially offset by the following increases:
•
$3,197,000 related to new property openings as noted in the table below;
•
$2,751,000 related to construction of a school at Beekman. These costs are reimbursed
by the New York City School Construction Authority, which are included in revenues from
real estate operations discussed above; and
•
$1,121,000 related to increases in commercial outlot land sales primarily at Victoria
Gardens and Short Pump Town Center, which were partially offset by a decrease in commercial
outlot land sales at Saddle Rock Village.
The balance of the remaining decrease of $2,682,000 was generally due to fluctuations in mature
properties and general operating activities.
Interest expense for the Commercial Group increased by $2,740,000, or 4.83%, for the three months
ended April 30, 2009 compared to the same period in the prior year. The increase is primarily
attributable to the openings of the properties listed in the table below.
The following table presents the increases (decreases) in revenues and operating expenses incurred
by the Commercial Group for newly-opened properties for the three months ended April 30, 2009
compared to the same period in the prior year:
Comparable occupancy for the Commercial Group is 90.0% and 90.3% for retail and office,
respectively, as of April 30, 2009 compared to 92.9% and 90.1%, respectively, as of April 30, 2008.
Retail and office occupancy as of April 30, 2009 and 2008 is based on square feet leased at the end
of the fiscal quarter. Average occupancy for hotels for the three months ended April 30, 2009 is
56.2% compared to 60.0% for the three months ended April 30, 2008.
As of April 30, 2009, the average base rent per square feet expiring for retail and office leases
is $26.40 and $30.91, respectively, compared to $26.66 and $30.15, respectively, as of April30, 2008. Square feet of expiring leases and average base rent per square feet are operating
statistics that represent 100% of the square footage and base rental income per square foot from
expiring leases. The average daily rate (“ADR”) for our hotel portfolio is $135.09 and $134.45 for
the three months ended April 30, 2009 and 2008, respectively. ADR is an operating statistic and is
calculated by dividing revenue by the number of rooms sold for all hotels that were open and
operating for both the three months ended April 30, 2009 and 2008.
Residential Group
Revenues from real estate operations – Included in revenues from real estate operations is fee
income related to the development and construction management related to our military housing
projects. Military housing fee income and related operating expenses may vary significantly from
period to period based on the timing of development and construction activity at each applicable
project. Revenues from real estate operations for the Residential Group decreased by $2,362,000, or
3.1%, during the three months ended April 30, 2009 compared to the same period in the prior year.
The variance is primarily attributable to the following decreases:
•
$19,433,000 related to military housing fee income from the management and development
of military housing units located primarily on the islands of Oahu and Kauai, Hawaii,
Chicago, Illinois, Seattle, Washington, and Colorado Springs, Colorado (refer to the
“Military Housing Fee Revenues” section below for further detail); and
•
$665,000 primarily related to decreases in occupancy at the following properties:
Emerald Palms in Miami, Florida, Heritage in San Diego, California, Grand in North
Bethesda, Maryland and Metro 417 in Los Angeles, California.
These decreases were partially offset by the following increases:
•
$14,000,000 related to the land sale and related development opportunity in Mamaroneck,
New York;
•
$1,915,000 related to the cancellation of a net leasing arrangement whereby we assumed
the operations from the previous lessee at Forest Trace in Lauderhill, Florida;
•
$818,000 primarily related to new property openings as noted in the table below; and
•
$494,000 primarily related to increases in rents and occupancy at the following
properties: Sky55 in Chicago, Illinois and One Franklintown in Philadelphia, Pennsylvania.
The balance of the remaining increase of $509,000 was generally due to fluctuations in other mature
properties.
Operating
and Interest Expenses – Operating expenses for the Residential Group increased by
$3,267,000, or 6.0%, during the three months ended April 30, 2009 compared to the same period in
the prior year. This variance is primarily attributable to the following increases:
•
$14,000,000 related to the land sale and related development opportunity in Mamaroneck,
New York;
•
$5,598,000 related to increased write-offs of abandoned development projects;
•
$2,358,000 related to the cancellation of the net lease arrangement with Forest Trace;
and
•
$1,009,000 related to new property openings as noted in the table below.
These increases were partially offset by the following decreases:
•
$17,175,000 related to expenditures associated with military housing fee revenues; and
•
$2,051,000 related to reduced payroll costs and specific cost reduction activities.
The balance of the remaining decrease of $472,000 was generally due to fluctuations in mature
properties and general operating activities.
Interest expense for the Residential Group increased by $1,151,000, or 12.45%, during the three
months ended April 30, 2009 compared to the same period in the prior year. The increase is
primarily attributable to the openings of the properties in the table below.
The following table presents the increases (decreases) in revenues and operating expenses incurred
by the Residential Group for newly-opened properties for the three months ended April 30, 2009
compared to the same period in the prior year:
Comparable average occupancy for the Residential Group is 90.1% and 92.5% for the three months
ended April 30, 2009 and 2008, respectively. Average residential occupancy for the three months
ended April 30, 2009 and 2008 is calculated by dividing gross potential rent less vacancy by gross
potential rent.
Total net rental income (“NRI”) for our Residential Group was 82.0% and 87.9% for the three months
ended April 30, 2009 and 2008, respectively. NRI is an operating statistic that represents the
percentage of potential rent received after deducting vacancy and rent concessions from gross
potential rent.
Military Housing Fee Revenues – Revenues for development fees related to our military housing
projects are earned based on a contractual percentage of the actual development costs incurred by
the military housing projects and are recognized on a monthly
basis as the costs are incurred. We also recognize additional development incentive fees upon
successful completion of certain criteria, such as incentives to realize development cost savings,
encourage small and local business participation, comply with specified safety standards and other
project management incentives as specified in the development agreements. Revenues of $2,868,000
and $22,464,000 were recognized during the three months ended April 30, 2009 and 2008,
respectively, related to base development and development incentive fees, which were recorded in
revenues from real estate operations in the Consolidated Statements of Operations.
Revenues related to construction management fees are earned based on the cost of each military housing construction
contract. We also recognized certain construction incentive fees based upon successful completion
of certain criteria as set forth in the construction contracts. Revenues of $2,850,000 and
$3,262,000 were recognized during the three months ended April 30, 2009 and 2008, respectively,
related to the base construction and incentive fees, which were recorded in revenues from real
estate operations in the Consolidated Statements of Operations.
Property management and asset management fee revenues are earned based on a contractual percentage
of the annual net rental income and annual operating income, respectively, that is generated by the
military housing privatization projects as defined in the agreements. We also recognized certain
property management incentive fees based upon successful completion of certain criteria as set
forth in the property management agreements. Property management and asset management fees of
$4,042,000 and $3,467,000 were recognized during the three months ended April 30, 2009 and 2008,
respectively, which were recorded in revenues from real estate operations in the Consolidated
Statements of Operations.
Land Development Group
Revenues from real estate operations – Land sales and the related gross margins vary from period to
period depending on the timing of sales and general market conditions relating to the disposition
of significant land holdings. We have an inventory of land that we believe is in good markets
throughout the country. Our land sales have been impacted by slowing demand from home buyers in
certain core markets for the land business, reflecting conditions throughout the housing industry.
Revenues from real estate operations for the Land Development Group decreased by $3,952,000 for the
three months ended April 30, 2009 compared to the same period in the prior year. This variance is
primarily attributable to the following decreases:
•
$3,336,000 related to decreases in unit/land sales at Summers Walk in Davidson, North
Carolina, Tangerine Crossing in Tucson, Arizona and Rockport Square in Lakewood, Ohio;
•
$779,000 related to a combination of smaller decreases in land sales at other land
development projects; and
•
$624,000 primarily related to reduced management fee income earned as a result of
reduced infrastructure costs as well as reduced marketing and profit participation fee
income earned as a result of lower home sales at Stapleton in Denver, Colorado.
These decreases were partially offset by the following increase:
•
$787,000 related to 2009 land sales at Creekstone in Copley, Ohio combined with several
smaller increases in land sales at other land development projects.
Operating and Interest Expenses – Operating expenses decreased by $3,578,000 for the three months
ended April 30, 2009 compared to the same period in the prior year. This variance is primarily
attributable to the following decreases:
•
$2,497,000 at Summers Walk, Tangerine Crossing and Rockport Square related to unit/land
sales;
•
$1,268,000 at Stapleton primarily related to reduced payroll costs and specific cost
reduction activities; and
•
$1,113,000 primarily related to a combination of several smaller expense decreases due
to decreases in land sales at other land development projects along with reduced payroll
costs and specific cost reduction activities.
These decreases were partially offset by the following increase:
•
$1,300,000 related to 2009 land sales at Creekstone combined with several smaller
expense increases due to increases in land sales at other land development projects.
Interest expense increased by $253,000 for the three months ended April 30, 2009 compared to the
same period in the prior year. Interest expense varies from year to year depending on the level of
interest-bearing debt within the Land Development Group.
The Nets
Our equity investment in The Nets incurred a pre-tax loss of $10,681,000 and $13,473,000 for the
three months ended April 30, 2009 and 2008, respectively, representing a decrease in allocated
losses of $2,792,000 compared to the same period in the prior year. Generally accepted accounting
principles require us to report losses, including significant non-cash losses resulting from
amortization, in excess of our legal ownership of approximately 23%. For the three months ended
April 30, 2009 and 2008, we recognized approximately 43% and 53% of the net loss, respectively,
because profits and losses are allocated to each member based on an analysis of the respective
member’s claim on the net book equity assuming a liquidation at book value at the end of the
accounting period without regard to unrealized appreciation (if any) in the fair value of The Nets.
For the three months ended April 30, 2009, we
recognized a lower share of the net loss than in the
prior year because of the distribution priority among members. Under certain facts and
circumstances, generally accepted accounting principles may require losses to be recognized in
excess of the basis in the equity investment. At April 30 and January 31, 2009, we recognized
$280,000 and $3,302,000, respectively, of losses in excess of our investment basis.
Included in the losses for the three months ended April 30, 2009 and 2008 are approximately
$7,278,000 and $10,656,000, respectively, of amortization, at our share, of certain assets related
to the purchase of the team. The remainder of the losses substantially relate to the operations of
the team. Comparable to prior years, the team is expected to operate at a loss in 2009 and will
require additional capital from its members to fund the loss.
Corporate Activities
Operating and Interest Expenses – Operating expenses for Corporate Activities increased by
$3,071,000 for the three months ended April 30, 2009 compared to the same period in the prior year.
The increase was primarily related to company-wide severance and outplacement expenses of
$8,720,000 offset with decreases in compensation and related benefits of $2,095,000, charitable
contributions of $1,473,000 and additional decreases in general corporate expenses.
Interest expense for Corporate Activities consists primarily of interest expense on the senior
notes and the bank revolving credit facility, excluding the portion allocated to the Land
Development Group (see “Financial Condition and Liquidity” section). Interest expense increased by
$5,091,000 for the three months ended April 30, 2009 compared to the same period in the prior year
related to increased interest on the credit facility due to increased borrowings and increased
borrowing costs.
Other Activity
The following items are discussed on a consolidated basis.
Depreciation and Amortization
We recorded depreciation and amortization of $66,458,000 and $66,006,000 for the three months ended
April 30, 2009 and 2008, respectively. Depreciation and amortization increased $452,000 for the
three months ended April 30, 2009 compared to the same period in the prior year.
Impairment of Real Estate
We review our real estate portfolio, including land held for development or sale, for impairment
whenever events or changes indicate that our carrying value of the long-lived assets may not be
recoverable. In cases where we do not expect to recover our carrying costs, an impairment charge is
recorded in accordance with the provisions of SFAS No. 144. We recorded an impairment of real
estate of $1,124,000 for the three months ended April 30, 2009 related to a residential land sale
and related development opportunity in Mamaroneck, New York. The write down to the estimated fair
value, less cost to sell, was determined based upon actual sales negotiations and a bona fide
purchase offer received from a third party. We did not record any impairments of real estate during
the three months ended April 30, 2008.
Impairment of Unconsolidated Entities
We review our portfolio of unconsolidated entities for other-than-temporary impairments whenever
events or changes indicate that our carrying value in the investments may not be recoverable. In
cases where we estimate that we do not expect the value in our equity method investments to be
recovered within 12 months, an impairment charge is recorded in accordance with the provisions of
APB No. 18, “The Equity Method of Accounting for Investments in Common Stock,” as a reduction in
the carrying value of the investment. We estimate the fair value of our unconsolidated entities in
accordance with SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). In order to arrive at the
estimates, we use varying assumptions that may include comparable sale prices, market
discount rates, market capitalization rates and estimated future discounted cash flows specific to
the geographic region and property type, which are considered to be Level 3 inputs.
The following table summarizes our impairment of unconsolidated entities for the three months ended
April 30, 2009 and 2008, which are included in the Consolidated Statements of Operations.
Classic Residence by Hyatt (Supported-Living Apartments)
(Yonkers, New York)
$
3,152
$
-
Apartment Communities
Millender Center
(Detroit, Michigan)
4,252
-
Metropolitan Lofts
(Los Angeles, California)
1,039
-
Residences at University Park
(Cambridge, Massachusetts)
855
-
Two land development projects
262
-
$
9,560
$
-
Write-Off of Abandoned Development Projects
We review, on a quarterly basis, each project under development to determine whether it is probable
the project will be developed. If it is determined by management that the project will not be
developed, project costs are written off to operating expenses as an abandoned development project
cost. We may abandon certain projects under development for a number of reasons, including, but not
limited to, changes in local market conditions, increases in construction or financing costs or due
to third party challenges related to entitlements or public financing. As a result, we may fail to
recover expenses already incurred in exploring development opportunities. We recorded write-offs of
abandoned development projects of $14,393,000 and $26,692,000 for the three months ended
April 30, 2009 and 2008, respectively, which were recorded in operating expenses in the
Consolidated Statement of Operations.
Amortization of Mortgage Procurement Costs
Mortgage procurement costs are amortized on a straight-line basis over the life of the related
nonrecourse mortgage debt, which approximates the effective interest method. For the three months
ended April 30, 2009 and 2008, we recorded amortization of mortgage procurement costs of $3,671,000
and $2,852,000, respectively. Amortization of mortgage procurement costs increased $819,000 for
the three months ended April 30, 2009 compared to the same period in the prior year.
Loss on Early Extinguishment of Debt
For the three months ended April 30, 2009 and 2008, we recorded $-0- and $5,179,000, respectively,
as loss on early extinguishment of debt. For the three months ended April 30, 2008, the loss
primarily represents the impact of early extinguishment of nonrecourse mortgage debt at Galleria at
Sunset, a regional mall located in Henderson, Nevada, and 1251 S. Michigan and Sky55, apartment
communities located in Chicago, Illinois, in order to secure more favorable financing terms. These
charges were partially offset by a gain on the early extinguishment of the Urban Development Action
Grant loan at Post Office Plaza, an office building located in Cleveland, Ohio.
Interest and Other Income
Interest and other income was $6,808,000 for the three months ended April 30, 2009 compared to
$8,398,000 for the three months ended April 30, 2008, representing a decrease of $1,590,000. The
decrease is primarily comprised of $1,170,000 of income earned on the Denver Urban Renewal
Authority (“DURA”) purchase obligation and fee in 2008 that did not recur (see the “Other
Structured Financing Arrangements” section of the MD&A).
Income Taxes
Income tax benefit for the three months ended April 30, 2009 and 2008 was $(22,271,000) and
$(19,859,000), respectively. The difference in the income tax benefit reflected in the
Consolidated Statements of Operations versus the income tax benefit computed at the statutory
federal income tax rate is primarily attributable to state income taxes, cumulative effect of
changing our effective tax rate, additional state NOL’s and general business credits, changes to
the Company’s charitable contribution carryover, changes to the valuation allowances related to
charitable contributions and various permanent differences between pre-tax GAAP income and taxable
income.
At January 31, 2009, we had a federal net operating loss carryforward for tax purposes of
$113,458,000 (generated primarily from the impact on our net earnings of tax depreciation expense
from real estate properties and excess deductions from stock-based compensation) that will expire
in the years ending January 31, 2024 through January 31, 2029, a charitable contribution deduction
carryforward of $42,705,000 that will expire in the years ending January 31, 2010 through
January 31, 2014 ($5,650,575 expiring in the year ended January 31, 2010), general business credit
carryovers of $15,099,000 that will expire in the years ending January 31, 2010 through January 31,2029 ($36,253 expiring in the year ended January 31, 2010), and an alternative minimum tax (“AMT”)
credit carryforward of $28,501,000 that is available until used to reduce Federal tax to the AMT
amount.
Our policy is to consider a variety of tax-deferral strategies, including tax deferred exchanges,
when evaluating our future tax position. We have a full valuation allowance against the deferred
tax asset associated with our charitable contributions. We have a valuation allowance against our
general business credits, other than those general business credits which are eligible to be
utilized to reduce future AMT liabilities. These valuation allowances exist because we believe at
this time that it is more likely than not that we will not realize these benefits.
We apply the “with-and-without” methodology for recognizing excess tax benefits from the deduction
of stock-based compensation. The net operating loss available for the tax return, as is noted in
the paragraph above, is significantly greater than the net operating loss available for the tax
provision due to excess deductions from stock-based compensation reported on the return, as well as
the impact of FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes – an
Interpretation of FASB Statement No. 109” (“FIN No. 48”) adjustments to the net operating loss.
We have not recorded a net deferred tax asset of approximately $17,096,000, as of January 31, 2009,
from excess stock-based compensation deductions for which a benefit has not yet been recognized.
FIN No. 48
Unrecognized tax benefits represent those tax benefits related to tax positions that have been
taken or are expected to be taken in tax returns that are not recognized in the financial
statements because management has either concluded that it is not more likely than not that the tax
position will be sustained if audited by the appropriate taxing authority or the amount of the
benefit will be less than the amount taken or expected to be taken in our income tax returns.
As of April 30 and January 31, 2009, we had unrecognized tax benefits of $1,611,000 and $1,481,000,
respectively. We recognize estimated interest payable on underpayments of income taxes and
estimated penalties that may result from the settlement of some uncertain tax positions as
components of income tax expense. As of April 30 and January 31, 2009, we had approximately
$496,000 and $463,000, respectively, of accrued interest related to uncertain income tax positions.
During the three months ended April 30, 2009 and 2008, $32,000 and $89,000, respectively, of tax
expense was booked relating to interest on uncertain tax positions.
The total amount of unrecognized tax benefits that would affect our effective tax rate, if
recognized as of April 30, 2009 and 2008, is $145,000 and $348,000, respectively. Based upon our
assessment of the outcome of examinations that are in progress, the settlement of liabilities, or
as a result of the expiration of the statutes of limitation for certain jurisdictions, it is
reasonably possible that the related unrecognized tax benefits for tax positions taken regarding
previously filed tax returns will materially change from those recorded at April 30, 2009.
Included in the $1,611,000 of unrecognized benefits noted above, is $1,450,000 which, due to the
reasons above, could significantly decrease during the next twelve months.
Equity in Earnings (Loss) of Unconsolidated Entities (also see the “Impairment of Unconsolidated
Entities” section of the MD&A)
Equity in loss of unconsolidated entities was $6,306,000 for the three months ended April 30, 2009
compared to $9,647,000 for the three months ended April 30, 2008, representing an increase of
$3,341,000. This variance is primarily attributed to the following increases that occurred within
our equity method investments:
-
The Nets
•
$2,792,000 related to a decrease in our share of the loss in The Nets (see The Nets section of the MD&A).
-
Land Development Group
•
$2,396,000 related to the net gain on a 2009 industrial land sale at Mesa Del Sol in Albuquerque, New Mexico.
-
Commercial Group
•
$1,272,000 related to a participation payment on the refinancing during 2008 at 350
Massachusetts Avenue, an office building in Cambridge, Massachusetts.
These increases were partially offset by the following decrease:
-
Commercial Group
•
$881,000 related to the 2008 gain on disposition of our partnership interest in One
International Place, an office building in Cleveland, Ohio.
The
balance of the remaining decrease of $2,238,000 was due to fluctuations in the operations of
equity method investments.
Discontinued Operations
Pursuant to the definition of a component of an entity in SFAS No. 144, all earnings of
discontinued operations sold or held for sale, assuming no significant continuing involvement, have
been reclassified in the Consolidated Statements of Operations for the three months ended
April 30, 2009 and 2008. We consider assets held for sale when the transaction has been approved
and there are no significant contingencies related to the sale that may prevent the transaction
from closing.
During the year ended January 31, 2008, we consummated an agreement to sell eight (seven operating
properties and one property that was under construction at the time of the agreement) and lease
four supported-living apartment properties to a third party. Pursuant to the agreement, during the
second quarter of 2007, six operating properties and the property under construction, Sterling Glen
of Roslyn located in Roslyn, New York, were sold. The seventh operating property, Sterling Glen of
Lynbrook, was operated by the purchaser under a short-term lease through the date of sale, which
occurred on May 20, 2008. The operating results of the property for the three months ended April30, 2008 is classified as discontinued operations.
The four remaining properties entered into long-term operating leases with the purchaser. On
January 30, 2009, terms of the purchase agreement for the sale of Sterling Glen of Rye Brook, whose
operating lease had a stated term of ten years, were amended and the property was sold. The
operating results of the property for the three months ended April 30, 2008 is classified as
discontinued operations. On January 31, 2009, another long-term operating lease with the purchaser
that had a stated term of ten years was cancelled and the operations of the property were
transferred back to us.
The two remaining properties have long-term operating leases with stated terms of five years with
various put and call provisions at a pre-determined purchase price that can be exercised beginning
in the second year of each lease at an amount that is in excess of the current carrying amount of
the properties. We are generally entitled to a fixed lease payment from the lessee over the term of
the lease in exchange for the operations of the properties, which will be retained by the lessee.
We have continued to consolidate the leased properties in our Consolidated Balance Sheets as the
criteria for sales accounting pursuant to the provisions of SFAS No. 66, “Accounting for Sales of
Real Estate,” have not been achieved. Further, we have concluded that the leased properties have
met the criteria as Variable Interest Entities (“VIEs”) pursuant to FIN No. 46 (Revised December
2003) “Consolidation of Variable Interest Entities” (“FIN No. 46(R)”), and due to our obligation to
absorb a majority of expected losses, the leased properties are consolidated by us at
April 30, 2009. Additionally, these properties do not meet the qualifications of assets held for
sale under SFAS No. 144 as of April 30, 2009; therefore, these properties have not been included in
discontinued operations.
The following table lists the consolidated rental properties included in discontinued operations:
Upon disposition, investments accounted for on the equity method are not classified as discontinued
operations under the provisions of SFAS No. 144; therefore, gains or losses on the sale of equity
method properties are reported in continuing operations when sold. During the three months ended
April 30, 2008, we recorded $881,000 related to our proportionate share of the gain on disposition
of an equity method investment, One International Place, located in Cleveland, Ohio, which is
included in equity in loss of unconsolidated entities in the Consolidated Statements of Operations.
There were no dispositions of equity method investments during the three months ended April 30,2009.
Ongoing economic conditions have negatively impacted the lending and capital markets, particularly
for real estate. The risk premium demanded by capital suppliers has increased significantly.
Lending spreads have widened from recent levels and originations of new loans for the Commercial
Mortgage Backed Securities market have virtually ceased. Underwriting standards are being tightened
with lenders requiring lower loan-to-values and increased debt service coverage levels. While the
long-term impact is unknown, borrowing costs for us will likely rise and financing levels will
decrease over the foreseeable future.
Our principal sources of funds are cash provided by operations, the bank revolving credit facility,
nonrecourse mortgage debt, dispositions of land held for sale as well as operating properties,
proceeds from the issuance of senior notes, equity joint ventures and other financing arrangements.
Our principal uses of funds are the financing of development projects and acquisitions of real
estate, capital expenditures for our existing portfolio and principal and interest payments on our
nonrecourse mortgage debt, interest payments on our bank revolving credit facility and previously
issued senior notes and repayment of borrowings under our bank revolving credit facility.
Our primary capital strategy seeks to isolate the operating and financial risk at the property
level to maximize returns and reduce risk on and of our equity capital. Our mortgage debt is
nonrecourse, including our construction loans, with each property separately financed. We do not
cross-collateralize our mortgage debt outside of a single identifiable project. We operate as a
C-corporation and retain substantially all of our internally generated cash flows. This cash flow,
together with refinancing and property sale proceeds, has historically provided us with the
necessary liquidity to take advantage of investment opportunities. Recent changes in the lending
and capital markets substantially reduced our ability to refinance and/or sell property and has also
increased the rates of return to make new investment opportunities appealing. As a result of these
market changes, we have dramatically cut back on new development and acquisition activities.
Despite the dramatic decrease in development activities, we still intend to complete all projects
that are under construction. We continue to make progress on certain other pre-development projects
primarily located in core markets. The cash we believe is required to fund our equity in projects
under development plus any cash necessary to extend or paydown the remaining 2009 debt maturities
is anticipated to exceed our cash from operations. As a result, we intend to extend maturing debt
or repay it with net proceeds from property sales or future debt or equity financing.
As of April 30, 2009, we had $651,123,000 of mortgage financings with scheduled maturities during
the fiscal year ending January 31, 2010, of which $58,829,000
represents scheduled payments. Subsequent to April 30, 2009, we have addressed
approximately $100,653,000 of these 2009 maturities, through closed nonrecourse mortgage financing
transactions and loan payoffs and another $66,000,000 through signed lender commitments and/or automatic
extensions. We also have extension options available on $379,233,000
of these 2009 maturities, all of which require some hurdle or milestone as defined in
the specific agreement in order to qualify for the extension. We cannot give assurance that the
defined hurdles or milestones will be achieved to qualify for these extensions. We are currently in
negotiations to refinance and/or extend the remaining $46,408,000 of scheduled nonrecourse
mortgage maturities for the year ended January 31, 2010. We cannot give assurance as to the
ultimate result of the negotiations.
As of
April 30, 2009, our share of nonrecourse mortgage debt recorded on
our unconsolidated subsidiaries amounted to $1,487,671,000, of which
$213,543,000 ($12,532,000 represents scheduled payments) was scheduled to mature during the year ending January31, 2010. As of June 1, 2009, we had addressed $30,576,000 of these
2009 maturities through closed nonrecourse mortgage transactions,
signed lender commitments and/or automatic extensions. We also had
extension options on $86,549,000 of these 2009 maturities all of
which require some hurdle or milestone as defined in the specific
agreement in order to qualify for the extension. We cannot give
assurance that the defined hurdles or milestones will be achieved to
qualify for the extensions. Negotiations are ongoing on the remaining
2009 maturities but we cannot give assurance that these financings
will be obtained on favorable terms or at all.
We have proactively taken necessary steps to preserve liquidity by properly aligning our overhead
costs with the reduced level of development and acquisition activities and suspension of cash
dividends on Class A and Class B common stock. We have also increased liquidity through our May
2009 public offering of 52,325,000 shares of Class A common stock from which we received
$330,417,000 in net proceeds, after deducting underwriter discounts
and commissions. We are
actively exploring various other options to enhance our liquidity, such as admitting other joint
venture partners into some of our properties, potential asset sales
and nonrecourse mortgage refinancings. There can be no assurance,
however, that any of these other options can be accomplished.
Bank Revolving Credit Facility
At April 30 and January 31, 2009, our bank revolving credit facility provides for maximum
borrowings of $750,000,000 and matures in March 2010. The credit facility bears interest at our
option at either a LIBOR-based rate plus 2.50% (3.06% and 2.98% at April 30 and January 31, 2009,
respectively), or a Prime-based rate option plus 1.50%. We have historically elected the
LIBOR-based rate option. The credit facility restricts our ability to purchase, acquire, redeem or
retire any of our capital stock, and prohibits us from paying any dividends on our capital stock
through the maturity date. The credit facility allows certain actions by us or our subsidiaries,
such as default in paying debt service or allowing foreclosure on an encumbered real estate asset,
only to the extent such actions do not have a material adverse effect, as defined in the agreement,
on us. Of the available borrowings, up to $100,000,000 may be used for letters of credit or surety
bonds. The credit facility also contains certain financial covenants, including maintenance of
certain debt service and cash flow coverage ratios, and specified levels of net worth (as defined
in the credit facility). At April 30, 2009, we were in compliance with all of these financial
covenants.
We are continuing to negotiate with our lenders to extend the revolving credit facility. While the
ultimate outcome of the extension is unknown, we anticipate an extension will result in a reduced
commitment from the lenders, increased borrowing costs and modifications to the financial
covenants. In the event an extension is not at a level to support our operating cash flows, we
would institute a plan to raise capital through the sale of assets, admitting other joint venture
equity partners into some of our properties, curtailing all capital expenditures and/or raising
additional funds in a public or private equity offering.
During
the period from May 1, 2009 to June 5, 2009, we have repaid $350,417,000 of the outstanding
borrowings under the bank revolving credit facility at April 30, 2009, primarily with the net
proceeds received from the May 2009 public common stock offering (see the “Subsequent Event” section of the
MD&A).
Senior and Subordinated Debt
Our Senior and Subordinated Debt is comprised of the following at April 30 and January 31, 2009:
3.625% Puttable Equity-Linked Senior Notes due 2011
$
250,295
$
248,154
Other Senior Notes:
7.625% Senior Notes due 2015
300,000
300,000
6.500% Senior Notes due 2017
150,000
150,000
7.375% Senior Notes due 2034
100,000
100,000
Total Senior Notes
800,295
798,154
Subordinated Debt:
Redevelopment Bonds due 2010
17,635
18,910
Subordinate Tax Revenue Bonds due 2013
29,000
29,000
Total Subordinated Debt
46,635
47,910
Total Senior and Subordinated Debt
$
846,930
$
846,064
Puttable Equity-Linked Senior Notes
On October 10, 2006, we issued $287,500,000 of 3.625% puttable equity-linked senior notes due
October 15, 2011 in a private placement. The notes were issued at par and accrued interest is
payable semi-annually in arrears on April 15 and October 15 of each year, which began on April 15,2007. We may not redeem these notes prior to maturity. The notes are unsecured unsubordinated
obligations and rank equally with all other unsecured and unsubordinated indebtedness. During the
year ended January 31, 2009, we purchased on the open market $15,000,000 in principal of our
puttable equity-linked senior notes. There was $272,500,000, of
principal, outstanding at April 30 and January 31, 2009.
Holders may put their notes to us at their option on any day prior to the close of business on the
scheduled trading day immediately preceding July 15, 2011 only under the following circumstances:
(1) during the five business-day period after any five consecutive trading-day period (the
“measurement period”) in which the trading price per note for each day of that measurement period
was less than 98% of the product of the last reported sale price of our Class A common stock and
the put value rate (as defined) on each such day; (2) during any fiscal quarter after the fiscal
quarter ending January 31, 2007, if the last reported sale price of our Class A common stock for 20
or more trading days in a period of 30 consecutive trading days ending on the last trading day of
the immediately preceding fiscal quarter exceeds 130% of the applicable put value price in effect
on the last trading day of the immediately preceding fiscal quarter; or (3) upon the occurrence of
specified corporate events as set forth in the applicable indenture. On and after July 15, 2011
until the close of business on the scheduled trading day immediately preceding the maturity date,
holders may put their notes to us at any time, regardless of the foregoing circumstances. In
addition, upon a designated event, as defined, holders may require us to purchase for cash all or a
portion of their notes for 100% of the principal amount of the notes plus accrued and unpaid
interest, if any, as set forth in the applicable indenture. At April 30, 2009, none of the
aforementioned circumstances have been met.
If a note is put to us, a holder would receive (i) cash equal to the lesser of the principal amount
of the note or the put value and (ii) to the extent the put value exceeds the principal amount of
the note, shares of our Class A common stock, cash, or a combination of Class A common stock and
cash, at our option. The initial put value rate was 15.0631 shares of Class A common stock per
$1,000 principal amount of notes (equivalent to a put value price of $66.39 per share of Class A
common stock). The put value rate will be subject to adjustment in some events but will not be
adjusted for accrued interest. In addition, if a “fundamental change,” as defined, occurs prior to
the maturity date, we will in some cases increase the put value rate for a holder that elects to
put their notes.
Concurrent with the issuance of the notes, we purchased a call option on our Class A common stock
in a private transaction. The purchased call option allows us to receive shares of our Class A
common stock and/or cash from counterparties equal to the amounts of Class A common stock and/or
cash related to the excess put value that we would pay to the holders of the notes if put to us.
These purchased call options will terminate upon the earlier of the maturity dates of the notes or
the first day all of the notes are no longer outstanding due to a put or otherwise. The purchased
call options, which cost an aggregate $45,885,000 ($28,155,000 net of the related tax benefit),
were recorded net of tax as a reduction of shareholders’ equity through additional paid-in capital
during the year ended January 31, 2007. In a separate transaction, we sold warrants to issue shares
of our Class A common stock at an exercise price of $74.35 per share in a private transaction. If
the average price of our Class A common stock during a defined period ending on or about the
respective settlement dates exceeds the exercise price of the warrants, the warrants will be
settled in shares of our Class A common stock. Proceeds received from the issuance of the warrants
totaled approximately $28,923,000 and were recorded as an addition to shareholders’ equity through
additional paid-in capital during the year ended January 31, 2007.
The effect of the adoption of FSP APB 14-1 (see the “Adoption of FSP APB 14-1” section of the MD&A)
on the carrying amounts of our debt and equity balances as of April 30 and January 31, 2009 is as
follows:
Outstanding principal amount of the puttable equity-linked senior notes
$
272,500
$
272,500
Unamortized discount
(22,205
)
(24,346
)
Net carrying amount of the puttable equity-linked senior notes
$
250,295
$
248,154
The unamortized discount will be amortized as additional interest expense through October 15, 2011.
The effective interest rate for the liability component of the puttable equity-linked senior notes
was 7.51% for both the three months ended April 30, 2009 and 2008. We recorded non-cash interest
expense of $2,141,000 and $2,200,000 for the three months ended April 30, 2009 and 2008,
respectively. We recorded contractual interest expense of $2,470,000 and $2,605,000 for the three
months ended April 30, 2009 and 2008, respectively.
Other Senior Notes
On May 19, 2003, we issued $300,000,000 of 7.625% senior notes due June 1, 2015 in a public
offering. Accrued interest is payable semi-annually on December 1 and June 1. These senior notes
may be redeemed by us at any time on or after June 1, 2008 at a redemption price of 103.813%
beginning June 1, 2008 and systematically reduced to 100% in the years thereafter.
On January 25, 2005, we issued $150,000,000 of 6.500% senior notes due February 1, 2017 in a public
offering. Accrued interest is payable semi-annually on February 1 and August 1. These senior
notes may be redeemed by us at any time on or after February 1, 2010 at a redemption price of
103.250% beginning February 1, 2010 and systematically reduced to 100% in the years thereafter.
On February 10, 2004, we issued $100,000,000 of 7.375% senior notes due February 1, 2034 in a
public offering. Accrued interest is payable quarterly on February 1, May 1, August 1, and
November 1. These senior notes may be redeemed by us, in whole or in part, at any time at a
redemption price equal to 100% of the principal amount plus accrued interest.
Our senior notes are unsecured senior obligations and rank equally with all existing and future
unsecured indebtedness; however, they are effectively subordinated to all existing and future
secured indebtedness and other liabilities of our subsidiaries to the extent of the value of the
collateral securing such other debt, including the bank revolving credit facility. The indentures
governing the senior notes contain covenants providing, among other things, limitations on
incurring additional debt and payment of dividends.
Subordinated Debt
In November 2000, we issued $20,400,000 of redevelopment bonds in a private placement. The bonds
bear a fixed interest rate of 8.25% and are due September 15, 2010. We entered into a total rate of
return swap (“TRS”) for the benefit of these bonds that expires on September 15, 2009. Under this
TRS, we receive a rate of 8.25% and pay the Security Industry and Financial Markets Association
(“SIFMA”) rate plus a spread (0.90% through the expiration date). Interest is payable
semi-annually on March 15 and September 15. This debt is unsecured and subordinated to the senior
notes and the bank revolving credit facility.
The TRS, accounted for as a derivative, is required to be marked to fair value at the end of each
reporting period. In accordance with SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities” (“SFAS No. 133”), any fluctuation in the value of the TRS would be offset by
the fluctuation in the value of the underlying borrowings. At April 30 and January 31, 2009, the
fair value of the TRS was $(2,765,000) and $(1,490,000), respectively, recorded in accounts payable
and accrued expenses; therefore, the fair value of the bonds was reduced by the same amount to
$17,635,000 and $18,910,000, respectively.
In May 2003, we purchased $29,000,000 of subordinate tax revenue bonds that were contemporaneously
transferred to a custodian, which in turn issued custodial receipts that represent ownership in the
bonds to unrelated third parties. The bonds bear a fixed interest rate of 7.875%. We evaluated
the transfer pursuant to the provisions of SFAS No. 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities” (“SFAS No. 140”), and have determined that the
transfer does not qualify for sale accounting treatment principally because we have guaranteed the
payment of principal and interest in the unlikely event that there is insufficient tax revenue to
support the bonds when the custodial receipts are subject to mandatory tender on December 1, 2013.
As such, we are the primary beneficiary of this VIE and the book value (which approximated
amortized costs) of the bonds was recorded as a collateralized borrowing reported as senior and
subordinated debt and as held-to-maturity securities reported as other assets in the Consolidated
Balance Sheets.
Financing Arrangements
Collateralized Borrowings
On July 13, 2005, the Park Creek Metropolitan District (the “District”) issued $65,000,000 Senior
Subordinate Limited Property Tax Supported Revenue Refunding and Improvement Bonds, Series 2005
(the “Senior Subordinate Bonds”) and Stapleton Land II, LLC, a consolidated subsidiary, entered
into an agreement whereby it will receive a 1% fee on the Senior Subordinate Bonds in exchange for
providing certain credit enhancement. We recorded $132,000 and $160,000 of interest income related
to this arrangement in the Consolidated Statements of Operations for the three months ended April30, 2009 and 2008, respectively. The counterparty to the credit enhancement arrangement also owns
the underlying Senior Subordinate Bonds and can exercise our rights requiring payment from
Stapleton Land II, LLC upon an event of default of the Senior Subordinate Bonds, a refunding of the
Senior Subordinate Bonds, or failure of Stapleton Land II, LLC to post required collateral. The
Senior Subordinated Bonds were remarketed on April 16, 2009 with proceeds from the issuance of
$86,000,000 of Park Creek Metropolitan District Senior Limited Property Tax Supported Revenue
Refunding and Improvement Bonds Series 2009. The agreement described above expired with the
remarketing of the Senior Subordinate Bonds on April 16, 2009.
On August 16, 2005, the District issued $58,000,000 Junior Subordinated Limited Property Tax
Supported Revenue Bonds, Series 2005 (the “Junior Subordinated Bonds”). The Junior Subordinated
Bonds initially were to pay a variable rate of interest. Upon issuance, the Junior Subordinated
Bonds were purchased by a third party and the sales proceeds were deposited with a trustee pursuant
to the terms of the Series 2005 Investment Agreement. Under the terms of the Series 2005
Investment Agreement, after March 1, 2006, the District may elect to withdraw funds from the
trustee for reimbursement for certain qualified infrastructure and interest expenditures
(“Qualifying Expenditures”). In the event that funds from the trustee are used for Qualifying
Expenditures, a corresponding amount of the Junior Subordinated Bonds converts to an 8.5% fixed
rate and matures in December 2037 (“Converted Bonds”). On August 16, 2005, Stapleton Land, LLC, a
consolidated subsidiary, entered into a Forward Delivery Placement Agreement (“FDA”) whereby
Stapleton Land, LLC was entitled and obligated to purchase the converted fixed rate Junior
Subordinated Bonds through June 2, 2008. The District withdrew $58,000,000 of funds from the
trustee for reimbursement of certain Qualifying Expenditures by June 2, 2008. Therefore, a
corresponding amount of the Junior Subordinated Bonds became Converted Bonds and was acquired by
Stapleton Land, LLC under the terms of the FDA. Stapleton Land, LLC immediately transferred the
Converted Bonds to investment banks and we simultaneously entered into a TRS with a notional amount
of $58,000,000. We receive a fixed rate of 8.5% and pay SIFMA plus a spread on the TRS related to
the Converted Bonds. We determined that the sale of the Converted Bonds to the investment banks
and simultaneous execution of the TRS did not surrender control; therefore, the Converted Bonds
have been recorded as a secured borrowing in the Consolidated Balance Sheets. During the year ended
January 31, 2009, one of
our consolidated subsidiaries purchased $10,000,000 of the Converted Bonds from one of the
investment banks. Simultaneous with the purchase, a $10,000,000 TRS contract was terminated and the
corresponding amount of the secured borrowing was removed from the Consolidated Balance Sheets. On
April 16, 2009, an additional $5,000,000 of the Converted Bonds were purchased by one of our
consolidated subsidiaries, and a corresponding amount of a related TRS was terminated and
corresponding secured borrowing removed from the Consolidated Balance Sheets. The fair value of
the Converted Bonds recorded in other assets in the Consolidated Balance Sheets was $58,000,000 at
both April 30 and January 31, 2009. The outstanding TRS contracts on the $43,000,000 and
$48,000,000 of secured borrowings related to the Converted Bonds at April 30 and January 31, 2009,
respectively, were supported by collateral consisting of certain notes receivable owned by us
aggregating $18,023,000. We recorded net interest income of $842,000 and $838,000 related to the
TRS in the Consolidated Statements of Operations for the three months ended April 30, 2009 and
2008, respectively.
Other Structured Financing Arrangements
In May 2004, Lehman Brothers, Inc. (“Lehman”) purchased $200,000,000 in tax increment revenue bonds
issued by the DURA, with a fixed-rate coupon of 8.0% and maturity date of October 1, 2024, which
were used to fund the infrastructure costs associated with phase II of the Stapleton development
project. The DURA bonds were transferred to a trust that issued floating rate trust certificates.
Stapleton Land, LLC entered into an agreement with Lehman to purchase the DURA bonds from the trust
if they are not repurchased or remarketed between June 1, 2007 and June 1, 2009. Stapleton
Land, LLC is entitled to receive a fee upon removal of the DURA bonds from the trust equal to the
8.0% coupon rate, less the SIFMA index, less all fees and expenses due to Lehman (collectively, the
“Fee”). On July 1, 2008, $100,000,000 of the DURA bonds were remarketed. On July 15, 2008,
Stapleton Land, LLC was paid $13,838,000 of the fee, which represented the fee earned on the
remarketed DURA bonds.
We have concluded that the trust described above is considered a qualified special purpose entity
pursuant to the provisions of SFAS No. 140 and thus is excluded from the scope of FIN No. 46(R). As
a result, the DURA bonds and the activity of the trust have not been recorded in the consolidated
financial statements. The Fee has been accounted for as a derivative with changes in fair value
recorded through earnings. During the year ended January 31, 2009 Lehman filed for bankruptcy. As a
result, we reassessed the collectibility of the Fee during the third quarter of 2008 and decreased
the fair value to $-0-, resulting in an increase to operating expenses in the Consolidated
Statements of Operations of $13,816,000 for the year ended January 31, 2009. We recorded interest
income of $-0- and $1,170,000, related to the change in fair value of the Fee in the Consolidated
Statements of Operations at April 30, 2009 and 2008, respectively.
Stapleton Land, LLC has committed to fund $24,500,000 to the District to be used for certain
infrastructure projects and has funded $16,232,000 of this commitment as of April 30, 2009.
Mortgage Financings
We use taxable and tax-exempt nonrecourse debt for our real estate projects. For those real estate
projects financed with taxable debt, we generally seek long-term, fixed-rate financing for those
operating projects whose loans mature within the next 12 months or are projected to open and
achieve stabilized operations during that same time frame. However, due to the limited availability
of long-term fixed rate mortgage debt based upon current market conditions, we are attempting to
extend maturities with existing lenders at current market terms. For real estate projects financed
with tax-exempt debt, we generally utilize variable-rate debt. For construction loans, we generally
pursue variable-rate financings with maturities ranging from two to five years.
We are actively working to refinance and/or extend the maturities of the nonrecourse debt that is
coming due in the next 24 months. During the three months ended April 30, 2009, we completed the
following financings:
Purpose of Financing
Amount
(in thousands)
Refinancings
$
154,174
Loan extensions/additional fundings
130,616
$
284,790
The
table listed above is the result of our effort in not only refinancing scheduled maturities,
but also includes early financings of future loan maturities on existing properties. As of April30, 2009, we had $651,123,000 of mortgage financings with scheduled maturities during the fiscal
year ending January 31, 2010, of which $58,829,000 represents
scheduled payments. Subsequent to April 30, 2009, we have addressed approximately
$100,653,000 of these 2009 maturities, through closed nonrecourse mortgage
financing transactions and loan payoffs and
another $66,000,000 through signed lender commitments and/or automatic extensions. We also have
extension options available on $379,233,000 of these 2009 maturities, all of which require some hurdle or milestone as defined in the specific
agreement in order to qualify for the extension. We cannot give assurance that the defined hurdles
or milestones will be achieved to qualify for these extensions. We are currently in negotiations to
refinance and/or extend the remaining $46,408,000 of scheduled nonrecourse mortgage maturities for the year ended January 31, 2010. We cannot give assurance as to
the ultimate result of these negotiations.
At April 30, 2009, the composition of nonrecourse mortgage debt was as follows:
Total
Operating
Development
Land
Weighted
Properties
Projects
Projects
Total
Average Rate
(dollars in thousands)
Fixed
$
4,079,665
$
-
$
11,195
$
4,090,860
6.04%
Variable (1)
Taxable
1,426,878
940,088
31,171
2,398,137
4.74%
Tax-Exempt
589,108
280,550
43,000
912,658
2.65%
$
6,095,651
$
1,220,638
(2)
$
85,366
$
7,401,655
5.20%
Total commitment from lenders
$
2,078,152
$
90,189
(1)
Taxable variable-rate debt of $2,398,137 and tax-exempt variable-rate debt of $912,658
as of April 30, 2009 is protected with swaps and caps described in the tables below.
(2)
Proceeds from outstanding debt of $254,386 described above is recorded as restricted
cash in our Consolidated Balance Sheets. For bonds issued in conjunction with development,
the full amount of the bonds is issued at the beginning of construction and must remain in
escrow until costs are incurred.
To mitigate short-term variable interest rate risk, we have purchased interest rate hedges for our
variable-rate debt as follows:
These LIBOR-based hedges as of May 1, 2009 protect the debt currently outstanding as
well as the anticipated increase in debt outstanding for projects under development or
anticipated to be under development during the year ending January 31, 2010.
The tax-exempt caps and swap expressed above mainly represent protection that was purchased in
conjunction with lender hedging requirements that require the borrower to protect against
significant fluctuations in interest rates. Outside of such requirements, we generally do not
hedge tax-exempt debt because, since 1990, the base rate of this type of financing has averaged
3.00% and has never exceeded 8.00%.
The interest rate hedges summarized in the tables above were purchased to mitigate variable
interest rate risk. We have entered into forward swaps to protect ourselves against fluctuations
in the swap rate at terms ranging between five to ten years associated with forecasted fixed rate
borrowings. At the time we secure and lock an interest rate on an anticipated financing, we intend
to simultaneously terminate the forward swap associated with that financing. At April 30, 2009, we
have one forward swap designated and qualified as a cash flow hedge under SFAS No. 133 with a
notional amount of $69,325,000 related to a fully consolidated property that expires during the
current year ending January 31, 2010. Our portion of unrealized loss on the effective portion of
this hedge has been recorded in accumulated OCI. To the extent effective, amounts recorded in
accumulated OCI will be amortized as either an increase or decrease to interest expense in the same
periods as the interest payments on the financing.
At April 30, 2009, we have one other forward swap outstanding with a notional amount of
$120,000,000, that expires during the current year ending January 31, 2010 and does not qualify as
a cash flow hedge under provisions of SFAS No. 133 because it relates to an unconsolidated
property. The change in the fair value of this swap is marked to market through earnings on a
quarterly basis. For the three months ended April 30, 2009 and 2008, we recorded $655,000 and
$12,000, respectively, as a reduction of interest expense related to this forward swap in our
Consolidated Statements of Operations. During the year ended January 31, 2009, we purchased an
interest rate floor in order to mitigate the interest rate risk on this forward swap should
interest rates fall below a certain level.
Sensitivity Analysis to Changes in Interest Rates
Including the effect of the protection provided by the interest rate swaps, caps and long-term
contracts in place as of April 30, 2009, a 100 basis point increase in taxable interest rates
(including properties accounted for under the equity method, corporate debt and the effect of
interest rate floors) would increase the annual pre-tax interest cost for the next 12 months of our
variable-rate debt by approximately $14,963,000 at April 30, 2009. Although tax-exempt rates
generally move in an amount that is smaller than corresponding changes in taxable interest rates, a
100 basis point increase in tax-exempt rates (including properties accounted for under the equity
method and subordinate debt) would increase the annual pre-tax interest cost for the next 12 months
of our tax-exempt variable-rate debt by approximately $9,981,000 at April 30, 2009. This analysis
includes a portion of our taxable and tax-exempt variable-rate debt related to construction loans
for which the interest expense is capitalized.
From time to time, we and/or certain of our joint ventures (the “Joint Ventures”) enter into TRS on
various tax-exempt fixed-rate borrowings generally held by us and/or within the Joint Ventures. The
TRS convert these borrowings from a fixed rate to a variable rate and provide an efficient
financing product to lower the cost of capital. In exchange for a fixed rate, the TRS require that
we and/or the Joint Ventures pay a variable rate, generally equivalent to the SIFMA rate. At April30, 2009, the SIFMA rate is 0.63%. Additionally, we and/or the Joint Ventures have guaranteed the
fair value of the underlying borrowing. Any fluctuation in the value of the guarantee would be
offset by the fluctuation in the value of the underlying borrowing, resulting in no financial
impact to us or the Joint Ventures. At April 30, 2009, the aggregate notional amount of TRS that
are designated as fair value hedging instruments under SFAS No. 133 in which we and the
consolidated Joint Ventures have an interest is $516,195,000 (which includes the TRS on the
$20,400,000 redevelopment bonds (refer to the “Senior and Subordinated Debt” section of the MD&A)).
We believe the economic return and related risk associated with a TRS is generally comparable to
that of nonrecourse variable-rate mortgage debt. The underlying TRS borrowings are subject to a
fair value adjustment.
Cash Flows
Operating Activities
Net cash provided by operating activities was $38,309,000 for the three months ended
April 30, 2009. Net cash used in operating activities was $486,000 (as adjusted) for the three
months ended April 30, 2008. The net increase in cash provided by operating activities in the
three months ended April 30, 2009 compared to the three months ended April 30, 2008 of $38,795,000
is the result of the following (in thousands):
Increase in rents and other revenues received
$
7,738
Increase in interest and other income received
19,218
Decrease in cash distributions from unconsolidated entities
(7,354
)
Decrease in proceeds from land sales - Land Development Group
(5,628
)
Increase in proceeds from land sales - Commercial Group
1,710
Decrease in land development expenditures
11,425
Decrease in operating expenditures
6,304
Decrease in interest paid
5,382
Net increase in cash provided by operating activities
Net cash used in investing activities was $457,916,000 and $385,392,000 for the three months ended
April 30, 2009 and 2008, respectively. Net cash used in investing activities consisted of the
following:
Net cash provided by financing activities was $356,681,000 and $311,294,000 for the three months
ended April 30, 2009 and 2008, respectively. Net cash provided by financing activities consisted of
the following:
We are involved in various claims and lawsuits incidental to our business, and management and legal
counsel believe that these claims and lawsuits will not have a material adverse effect on our
consolidated financial statements.
VARIABLE INTEREST ENTITIES
In accordance with FIN No. 46 (R) (Revised December 2003) “Consolidation of Variable Interest
Entities” (“FIN No. 46 (R)”), we consolidate a VIE in which we have a variable interest (or a
combination of variable interests) that will absorb a majority of the entity’s expected losses,
receive a majority of the entity’s expected residual returns, or both, based on an assessment
performed at the time the we become involved with the entity. VIEs are entities in which the equity
investors do not have a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial support. We
reconsider this assessment only if the entity’s governing documents or the contractual arrangements
among the parties involved change in a manner that changes the characteristics or adequacy of the
entity’s equity investment at risk, some or all of the equity investment is returned to the
investors and other parties become exposed to expected losses of the entity, the entity undertakes
additional activities or acquires additional assets beyond those that were anticipated at inception
or at the last reconsideration date that increase its expected losses, or the entity receives an
additional equity investment that is at risk, or curtails or modifies its activities in a way that
decreases its expected losses. We may be subject to additional losses to the extent of any
financial support that we voluntarily provide in the future. Additionally, if different estimates
are applied in determining future cash flows, and how the cash flows are funded, we may have
otherwise concluded on the consolidation method of an entity.
The determination of the consolidation method for each entity can change as reconsideration events
occur. Expected results after the formation of an entity can vary, which could cause a change in
the allocation to the partners. In addition, if we sell a property, sell our interest in a joint
venture or enter into a new joint venture, the number of VIEs we are involved with could vary
between quarters.
As of April 30, 2009, we determined that we were the primary beneficiary under FIN No. 46 (R) of
35 VIEs representing 23 properties (21 VIEs representing 10 properties in the Residential Group,
12 VIEs representing 11 properties in the Commercial Group and 2 VIEs/properties in the Land
Development Group). The creditors of the consolidated VIEs do not have recourse to our general
credit. As of April 30, 2009, we held variable interests in 41 VIEs for which we are not the
primary beneficiary. The maximum exposure to loss as a result of our involvement with these
unconsolidated VIEs is limited to our recorded investments in those VIEs totaling approximately
$99,000,000 at April 30, 2009. Our VIEs consist of joint ventures that are engaged, directly or
indirectly, in the ownership, development and management of office buildings, regional malls,
specialty retail centers, apartment communities, military housing, supported-living communities,
land development and The Nets.
The carrying value of real estate, nonrecourse mortgage debt and noncontrolling interest of VIEs
for which we are the primary beneficiary are as follows:
In addition to the VIEs described above, we have also determined that we are the primary
beneficiary of a VIE which holds collateralized borrowings of $29,000,000 (see the “Senior and
Subordinated Debt” section of MD&A) as of April 30, 2009.
NEW ACCOUNTING STANDARDS
In addition to FSP APB 14-1 previously noted in the MD&A, the following accounting standards were
also adopted on February 1, 2009:
SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance
with generally accepted accounting principles and expands disclosures about the use of fair value
measurements. SFAS No. 157 does not require new fair value measurements, but applies to accounting
pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. In February 2008, the FASB issued two Staff
Positions on SFAS No. 157: (1) FSP No. FAS 157-1, “Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13” (“FSP FAS 157-1”) and
(2) FSP No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). FSP FAS 157-1
excludes SFAS No. 13, “Accounting for Leases” (“SFAS No. 13”) and other accounting pronouncements
that address fair value measurements for purposes of
lease classification or measurement under SFAS No. 13 from SFAS No. 157’s scope. FSP FAS 157-2
delays the effective date of
SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring basis (at least
annually), to fiscal years beginning after November 15, 2008 and interim periods within those
fiscal years. We adopted this statement for our financial assets and liabilities on
February 1, 2008 and for our nonfinancial assets and liabilities on February 1, 2009.
In October 2008, FASB issued FSP No. FAS 157-3, “Determining the Fair Value of a Financial Asset
When the Market for That Asset is Not Active” (“FSP FAS No. 157-3”), which clarifies the
application of SFAS No. 157. FSP FAS No. 157-3 provides guidance in determining the fair value of a
financial asset when the market for that financial asset is not active. The adoption of this
standard as of October 31, 2008 did not have a material impact on our consolidated financial
statements.
In November 2008, the FASB issued EITF No. 08-6, “Equity Method Accounting Considerations” (“EITF
08-6”), which clarifies accounting and impairment considerations involving equity method
investments after the effective date of both SFAS 141 (R) and SFAS 160. EITF 08-6 provides
clarification of how business combination and noncontrolling interest accounting will impact equity
method investments. EITF 08-6 is effective for fiscal years, and interim reporting periods within
those fiscal years, beginning on or after December 15, 2008 and early adoption is prohibited. The
adoption of EITF No. 08-6 on February 1, 2009 did not have a material impact on our consolidated
financial statements.
In June 2008, the FASB issued FSP EITF No. 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). This new
standard requires that nonvested share-based payment awards that contain non-forfeitable rights to
dividends or dividend equivalents be treated as participating securities in the computation of
earnings per share pursuant to the two-class method. FSP EITF 03-6-1 will be applied
retrospectively to all periods presented for fiscal years beginning after December 15, 2008. The
adoption of FSP EITF 03-6-1 on February 1, 2009 did not have a material impact on our consolidated
financial statements.
In June 2008, the FASB ratified EITF Issue 07-5, “Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). Paragraph 11(a) of SFAS No. 133
specifies that a contract that would otherwise meet the definition of a derivative but is both
(a) indexed to our own stock and (b) classified in stockholders’ equity in the statement of
financial position would not be considered a derivative financial instrument. EITF 07-5 provides a
new two-step model to be applied in determining whether a financial instrument or an embedded
feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS No. 133 paragraph
11(a) scope exception. EITF 07-5 is effective for the first annual reporting period beginning after
December 15, 2008. The adoption of EITF 07-5 on February 1, 2009 did not have a material impact on
our consolidated financial statements.
In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible
Assets.” This FSP amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,
“Goodwill and Other Intangible Assets”. This FSP allows us to use our historical experience in
renewing or extending the useful life of intangible assets. This FSP is effective for fiscal years
beginning after December 15, 2008 and interim periods within those fiscal years and shall be
applied prospectively to intangible assets acquired after the effective date. The adoption of this
FSP on February 1, 2009 did not have a material impact on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging
Activities” (“SFAS No. 161”). SFAS No. 161 amends and expands the disclosure requirements of SFAS
No. 133 with the intent to provide users of financial statements with an enhanced understanding of
how derivative instruments and hedging activities affect an entity’s financial position, financial
performance and cash flows. These disclosure requirements include a tabular summary of the fair
values of derivative instruments and their gains and losses, disclosure of derivative features that
are credit risk related to provide more information regarding an entity’s liquidity and
cross-referencing within footnotes to make it easier for financial statement users to locate
important information about derivative instruments. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008. We have
included the disclosures required by SFAS No. 161 in our consolidated financial statement
disclosures.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No.
141(R)”). SFAS No. 141(R) provides greater consistency in the accounting and financial reporting
of business combinations. SFAS No. 141(R) requires the acquiring entity in a business combination
to recognize all assets acquired and liabilities assumed in the transaction, establishes the
acquisition-date fair value as the measurement objective for all assets acquired and liabilities
assumed and requires the acquirer to disclose the nature and financial effect of the business
combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008. In
February 2009, the FASB voted to issue FSP FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination that Arise from Contingencies” (“FSP FAS 141(R)-1”).
FSP FAS 141(R)-1 amends the provisions related to the initial recognition and measurement,
subsequent measurement and disclosure of assets and liabilities arising from contingencies in a
business combination under SFAS No. 141(R). FSP FAS 141(R)-1 requires that such contingencies be
recognized at fair value on the acquisition date if fair value can be reasonably estimated during
the allocation period. Otherwise, companies would typically account for the acquired contingencies
in accordance with SFAS No. 5, “Accounting for Contingencies”. The adoption of SFAS No. 141(R) and
FSP FAS 141(R)-1 on February 1, 2009 did not have a material impact on our consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements” an Amendment of Accounting Research Bulletin No. 51 (“SFAS No. 160”). A noncontrolling
interest, sometimes called minority interest, is the portion of equity in a subsidiary not
attributable, directly or indirectly, to a parent. The objective of this statement is to improve
the relevance, comparability, and transparency of the financial information that a reporting entity
provides in its consolidated financial statements by establishing accounting and reporting
standards that require: (i) the ownership interest in subsidiaries held by parties other than the
parent be clearly identified, labeled, and presented in the consolidated statement of financial
position within equity, but separate from the parent’s equity; (ii) the amount of consolidated net
income attributable to the parent and to the noncontrolling interest be clearly identified and
presented on the face of the consolidated statement of operations; (iii) changes in a parent’s
ownership interest while the parent retains its controlling financial interest in its subsidiary be
accounted for consistently and requires that they be accounted for similarly, as equity
transactions; (iv) when a subsidiary is deconsolidated, any retained non-controlling equity
investment in the former subsidiary be initially measured at fair value, the gain or loss on the
deconsolidation of the subsidiary is measured using fair value of any noncontrolling equity
investments rather than the carrying amount of that retained investment; and (v) entities provide
sufficient disclosures that clearly identify and distinguish between the interest of the parent and
the interest of the noncontrolling owners. This statement is effective for fiscal years, and
interim reporting periods within those fiscal years, beginning on or after December 15, 2008.
We adopted SFAS No. 160 on February 1, 2009 and adjusted our January31, 2009 Consolidated Balance Sheet to reflect noncontrolling
interest as a component of total equity.
The following new accounting standards will be adopted on their respective required effective date:
In April 2009, the Financial Accounting Standards Board (“FASB”) issued FSP No. FAS 107-1 and APB
28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP No. FAS 107-1 and APB
28-1”). FSP No. FAS 107-1 and APB 28-1 amends SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments” and APB No. 28, “Interim Financial Reporting” to require disclosure about
the fair value of financial instruments at interim reporting periods. The statement is effective
for interim reporting periods ending after June 15, 2009. We do not expect adoption of FSP No. FAS
107-1 and APB 28-1 to have a material impact on our consolidated financial statement disclosures.
In April 2009, FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly” (“FSP FAS No. 157-4”), which further clarifies the application of SFAS No. 157 and
of FSP FAS No. 157-3. FSP FAS No. 157-4 provides additional guidance in determining the fair value
of an asset or liability when the volume and level of activity for the asset or liability have
significantly decreased. The statement is effective for interim and annual reporting periods ending
after June 15, 2009, and shall be applied prospectively. We do not expect adoption of FSP FAS No.
157-4 to have a material impact on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles” (“SFAS No. 162”), which is intended to improve financial reporting by identifying a
consistent framework or hierarchy for selecting accounting principles to be used in preparing
financial statements that are presented in conformity with GAAP for nongovernmental entities.
SFAS No. 162 is effective 60 days following the Securities and Exchange Commission’s (“SEC”)
approval of the Public Company Accounting Oversight Board amendment to AU Section 411, “The Meaning
of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We do not expect
adoption of SFAS No. 162 to have a material impact on our consolidated financial statements.
CLASS A COMMON UNITS
Master Contribution Agreement
We and certain of our affiliates (the “FCE Entities”) entered into a Master Contribution and Sale
Agreement (the “Master Contribution Agreement”) with Bruce C. Ratner (“Mr. Ratner”), an Executive
Vice President and Director of ours, and certain entities and individuals affiliated with Mr.
Ratner (the “BCR Entities”) on August 14, 2006. Pursuant to the Master Contribution Agreement, on
November 8, 2006, we issued Class A Common Units (“Units”) in a jointly-owned limited liability
company to the BCR Entities in exchange for their interests in a total of 30 retail, office and
residential operating properties, and certain service companies, all in the greater New York City
metropolitan area. We accounted for the issuance of the Units in exchange for the noncontrolling
interest under the purchase method of accounting. The Units may be exchanged for one of the
following forms of consideration at our sole discretion: (i) an equal number of shares of our
Class A common stock or, (ii) cash based on a formula using the average closing price of the
Class A common stock at the time of conversion or, (iii) a combination of cash and shares of our
Class A common stock. We have no rights to redeem or repurchase the Units. The carrying value of
the Units are included as noncontrolling interest in the Consolidated Balance Sheets at April 30
and January 31, 2009 in accordance with SFAS No. 160. Also pursuant to the Master Contribution
Agreement, we and Mr. Ratner agreed that certain projects under development would remain owned
jointly until such time as each individual project was completed and achieved “stabilization.” As
each of the development projects achieves stabilization, it is valued and we, in our discretion,
choose among various options for the ownership of the project following stabilization consistent
with the Master Contribution Agreement. The development projects were not covered by the Tax
Protection Agreement that the parties entered into in connection with the Master Contribution
Agreement. The Tax Protection Agreement indemnified the BCR Entities included in the initial
closing against taxes payable by reason of any subsequent sale of certain operating properties.
Two of the development projects, New York Times, an office building located in Manhattan, New York
and Twelve MetroTech Center, an office building located in Brooklyn, New York, recently achieved
stabilization. We elected to cause certain of our affiliates to acquire for cash the BCR Entities’
interests in the two projects pursuant to agreements dated May 6, 2008 and May 12, 2008,
respectively. In accordance with the agreements, the applicable BCR Entities assigned and
transferred their interests in the two projects to affiliates of ours and will receive
approximately $121,000,000 over a 15 year period. An affiliate of ours has also agreed to
indemnify the applicable BCR Entity against taxes payable by it by reason of a subsequent sale or
other disposition of one of the projects. The tax indemnity provided by the affiliate of ours
expires on December 31, 2014 and is similar to the indemnities provided for the operating
properties under the Tax Protection Agreement.
The consideration exchanged by us for the BCR Entities’ interest in the two development projects
has been accounted for under the purchase method of accounting. Pursuant to the agreements, the
BCR Entities received an initial cash amount of $49,249,000. We calculated the net present value
of the remaining payments over the 15 year period using a discounted interest rate. This initial
discounted amount of $56,495,000 was recorded in accounts payable and accrued expenses on our
Consolidated Balance Sheet and will be accreted up to the total liability through interest expense
over the next 15 years using the effective interest method.
The following table summarizes the final allocation of the consideration exchanged for the BCR
Entities’ interests in the two projects (in thousands):
Completed rental properties (1)
$
102,378
Notes and accounts receivable, net (2)
132
Other assets (3)
12,513
Accounts payable and accrued expenses (4)
(9,279
)
Total purchase price allocated
$
105,744
Represents allocation for:
(1)
Land, building and tenant improvements associated with the underlying real
estate
(2)
Above market leases
(3)
In-place leases, tenant relationships and leasing commissions
(4)
Below market leases
Exchange of Units
In July 2008, the BCR Entities exchanged 247,477 of the Units. We issued 128,477 shares of our
Class A common stock for 128,477 of the Units and paid cash of $3,501,000 for 119,000 Units. We
accounted for the exchange as a purchase of noncontrolling interest, resulting in a reduction of
noncontrolling interest of $12,624,000. The following table summarizes the components of the
exchange transaction (in thousands):
Reduction of completed rental properties
$
5,345
Reduction of cash and equivalents
3,501
Increase in
Class A common stock - par value
42
Increase in additional paid-in capital
3,736
Total reduction of noncontrolling interest
$
12,624
Other Related Party Transactions
During the year ended January 31, 2009, in accordance with the parties prior understanding, we
redeemed Mr. Ratner’s noncontrolling interest in two entities in exchange for our majority
ownership interests in 17 single-tenant pharmacy properties and $9,043,000 in cash. This
transaction was accounted for in accordance with SFAS No. 141, “Business Combinations” as
acquisitions of the noncontrolling interest in the subsidiaries. The fair value of the
consideration paid was allocated to the acquired ownership interests, which approximated the fair
value of the 17 single-tenant pharmacy properties. This transaction resulted in a reduction of
noncontrolling interest of $14,503,000 and did not result in a gain or loss. The earnings of these
properties have not been reclassified to discontinued operations for the three months ended
April 30, 2008 as the results do not have a material impact on the Consolidated Statements of
Operations.
In
May 2009, we sold 52,325,000 of our Class A Common Shares,
which included shares to cover the underwriters’ over-allotment,
in an underwritten public offering pursuant to an effective
registration statement at a public offering price of
$6.60 per share. We received net proceeds of $330,417,000 after deducting underwriting discounts
and commissions. We used the net proceeds from the offering to reduce our outstanding borrowings
under our bank revolving credit facility.
INFORMATION RELATED TO FORWARD-LOOKING STATEMENTS
This Form 10-Q, together with other statements and information publicly disseminated by us,
contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such
statements reflect management’s current views with respect to financial results related to future
events and are based on assumptions and expectations that may not be realized and are inherently
subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of
which might not even be anticipated. Future events and actual results, financial or otherwise, may
differ from the results discussed in the forward-looking statements. Risk factors discussed in Item
1A of our Form 10-K for the year ended January 31, 2009, as updated in Part II, Item 1A. of this
Form 10-Q, and other factors that might cause differences, some of which could be material,
include, but are not limited to, the impact of current market conditions on our liquidity, ability
to finance or refinance projects and repay our debt, general real estate investment and development
risks, vacancies in our 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, our substantial debt leverage and the
ability to obtain and service debt, the impact of restrictions imposed by our 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, environmental liabilities, conflicts of interest,
risks associated with developing and managing properties in partnership with others, the ability to
maintain effective internal controls, compliance with governmental regulations, volatility in the
market price of our publicly traded securities, litigation risks, as well as other risks listed
from time to time in our reports filed with the Securities and Exchange Commission. We have no
obligation to revise or update any forward-looking statements, other than imposed by law, as a
result of future events or new information. Readers are cautioned not to place undue reliance on
such forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Ongoing economic conditions have negatively impacted the lending and capital markets. Our market
risk includes the inability to obtain construction loans, refinance existing construction loans
into long-term fixed-rate nonrecourse financing, refinance existing nonrecourse financing at
maturity, obtain renewals or replacement of credit enhancement devices, such as letters of credit,
or otherwise obtain funds by selling real estate assets or by raising equity. We also have
interest-rate exposure on our current variable-rate debt portfolio. During the construction period,
we have historically used variable-rate debt to finance developmental projects. At April 30, 2009,
our outstanding variable-rate debt portfolio consisted of $2,776,137,000 of taxable debt (which
includes $378,000,000 related to the bank revolving credit facility) and $930,293,000 of tax-exempt
variable-rate debt (which includes $17,635,000 of subordinated debt). Upon opening and achieving
stabilized operations, we have historically procured long-term fixed-rate financing for our rental
properties. However, due to the current market conditions, when available, we are currently
extending maturities with existing lenders at current market terms. Additionally, we are exposed to
interest rate risk upon maturity of our long-term fixed-rate financings.
To mitigate short-term variable interest rate risk, we have purchased interest rate hedges for our
variable-rate debt as follows:
(2) These LIBOR-based hedges as of May 1, 2009 protect the debt currently outstanding as
well as the anticipated increase in debt outstanding for projects under development or
anticipated to be under development during the year ending
January 31, 2010.
The tax-exempt caps and swap expressed above mainly represent protection that was purchased in
conjunction with lender hedging requirements that require the borrower to protect against
significant fluctuations in interest rates. Outside of such requirements, we generally do not
hedge tax-exempt debt because, since 1990, the base rate of this type of financing has averaged
3.00% and has never exceeded 8.00%.
Forward Swaps
The interest rate hedges summarized in the tables above were purchased to mitigate variable
interest rate risk. We have entered into forward swaps to protect ourselves against fluctuations
in the swap rate at terms ranging between five to ten years associated with forecasted fixed rate
borrowings. At the time we secure and lock an interest rate on an anticipated financing, we intend
to simultaneously terminate the forward swap associated with that financing. At April 30, 2009, we
have one forward swap designated and qualified as a cash flow hedge under SFAS No. 133 with a
notional amount of $69,325,000 related to a fully consolidated property that expires during the
current year ending January 31, 2010. Our portion of unrealized loss on the effective portion of
this hedge has been recorded in accumulated OCI. To the extent effective, amounts recorded in
accumulated OCI will be amortized as either an increase or decrease to interest expense in the same
periods as the interest payments on the financing.
At April 30, 2009, we have one other forward swap outstanding with a notional amount of
$120,000,000, that expires during the current year ending January 31, 2010 and does not qualify as
a cash flow hedge under the provisions of SFAS No. 133 because it relates to an unconsolidated
property. The change in the fair value of this swap is marked to market through earnings on a
quarterly basis. For the three months ended April 30, 2009 and 2008, we recorded $655,000 and
$12,000, respectively, as a reduction of interest expense related to this forward swap in our
Consolidated Statements of Operations. During the year ended January 31, 2009, we purchased an
interest rate floor in order to mitigate the interest rate risk on this forward swap should
interest rates fall below a certain level.
Sensitivity Analysis to Changes in Interest Rates
Including the effect of the protection provided by the interest rate swaps, caps and long-term
contracts in place as of April 30, 2009, a 100 basis point increase in taxable interest rates
(including properties accounted for under the equity method, corporate debt and the effect of
interest rate floors) would increase the annual pre-tax interest cost for the next 12 months of our
variable-rate debt by approximately $14,963,000 at April 30, 2009. Although tax-exempt rates
generally move in an amount that is smaller than corresponding changes in taxable interest rates, a
100 basis point increase in tax-exempt rates (including properties accounted for under the equity
method and subordinate debt) would increase the annual pre-tax interest cost for the next 12 months
of our tax-exempt variable-rate debt by approximately $9,981,000 at April 30, 2009. This analysis
includes a portion of our taxable and tax-exempt variable-rate debt related to construction loans
for which the interest expense is capitalized.
We estimate the fair value of our hedging instruments based on interest rate market bond pricing
models. At April 30 and January 31, 2009, interest rate caps, floors and swaptions were reported at
fair value of approximately $1,887,000 and $2,419,000, respectively, in other assets in the
Consolidated Balance Sheets. At April 30 and January 31, 2009, interest rate swap agreements and
TRS which had a negative fair value of approximately $229,104,000 and $247,048,000, respectively,
(which includes the forward swaps) were included in accounts payable and accrued expenses in the
Consolidated Balance Sheets. At April 30 and January 31, 2009, interest rate swap agreements and
TRS which had a positive fair value of approximately $3,721,000 and $7,364,000, respectively, were
included in other assets in the Consolidated Balance Sheets.
We estimate the fair value of our long-term debt instruments by market rates, if available, or by
discounting future cash payments at interest rates that approximate the current market. Based on
these parameters, the table below contains the estimated fair value of our long-term debt at
April 30, 2009.
Fair Value
with 100 bp Decrease
Carrying Value
Fair Value
in Market Rates
(in thousands)
Fixed
$
4,920,155
$
4,228,941
$
4,423,170
Variable
Taxable
2,776,137
2,429,440
2,496,646
Tax-Exempt
930,293
790,817
904,854
The
following tables provide information about our financial instruments that are sensitive to changes in interest rates.
Weighted average interest rate is based on current market rates as of April 30, 2009.
(3)
As a result of the adoption of FSP APB 14-1, the Company recorded an unamortized
discount of $22,205, which reduced the principal of $272,500 of the puttable equity-linked
senior notes as of April 30, 2009. This unamortized discount is accreted through interest
expense, which resulted in an effective interest rate of 7.51% that is reflected in the
Company’s Consolidated Statements of Operations.
Weighted average interest rate is based on current market rates as of January 31, 2009.
(3)
Represents the principal amount of the puttable equity-linked senior notes of $272,500
less the unamortized discount of $24,346 as of January 31, 2009, as adjusted for the
adoption of FSP APB 14-1.
The Company maintains a set of disclosure controls and procedures designed to ensure that
information required to be disclosed by the Company in reports that it files or furnishes under the
Securities Exchange Act of 1934 (“Securities Exchange Act”) is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission rules and forms
and that such information is accumulated and communicated to the Company’s management, including
the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow
timely decisions regarding required disclosure. As of the end of the period covered by this
quarterly report, an evaluation of the effectiveness of the Company’s disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, was
carried out under the supervision and with the participation of the Company’s management, which
includes the CEO and CFO. Based on that evaluation, the CEO and CFO have concluded that the
Company’s disclosure controls and procedures were effective as of April 30, 2009.
There have been no changes in the Company’s internal control over financial reporting that occurred
during the fiscal quarter ended April 30, 2009 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.
In connection with the rules, the Company continues to review and document its disclosure controls
and procedures, including the Company’s internal control over financial reporting, and may from
time to time make changes aimed at enhancing their effectiveness and ensuring that the Company’s
systems evolve with the business.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various claims and lawsuits incidental to its business, and management
and legal counsel believe that these claims and lawsuits will not have a material adverse effect on
the Company’s consolidated financial statements.
Item 1A. Risk Factors
Risks Related to Our Business
In the “Market Conditions May Negatively Impact Our Liquidity and Our Ability to Finance or
Refinance Projects or Repay Our Debt”risk factor in our Annual Report on Form 10-K, we disclosed
nonrecourse mortgage debt that was past due or in default as of
January 31, 2009 and our access to liquidity through our $750 million revolving credit facility.
The following updates that information as of April 30, 2009.
At April 30, 2009, we have three nonrecourse mortgages amounting to $31.1 million that have matured
and are currently past due. If we are unable to negotiate an extension or refinancing of the
mortgages, the lender could commence foreclosure proceedings and we could lose the properties. Five
of our joint ventures accounted for under the equity method of accounting have nonrecourse
mortgages that are past due or in default at April 30, 2009. If we are unable to negotiate an
extension or refinancing or cure the default on those mortgages, the lender could commence
foreclosure proceedings and we could lose our investment in the projects amounting to
$11.8 million. Under the terms of four of the eight mortgages that are past due or in default, we have
guaranteed the lender the lien free completion of certain horizontal infrastructure associated with
those land development projects. The maximum amount due by us and our partners under these
completion guarantees is approximately $30.5 million. This guaranty is recourse to us and the
lender could enforce the completion guaranty which would have an adverse affect on our cash flows.
While we are actively negotiating with the lenders to resolve these past due loans and completion
guarantees, we cannot assure you that we will be successful.
We are currently in negotiations with our lenders to extend our $750 million revolving credit
facility, which matures in March 2010, although we have not agreed to definitive terms. While we
cannot predict the outcome of these negotiations, we anticipate that any extension of the facility
will result in reduced commitment from our lenders, increased borrowing costs and modification to
the financial covenants. We cannot assure you, however, that we will be able to obtain an extension
or renewal of the facility on favorable terms or at all, which would materially adversely affect
our liquidity and financial position.
In the “We are Subject to Real Estate Development Risks”risk factor in our Annual Report on Form
10-K we disclosed risks associated with our Brooklyn Atlantic Yards project. The following updates
that risk factor to provide additional information.
Brooklyn Atlantic Yards. We are in the process of developing Brooklyn Atlantic Yards, an
approximately $4.0 billion long-term mixed-use project in downtown Brooklyn expected to feature a
state of the art sports and entertainment arena for The Nets basketball team, a franchise of the
NBA. The acquisition and development of Brooklyn Atlantic Yards has been formally approved by the
required state governmental authorities but final documentation of the transactions is subject to
the completion of negotiations with local and state governmental authorities, including negotiation
of the applicable development documentation and public subsidies. Pre-construction activities have
commenced for the potential removal, remediation or other activities to address environmental
contamination at, on, under or emanating to or from the land. As a result of prior litigation, this
project has experienced delays and may continue to experience further delays. There is also the
potential for increased costs and further delays to the project as a result of (i) increasing
construction costs, (ii) scarcity of labor and supplies, (iii) our ability to obtain tax-exempt
financing or the availability of financing or public subsidies, or our inability to retain the
current land acquisition financing, (iv) our or our partners’ inability or failure to meet required
equity contributions, (v) increasing rates for financing, (vi) loss of arena sponsorships and
related revenues, (vii) our inability to meet certain agreed upon deadlines for the development of
the project and (viii) other potential litigation seeking to enjoin or prevent the project or
litigation for which there may not be insurance coverage. The development of Brooklyn Atlantic
Yards is being done in connection with the proposed move of The Nets to the planned arena. The
arena itself (and its plans) along with any movement of the team is subject to approval by the NBA,
which we may not receive.
If any of the foregoing risks were to occur we may: (i) not be able to develop Brooklyn Atlantic
Yards to the extent intended or at all resulting in a potential write-off of our investment, (ii)
be required to repay the City and/or State of New York amounts previously advanced under public
subsidies, plus penalties if applicable, (iii) be in default of our nonrecourse mortgages on the
project, and (iv) be required to restore the rail yards that previously existed on the land. The
costs associated with those events could be significant and could have a material adverse effect on
our business, cash flows and results of operations. Even if we are able to continue with the
development, or a portion thereof, we would likely not be able to do so as quickly as originally
planned, would be likely to incur additional costs and may need to write-off a portion of the
development.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) and
(b) – Not applicable.
(c) – Repurchase of equity securities during the quarter.
In February, March and April 2009, the Company repurchased into treasury 21,856
shares of Class A common stock to satisfy the minimum tax withholding requirements
relating to restricted stock vesting. These shares were not reacquired as part of a
publicly announced repurchase plan or program.
Indenture, dated as of October 10, 2006, between Forest City Enterprises, Inc., as issuer, and The
Bank of New York Trust Company, N.A., as trustee, including, as Exhibit A thereto, the Form of 3.625%
Puttable Equity-Linked Senior Note due 2011, incorporated by reference to Exhibit 4.1 to the
Company’s Form 8-K filed on October 16, 2006 (File No. 1-4372).
9.1
-
Voting Agreement, dated November 8, 2006, by and among Forest City Enterprises, Inc., RMS Limited
Partnership, Powell Partners, Limited, Joseph M. Shafran and Bruce C. Ratner, incorporated by
reference to Exhibit 9.1 to the Company’s Form 10-K for the year ended January 31, 2007 (File No.
1-4372).
Deferred Compensation Plan for Nonemployee Directors, effective as of January 1, 1999, incorporated
by reference to Exhibit 10.44 to the Company’s Form 10-K for the year ended January 31, 1999 (File
No. 1-4372).
Forest City Enterprises, Inc. Unfunded Nonqualified Supplemental Retirement Plan for Executives (As
Amended and Restated Effective January 1, 2008), incorporated by reference to Exhibit 10.59 to the
Company’s Form 10-K for the year ended January 31, 2008 (File No. 1-4372).
+10.20
-
Amended and Restated Form of Stock Option Agreement, effective as of June 8, 2004, incorporated by
reference to Exhibit 10.17 to the Company’s Form 10-Q for the quarter ended April 30, 2005 (File No.
1-4372).
+10.21
-
Amended and Restated Form of Restricted Stock Agreement, effective as of June 8, 2004, incorporated
by reference to Exhibit 10.18 to the Company’s Form 10-Q for the quarter ended April 30, 2005 (File
No. 1-4372).
Form of Forest City Enterprises, Inc. Nonqualified Stock Option Agreement for Nonemployee Directors,
incorporated by reference to Exhibit 10.66 to the Company’s Form 10-Q for the quarter ended July 31,2008. (File No. 1-4372).
+10.24
-
Form of Forest City Enterprises, Inc. Restricted Shares Agreement for Nonemployee Directors,
incorporated by reference to Exhibit 10.67 to the Company’s Form 10-Q for the quarter ended July 31,2008 (File No. 1-4372).
Master Contribution and Sale Agreement, dated as of August 10, 2006, by and among Forest City
Enterprises, Inc., certain entities affiliated with Forest City Enterprises, Inc., Forest City Master
Associates III, LLC, certain entities affiliated with Forest City Master Associates III, LLC, certain
entities affiliated with Bruce C. Ratner and certain individuals affiliated with Bruce C. Ratner,
incorporated by reference to Exhibit 10.54 to the Company’s Form 10-Q for the quarter ended July 31,2006 (File No. 1-4372).
Amended and Restated Credit Agreement, dated as of June 6, 2007, by and among Forest City Rental
Properties Corporation, KeyBank National Association, as Administrative Agent, National City Bank, as
Syndication Agent, Bank of America, N.A. and LaSalle Bank National Association, as Co-Documentation
Agents, and the banks named therein, incorporated by reference to Exhibit 10.1 to the Company’s Form
8-K filed on June 12, 2007 (File No. 1-4372).
10.40
-
Additional Bank Assumption Agreement by and among The Bank of New York, Forest City Rental Properties
Corporation, and KeyBank in its capacity as administrative agent under the Credit Agreement,
incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on December 20, 2007 (File
No. 1-4372).
10.41
-
Additional Bank Assumption Agreement by and among Wachovia Bank, N.A., Forest City Rental Properties
Corporation, and KeyBank in its capacity as administrative agent under the Credit Agreement,
incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on December 20, 2007 (File
No. 1-4372).
10.42
-
Exhibit A to the Amended and Restated Credit Agreement by and among Forest City Rental Properties
Corporation, KeyBank National Association, as Administrative Agent, National City Bank, as
Syndication Agent, Bank of America, N.A. and LaSalle Bank National Association, as Co-Documentation
Agents, and the banks named therein, revised as of December 20, 2007, further revised as of February4, 2008 and further revised as of February 19, 2008, incorporated by reference to Exhibit 10.56 to
the Company’s Form 10-K for the year ended January 31, 2008 (File No. 1-4372).
10.43
-
First Amendment to Amended and Restated Credit Agreement, dated as of September 10, 2008, by and
among Forest City Rental Properties Corporation, Key Bank National Association, as Administrative
Agent, National City Bank, as Syndication Agent, Bank of America, N.A., as Documentation Agent, and
the banks named therein, incorporated by reference to Exhibit 10.44 to the Company’s Form 10-Q for
the quarter ended October 31, 2008 (File No. 1-4372).
10.44
-
Amended and Restated Guaranty of Payment of Debt, dated as of June 6, 2007, by Forest City
Enterprises, Inc. for the benefit of KeyBank National Association, as Administrative Agent, National
City Bank, as Syndication Agent, Bank of America, N.A. and LaSalle Bank National Association, as
Co-Documentation Agents, and the banks named therein, incorporated by reference to Exhibit 10.2 to
the Company’s Form 8-K filed on June 12, 2007 (File No. 1-4372).
10.45
-
First Amendment to Amended and Restated Guaranty of Payment of Debt, dated as of September 10, 2008,
by Forest City Enterprises, Inc. for the benefit of KeyBank National Association, as Administrative
Agent, National City Bank, as Syndication Agent, Bank of America, N.A., as Documentation Agent, and
the banks named therein, incorporated by reference to Exhibit 10.46 to the Company’s Form 10-Q for
the quarter ended October 31, 2008 (File No. 1-4372).
10.46
-
Second Amendment to Amended and Restated Credit Agreement and Amended and Restated Guaranty of
Payment of Debt, dated as of January 30, 2009, by and among Forest City Rental Properties
Corporation, Forest City Enterprises, Inc., KeyBank National Association, as Administrative Agent,
National City Bank, as Syndication Agent, Bank of America, N.A., as Documentation Agent, and the
banks named therein, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on
February 5, 2009 (File No. 1-4372).
*31.1
-
Principal Executive Officer’s Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2
-
Principal Financial Officer’s Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1
-
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
+
Management contract or compensatory arrangement required to be filed as an exhibit to this Form
10-Q pursuant to Item 6.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
