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10-Q
FOREST CITY ENTERPRISES INC filed this Form 10-Q on 11/03/2015
Entire Document
 
10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
Form 10-Q
_____________________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to                 
Commission file number 1-4372 
_____________________________________________________________
FOREST CITY ENTERPRISES, INC.
(Exact name of registrant as specified in its charter) 
_____________________________________________________________
Ohio
(State or other jurisdiction of
incorporation or organization)
 
 
 
34-0863886
(I.R.S. Employer
Identification No.)
 
 
 
 
 
Terminal Tower
Suite 1100
 
50 Public Square
Cleveland, Ohio
 
44113
(Address of principal executive offices)
 
(Zip Code)
216-621-6060
(Registrant’s telephone number, including area code)
(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  ý    No  ¨
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  ý    No  ¨
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
ý
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
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.
Class
Outstanding at October 29, 2015
Class A Common Stock, $.33 1/3 par value
240,919,839 shares
Class B Common Stock, $.33 1/3 par value
18,824,341 shares



Forest City Enterprises, Inc. and Subsidiaries
Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certifications
 


i


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
 
September 30, 2015
 
 
(Unaudited)
December 31, 2014
 
(in thousands)
Assets
 
 
Real Estate
 
 
Completed rental properties
$
8,592,934

$
7,753,561

Projects under construction and development
802,621

477,957

Land inventory
73,566

97,469

Total Real Estate
9,469,121

8,328,987

Less accumulated depreciation
(1,677,620
)
(1,555,965
)
Real Estate, net – (variable interest entities $591.5 million and $427.8 million, respectively)
7,791,501

6,773,022

Cash and equivalents – (variable interest entities $45.7 million and $20.6 million, respectively)
331,449

326,518

Restricted cash – (variable interest entities $13.6 million and $28.6 million, respectively)
241,562

266,530

Notes and accounts receivable, net
444,136

419,038

Investments in and advances to unconsolidated entities
665,623

620,466

Other assets – (variable interest entities $19.4 million and $19.6 million, respectively)
485,970

409,366

Total Assets
$
9,960,241

$
8,814,940

Liabilities and Equity
 
 
Liabilities
 
 
Mortgage debt and notes payable, nonrecourse – (variable interest entities $283.1 million and $250.7 million, respectively)
$
4,501,169

$
4,238,201

Revolving credit facility


Convertible senior debt
272,249

700,000

Accounts payable, accrued expenses and other liabilities – (variable interest entities $115.5 million and $42.6 million, respectively)
968,089

847,011

Cash distributions and losses in excess of investments in unconsolidated entities
149,162

211,493

Deferred income taxes
483,084

482,474

Total Liabilities
6,373,753

6,479,179

Redeemable Noncontrolling Interest
168,226

183,038

Commitments and Contingencies


Equity
 
 
Shareholders’ Equity
 
 
Preferred stock – without par value; 20,000,000 shares authorized; no shares issued


Common stock – $.33 1/3 par value
 
 
Class A, 371,000,000 shares authorized, 240,354,028 and 180,859,262 shares issued and 238,844,963 and 179,763,952 shares outstanding, respectively
80,118

60,286

Class B, convertible, 56,000,000 shares authorized, 18,824,341 and 19,208,517 shares issued and outstanding, respectively; 26,257,961 issuable
6,275

6,403

Total common stock
86,393

66,689

Additional paid-in capital
2,460,133

1,165,828

Retained earnings
510,526

563,198

Less treasury stock, at cost; 1,509,065 and 1,095,310 Class A shares, respectively
(29,647
)
(18,922
)
Shareholders’ equity before accumulated other comprehensive loss
3,027,405

1,776,793

Accumulated other comprehensive loss
(49,959
)
(58,846
)
Total Shareholders’ Equity
2,977,446

1,717,947

Noncontrolling interest
440,816

434,776

Total Equity
3,418,262

2,152,723

Total Liabilities and Equity
$
9,960,241

$
8,814,940


The accompanying notes are an integral part of these consolidated financial statements.
2

Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
2014
 
2015
2014
 
(in thousands, except per share data)
Revenues
 
 
 
 
 
Rental
$
168,723

$
132,536

 
$
457,809

$
391,019

Tenant recoveries
38,161

30,082

 
101,241

89,146

Service and management fees
9,911

12,150

 
31,394

36,053

Parking and other
17,145

13,604

 
43,644

38,272

Arena
24,637

25,039

 
80,497

84,968

Land sales
23,535

15,123

 
47,589

50,367

Military Housing
6,945

6,209

 
23,724

24,092

Total revenues
289,057

234,743

 
785,898

713,917

Expenses
 
 
 
 
 
Property operating and management
97,215

92,347

 
285,940

283,075

Real estate taxes
24,261

19,691

 
66,959

59,445

Ground rent
3,701

2,411

 
9,376

6,465

Arena operating
17,199

17,105

 
55,019

55,399

Cost of land sales
9,189

2,879

 
15,716

17,081

Military Housing operating
1,938

1,958

 
6,289

10,216

Corporate general and administrative
10,191

13,763

 
35,895

35,383

REIT conversion and reorganization costs
9,515


 
25,498


 
173,209

150,154

 
500,692

467,064

Depreciation and amortization
79,966

55,511

 
206,782

169,838

Write-offs of abandoned development projects and demolition costs

456

 
5,778

1,389

Impairment of real estate
425,463

966

 
425,463

130,795

Total expenses
678,638

207,087

 
1,138,715

769,086

Operating income (loss)
(389,581
)
27,656

 
(352,817
)
(55,169
)
 
 
 
 
 
 
Interest and other income
8,995

10,096

 
27,977

33,974

Net loss on disposition of partial interest in development project


 

(19,590
)
Net gain (loss) on disposition of full or partial interest in rental properties
1,746

(146
)
 
1,746

(613
)
Net gain on change in control of interests


 
487,684

2,759

Interest expense
(49,007
)
(59,312
)
 
(149,335
)
(178,917
)
Amortization of mortgage procurement costs
(1,793
)
(2,074
)
 
(5,756
)
(5,967
)
Loss on extinguishment of debt
(23,609
)
(49
)
 
(61,953
)
(927
)
Loss before income taxes
(453,249
)
(23,829
)
 
(52,454
)
(224,450
)
Income tax expense (benefit)
 
 
 
 
 
Current
6,526

3,493

 
10,050

8,992

Deferred
(186,172
)
(3,858
)
 
(6,651
)
(52,373
)
 
(179,646
)
(365
)
 
3,399

(43,381
)
Earnings (loss) from unconsolidated entities, gross of tax
 
 
 
 
 
Equity in earnings (loss)
(29,132
)
10,157

 
(20,094
)
30,468

Net gain on disposition of interest in unconsolidated entities
1,009

9,189

 
20,293

50,075

Impairment
(1,384
)

 
(1,384
)

 
(29,507
)
19,346

 
(1,185
)
80,543

Loss from continuing operations
(303,110
)
(4,118
)
 
(57,038
)
(100,526
)
Discontinued operations, net of tax
 
 
 
 
 
Operating loss from rental properties


 

(1,844
)
Gain on disposition of rental properties


 

14,856

 


 

13,012

Net loss
(303,110
)
(4,118
)
 
(57,038
)
(87,514
)
Noncontrolling interests
 
 
 
 
 
Loss from continuing operations attributable to noncontrolling interests, gross of tax
891

4,804

 
4,366

10,778

Earnings from discontinued operations attributable to noncontrolling interests


 

(50
)
 
891

4,804

 
4,366

10,728

Net earnings (loss) attributable to Forest City Enterprises, Inc.
$
(302,219
)
$
686

 
$
(52,672
)
$
(76,786
)
 
 
 
 
 
 
Basic and diluted earnings (loss) per common share
 
 
 
 
 
Earnings (loss) from continuing operations attributable to common shareholders
$
(1.18
)
$

 
$
(0.23
)
$
(0.45
)
Earnings from discontinued operations attributable to common shareholders


 

0.06

Net earnings (loss) attributable to common shareholders
$
(1.18
)
$

 
$
(0.23
)
$
(0.39
)

The accompanying notes are an integral part of these consolidated financial statements.
3

Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

 
Three Months Ended September 30,
 
2015
2014
 
(in thousands)
Net earnings (loss)
$
(303,110
)
$
(4,118
)
Other comprehensive income (loss), net of tax:
 
 
Foreign currency translation adjustments (net of tax of $(68) and $64, respectively)
109

(102
)
Unrealized net gains on interest rate derivative contracts (net of tax of $(739) and $(4,587), respectively)
2,069

7,265

Total other comprehensive income, net of tax
2,178

7,163

Comprehensive income (loss)
(300,932
)
3,045

Comprehensive loss attributable to noncontrolling interest
887

4,779

Total comprehensive income (loss) attributable to Forest City Enterprises, Inc.
$
(300,045
)
$
7,824

 
 
 
 
Nine Months Ended September 30,
 
2015
2014
 
(in thousands)
Net earnings (loss)
$
(57,038
)
$
(87,514
)
Other comprehensive income (loss), net of tax:
 
 
Foreign currency translation adjustments (net of tax of $(18) and ($30), respectively)
29

48

Unrealized net gains on interest rate derivative contracts (net of tax of $(5,612) and $(9,647), respectively)
8,870

15,272

Total other comprehensive income, net of tax
8,899

15,320

Comprehensive income (loss)
(48,139
)
(72,194
)
Comprehensive loss attributable to noncontrolling interest
4,354

10,682

Total comprehensive income (loss) attributable to Forest City Enterprises, Inc.
$
(43,785
)
$
(61,512
)

The accompanying notes are an integral part of these consolidated financial statements.
4


Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Equity
(Unaudited)
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
Common Stock
Additional
 
 
 
Other
 
 
 
Class A
Class B
Paid-In
Retained
Treasury Stock
Comprehensive
Noncontrolling
 
 
Shares
Amount
Shares
Amount
Capital
Earnings
Shares
Amount
(Loss) Income
Interest
Total
 
(in thousands)

Balances at December 31, 2013
178,499

$
59,500

20,173

$
6,725

$
1,095,748

$
570,793

942

$
(15,978
)
$
(76,582
)
$
285,913

$
1,926,119

Net loss, net of $17,095 loss attributable to redeemable noncontrolling interest
 
 
 
 
 
(7,595
)
 
 
 
3,670

(3,925
)
Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
17,736

55

17,791

Purchase of treasury stock
 
 
 
 
 
 
215

(4,009
)
 
 
(4,009
)
Conversion of Class B to Class A shares
964

322

(964
)
(322
)
 
 
 
 
 
 

Restricted stock vested
723

240

 
 
(240
)
 
 
 
 
 

Exercise of stock options
 
 
 
 
(276
)
 
(62
)
1,065

 
 
789

Stock-based compensation
 
 
 
 
19,673

 
 
 
 
 
19,673

Write-off of deferred tax asset related to expired stock options
 
 
 
 
(419
)
 
 
 
 
 
(419
)
Exchange of Class A Common Units for Class A shares
673

224

 
 
34,134

 
 
 
 
(34,358
)

Redeemable noncontrolling interest adjustment
 
 
 
 
(28,390
)
 
 
 
 
 
(28,390
)
Acquisition of partners’ noncontrolling interest in consolidated subsidiaries
 
 
 
 
(32,505
)
 
 
 
 
(67,358
)
(99,863
)
Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
175,274

175,274

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
(14,634
)
(14,634
)
Adjustment due to change in ownership of consolidated subsidiaries
 
 
 
 
78,103

 
 
 
 
(82,038
)
(3,935
)
Change in control of equity method subsidiary
 
 
 
 
 
 
 
 
 
168,252

168,252

Balances at December 31, 2014
180,859

$
60,286

19,209

$
6,403

$
1,165,828

$
563,198

1,095

$
(18,922
)
$
(58,846
)
$
434,776

$
2,152,723

Net loss, net of $14,812 loss attributable to redeemable noncontrolling interest
 
 
 
 
 
(52,672
)
 
 
 
10,446

(42,226
)
Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
8,887

12

8,899

Issuance of Class A shares in equity offering
37,375

12,458

 
 
794,042

 
 
 
 
 
806,500

Purchase of treasury stock
 
 
 
 
 
 
217

(5,412
)
 
 
(5,412
)
Conversion of Class B to Class A shares
385

128

(385
)
(128
)
 
 
 
 
 
 

Proceeds and Class A shares received from termination of Convertible Senior Notes hedge
 
 
 
 
24,321

 
258

(6,503
)
 
 
17,818

Issuance of Class A shares in exchange for Convertible Senior Notes
19,967

6,656

 
 
403,924

 
 
 
 
 
410,580

Restricted stock vested
736

246

 
 
(246
)
 
 
 
 
 

Exercise of stock options
 
 
 
 
(235
)
 
(61
)
1,190

 
 
955

Stock-based compensation
 
 
 
 
21,536

 
 
 
 
 
21,536

Write-off of deferred tax asset related to expired stock options
 
 
 
 
(1,536
)
 
 
 
 
 
(1,536
)
Exchange of Class A Common Units for Class A shares
1,032

344

 
 
52,319

 
 
 
 
(52,663
)

Acquisition of partners’ noncontrolling interest in consolidated subsidiaries
 
 
 
 
(299
)
 
 
 
 
(9
)
(308
)
Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
77,369

77,369

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
(28,588
)
(28,588
)
Adjustment due to change in ownership of consolidated subsidiaries
 
 
 
 
479

 
 
 
 
(527
)
(48
)
Balances at September 30, 2015 (Unaudited)
240,354

$
80,118

18,824

$
6,275

$
2,460,133

$
510,526

1,509

$
(29,647
)
$
(49,959
)
$
440,816

$
3,418,262


The accompanying notes are an integral part of these consolidated financial statements.
5

Forest City Enterprises, Inc. and Subsidiaires
Consolidated Statements of Cash Flows
(Unaudited)

 
Nine Months Ended September 30,
 
2015
2014
 
(in thousands)
Net loss
$
(57,038
)
$
(87,514
)
Depreciation and amortization
206,782

169,838

Amortization of mortgage procurement costs
5,756

5,967

Impairment of real estate
425,463

130,795

Impairment of unconsolidated entities
1,384


Write-offs of abandoned development projects
674

283

Loss on extinguishment of debt
61,953

927

Net loss on disposition of partial interest in development project

19,590

Net (gain) loss on disposition of full or partial interest in rental properties
(1,746
)
613

Net gain on change in control of interests
(487,684
)
(2,759
)
Deferred income tax benefit
(6,651
)
(52,373
)
Earnings from unconsolidated entities
(199
)
(80,543
)
Stock-based compensation expense
16,569

10,730

Amortization and mark-to-market adjustments of derivative instruments
(2,653
)
4,984

Cash distributions from operations of unconsolidated entities
46,671

59,217

Non-cash operating expenses and deferred taxes included in discontinued operations

9,883

Gain on disposition of rental properties included in discontinued operations

(28,100
)
Decrease in land inventory
5,062

9,203

Increase in notes and accounts receivable
(17,726
)
(2,065
)
(Increase) decrease in other assets
(15,341
)
7,562

Decrease in accounts payable, accrued expenses and other liabilities
(22,726
)
(15,009
)
Net cash provided by operating activities
158,550

161,229

Cash flows from investing activities
 
 
Capital expenditures
(338,490
)
(295,182
)
Acquisitions
(397,275
)
(19,988
)
Payment of lease procurement costs
(8,063
)
(7,212
)
(Increase) decrease in notes receivable
(10,934
)
10,580

Decrease in restricted cash used for investing purposes
42,262

106,165

Proceeds from disposition of rental properties or development project
36,594

236,908

Contributions to investments in and advances to unconsolidated entities
(92,678
)
(112,613
)
Distributions from investments in and advances to unconsolidated entities
11,911

120,294

Net cash (used in) provided by investing activities
(756,673
)
38,952

Cash flows from financing activities
 
 
Proceeds from nonrecourse mortgage debt and notes payable
256,049

507,788

Principal payments on nonrecourse mortgage debt and notes payable
(441,822
)
(733,937
)
Borrowings on revolving credit facility
111,850

832,325

Payments on revolving credit facility
(111,850
)
(832,325
)
Payments to noteholders related to exchange of convertible senior notes
(61,110
)

Transaction costs related to exchange of convertible senior notes
(6,950
)

Proceeds received from termination of convertible senior note hedge
17,818


Proceeds from issuance of Class A common stock, net of $34,438 of transaction costs
806,500


Payments of deferred financing costs
(11,447
)
(10,751
)
Purchase of treasury stock
(5,412
)
(3,800
)
Exercise of stock options
955

583

Acquisitions of noncontrolling interests
(308
)
(83,871
)
Contributions from noncontrolling interests
77,369

34,249

Distributions to noncontrolling interests
(28,588
)
(8,992
)
Net cash provided by (used in) financing activities
603,054

(298,731
)
Net increase (decrease) in cash and equivalents
4,931

(98,550
)
Cash and equivalents at beginning of period
326,518

280,206

Cash and equivalents at end of period
$
331,449

$
181,656



The accompanying notes are an integral part of these consolidated financial statements.
6

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)


A. Accounting Policies
Basis of Presentation
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 December 31, 2014, as amended. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In management’s opinion, all adjustments (consisting solely of normal recurring matters) necessary for a fair statement of financial position, results of operations and cash flows as of and for the periods presented have been included.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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 include, but are not limited to, determination of the primary beneficiary of variable interest entities (“VIEs”), estimates of useful lives for long-lived assets, reserves for collection on accounts and notes receivable and other investments, the fair value estimate of redeemable noncontrolling interest, net gain on change in control of interests, impairment of real estate and other-than-temporary impairments on equity method investments. Actual results could differ from those estimates.
Planned REIT Conversion
On January 13, 2015, the Company announced its Board of Directors approved a plan to pursue conversion to real estate investment trust (“REIT”) status. On September 16, 2015, the Securities and Exchange Commission (the “SEC”) declared the Company’s wholly owned subsidiary, Forest City Realty Trust, Inc.’s registration statement on Form S-4 effective. On September 17, 2015, the Company filed with the SEC a definitive proxy statement and Forest City Realty Trust, Inc. filed a prospectus in connection with the Company’s plan to convert to REIT status. The Company’s special shareholder meeting to present proposals related to the Company’s conversion to REIT status was held on October 20, 2015. Each of the proposals presented to the shareholders received the required number of affirmative votes, and as a result, each proposal was approved by the shareholders. The Company expects to elect REIT status for its taxable year ended December 31, 2016, subject to business conditions, the completion of related preparatory work, obtaining necessary approvals and third-party consents.
Variable Interest Entities
As of September 30, 2015, the Company determined it was the primary beneficiary of 25 VIEs representing 21 consolidated properties. The creditors of the consolidated VIEs do not have recourse to the Company’s general credit. As of September 30, 2015, the Company determined it was not the primary beneficiary of 64 VIEs and accounts for these interests as equity method investments. The maximum exposure to loss of these unconsolidated VIEs is limited to $339,000,000, the Company’s investment balances as of September 30, 2015.
Investments in Unconsolidated Entities
The Company owns an equity interest in the Brooklyn Nets (the “Nets”), a member of the National Basketball Association (“NBA”), through the Company’s consolidated subsidiary Nets Sports & Entertainment (“NS&E”). NS&E owns 20% of the Nets and accounts for its interests in the Nets on the equity method of accounting.
In July 2013, the Company elected not to fund current or future capital calls related to this non-core investment and began investigating various disposition strategies. The Company’s election did not constitute a default under any agreements related to the Company’s investment in the Nets but did provide the right to the majority partner to dilute the Company’s ownership interest. In order to preserve the ownership interest while pursuing disposition strategies, the Company entered into a forbearance agreement with the majority partner of the Nets related to the 2013-2014 and 2014-2015 NBA basketball season capital calls. Based on the decision to no longer fund the equity method investment, the Company ceased recording the Company’s portion of the equity in earnings. The Company has been actively marketing its interest in the Nets but has yet to enter a definitive agreement to sell its ownership interests. On September 8, 2015, the forbearance agreement, as amended, expired and the Company made the strategic decision to fund the Company’s portion of the Nets capital calls, rather than have the Company’s ownership interests diluted. As a result, the Company’s portion of the net loss recorded during the nine months ended September 30, 2015 primarily represents losses related to its ownership interest in the Nets from the period the Company ceased funding to present. It is the Company’s intention to continue to market this equity method investment for sale.

7

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

For the nine months ended September 30, 2015, Brooklyn Basketball Holdings, LLC ("BBH"), the equity method subsidiary of NS&E that owns the Nets, was deemed a significant subsidiary. Summarized financial information for BBH is as follows:
 
Nine Months Ended September 30,
 
2015
 
2014
 
(in thousands)
Operations:
 
 
 
Revenues
$
90,675

 
$
92,790

Operating expenses
(135,256
)
 
(180,482
)
Interest expense, net
(9,191
)
 
(9,209
)
Depreciation and amortization
(5,037
)
 
(5,754
)
Net loss (pre-tax)
$
(58,809
)
 
$
(102,655
)
Company's portion of net loss (pre-tax)
$
(38,435
)
 
$
(2,361
)
New Accounting Guidance
The following accounting pronouncements were adopted during the nine months ended September 30, 2015:
In January 2015, the FASB issued an amendment to the accounting guidance to eliminate the concept of extraordinary items from GAAP. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently has been retained and expanded to include items that are both unusual in nature and infrequently occurring. This guidance was early adopted effective January 1, 2015 and did not have a material impact on the Company’s consolidated financial statements.
The following new accounting pronouncements will be adopted on their respective effective dates:
In May 2014, the FASB issued an amendment to the accounting guidance for revenue from contracts with customers. The core principle of this guidance is an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance defines steps an entity should apply to achieve the core principle. This guidance is effective for annual reporting periods beginning after December 15, 2017 and interim reporting periods within that annual period and allows for both retrospective and modified retrospective methods of adoption. Early adoption is permitted for annual periods beginning after December 15, 2016. The Company is currently in the process of determining the method of adoption and evaluating the impact of adopting this guidance on its consolidated financial statements.
In August 2014, the FASB issued an amendment to the accounting guidance on disclosure of uncertainties about an entity’s ability to continue as a going concern. This guidance requires management to assess the Company’s ability to continue as a going concern and to provide disclosures under certain circumstances. This guidance is effective for annual reporting periods ending after December 15, 2016 and interim reporting periods thereafter. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In February 2015, the FASB issued an amendment to the consolidation accounting guidance. This guidance changes the required analysis to determine whether certain types of legal entities should be consolidated. The amendment modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and may affect the consolidation analysis of entities involved in VIEs, particularly those having fee arrangements and related party relationships. This guidance is effective for fiscal years, and for interim reporting periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In April 2015, the FASB issued an Accounting Standards Update to simplify the presentation of debt issuance costs. This guidance requires that third-party debt issuance costs be presented in the balance sheet as a direct deduction from the carrying value of the debt. Debt issuance costs related to revolving lines of credit are not within the score of this new guidance. This guidance is effective for fiscal years, and for interim reporting periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

8

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Related Party Transactions
The Company and certain of its affiliates entered into a Master Contribution and Sale Agreement (the “Master Contribution Agreement”) with Bruce C. Ratner (“Mr. Ratner”), Executive Vice President and Director, and certain entities and individuals affiliated with Mr. Ratner (the “BCR Entities”) in August 2006 to purchase their interests in a total of 30 retail, office and residential operating properties and service companies in the Greater New York City metropolitan area. The Company issued Class A Common Units (“Units”) in a jointly-owned, limited liability company in exchange for their interests. 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. Pursuant to the Master Contribution Agreement, certain projects under development would remain owned jointly until each project was completed and achieved “stabilization.” Upon stabilization, each project would be valued and the Company, in its discretion, would choose among various ownership options for the project.
In September 2015, certain BCR Entities exchanged 1,032,402 of the Units. The Company issued 1,032,402 shares of its Class A common stock for the exchanged Units. The Company accounted for the exchange as a purchase of noncontrolling interests, resulting in a reduction of noncontrolling interests of $52,663,000, an increase to Class A common stock of $344,000 and a combined increase to additional paid-in capital of $52,319,000, accounting for the fair value of common stock issued and the difference between the fair value of consideration exchanged and the noncontrolling interest balance. At September 30, 2015 and December 31, 2014, 1,940,788 and 2,973,190 Units, respectively, were outstanding. The carrying value of the Units of $99,000,000 and $151,663,000 is included as noncontrolling interests at September 30, 2015 and December 31, 2014, respectively.
In June 2014, one of the BCR Entities exchanged 673,565 of the Units. The Company issued 673,565 shares of its Class A common stock for the exchanged Units. The Company accounted for the exchange as a purchase of noncontrolling interests, resulting in a reduction of noncontrolling interests of $34,358,000, an increase to Class A common stock of $224,000 and a combined increase to additional paid-in capital of $34,134,000, accounting for the fair value of common stock issued and the difference between the fair value of consideration exchanged and the noncontrolling interest balance. At September 30, 2014 and December 31, 2013, 2,973,190 and 3,646,755 Units, respectively, were outstanding.
Pursuant to the terms of the Master Contribution Agreement, in January 2014, the Company caused certain of its affiliates to acquire the BCR Entities’ interests in 8 Spruce Street, an apartment community in Manhattan, New York, DKLB BKLN, an apartment community in Brooklyn, New York, and East River Plaza, a specialty retail center in Manhattan, New York, for $14,286,000. Prior to the transaction, the Company accounted for the three projects using the equity method of accounting and subsequently accounts for the projects as equity method investments as the partners continue to have joint control.
As a result of the March 2014 disposal of Quartermaster Plaza, a specialty retail center in Philadelphia, Pennsylvania, the Company accrued $1,646,000 during the nine months ended September 30, 2014, related to a tax indemnity payment due to the BCR Entities, all of which was paid as of March 31, 2015.
Accumulated Other Comprehensive Loss
The following table summarizes the components of accumulated other comprehensive income (loss) (“accumulated OCI”):
 
September 30, 2015
December 31, 2014
 
(in thousands)
Unrealized losses on foreign currency translation
$
90

$
137

Unrealized losses on interest rate contracts (1) 
81,602

96,084

 
81,692

96,221

Income tax benefit
(31,651
)
(37,281
)
Noncontrolling interest
(82
)
(94
)
Accumulated Other Comprehensive Loss
$
49,959

$
58,846

(1)
Included in the amounts as of September 30, 2015 and December 31, 2014 are $58,223 and $73,536, respectively, of unrealized loss on an interest rate swap associated with the New York Times office building on its nonrecourse mortgage debt with a notional amount of $640,000. This swap effectively fixes the mortgage at an all-in lender interest rate of 6.40% and expires in September 2017.

9

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following table summarizes the changes, net of tax and noncontrolling interest, of accumulated OCI by component:
 
Foreign Currency Translation
Interest Rate Contracts
Total
 
(in thousands)
Nine Months Ended September 30, 2015
 
 
 
Balance, January 1, 2015
$
(84
)
$
(58,762
)
$
(58,846
)
Gain (loss) recognized in accumulated OCI
29

(9,524
)
(9,495
)
Loss reclassified from accumulated OCI

18,382

18,382

Total other comprehensive income
29

8,858

8,887

Balance, September 30, 2015
$
(55
)
$
(49,904
)
$
(49,959
)
Nine Months Ended September 30, 2014
 
 
 
Balance, January 1, 2014
$
(116
)
$
(76,466
)
$
(76,582
)
Gain (loss) recognized in accumulated OCI
48

(6,235
)
(6,187
)
Loss reclassified from accumulated OCI

21,461

21,461

Total other comprehensive income
48

15,226

15,274

Balance, September 30, 2014
$
(68
)
$
(61,240
)
$
(61,308
)
The following table summarizes losses reclassified from accumulated OCI and their location on the Consolidated Statements of Operations:
Accumulated OCI Components
Loss Reclassified from Accumulated OCI
 
Location on Consolidated Statements of Operations
 
(in thousands)
 
 
Nine Months Ended September 30, 2015
 
 
 
Interest rate contracts
$
28,087

 
Interest expense
Interest rate contracts
(900
)
 
Net gain on change in control of interests
Interest rate contracts
2,852

 
Earnings (loss) from unconsolidated entities, gross of tax
 
30,039

 
Total before income tax and noncontrolling interest
 
(11,645
)
 
Income tax benefit
 
(12
)
 
Noncontrolling interest
 
$
18,382

 
Loss reclassified from accumulated OCI
Nine Months Ended September 30, 2014
 
 
 
Interest rate contracts
$
28,413

 
Interest expense
Interest rate contracts
3,666

 
Discontinued operations
Interest rate contracts
3,005

 
Earnings (loss) from unconsolidated entities, gross of tax
 
35,084

 
Total before income tax and noncontrolling interest
 
(13,597
)
 
Income tax benefit
 
(26
)
 
Noncontrolling interest
 
$
21,461

 
Loss reclassified from accumulated OCI

10

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Supplemental Non-Cash Disclosures
The following table summarizes the impact to the applicable balance sheet line items as a result of various non-cash transactions. Non-cash transactions primarily include dispositions of operating properties whereby the nonrecourse mortgage debt is assumed by the buyer, acquisition of rental properties, exchanges of Units or senior notes for Class A common stock, changes in consolidation methods of fully consolidated properties and equity method investments due to the occurrence of triggering events including, but not limited to, disposition of a partial interest in rental properties or development projects or acquisition of a partner’s interest, change in construction payables and other capital expenditures, change in the fair market value of redeemable noncontrolling interest and capitalization of stock-based compensation granted to employees directly involved with the development and construction of real estate.
 
Nine Months Ended September 30,
 
2015
2014
 
(in thousands)
Non-cash changes to balance sheet - Investing Activities
 
 
Projects under construction and development
$
84,971

$
(351,905
)
Completed rental properties
827,125

(136,008
)
Restricted cash
8,969

20

Notes and accounts receivable

2,728

Investments in and advances to affiliates - due to dispositions or change in control
71,438

97,154

Investments in and advances to affiliates - other activity
20,397

25,509

Total non-cash effect on investing activities
$
1,012,900

$
(362,502
)
Non-cash changes to balance sheet - Financing Activities
 
 
Accounts payable, accrued expenses and other liabilities
$

$
10,683

Nonrecourse mortgage debt and notes payable
448,741

(342,960
)
Convertible senior debt
(424,433
)

Class A common stock
7,000

225

Additional paid-in capital
473,614

34,741

Treasury stock
(6,503
)

Redeemable noncontrolling interest

28,390

Noncontrolling interest
(53,188
)
(73,535
)
Total non-cash effect on financing activities
$
445,231

$
(342,456
)

B. Mortgage Debt and Notes Payable, Nonrecourse
The following table summarizes the mortgage debt and notes payable, nonrecourse maturities as of September 30, 2015:
Years Ending December 31,
 
 
(in thousands)
2015
$
75,578

2016
283,047

2017
1,259,953

2018
360,710

2019
363,087

Thereafter
2,158,794

Total
$
4,501,169



11

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

C. Revolving Credit Facility
The Company’s Fourth Amended and Restated Credit Agreement and Fourth Amended and Restated Guaranty of Payment of Debt, as amended to the date hereof (collectively, the “Credit Facility”), provides total available borrowings of $500,000,000. The Credit Facility matures on February 21, 2016 and provides for one, 12-month extension option, subject to certain conditions. Borrowings bear interest at London Interbank Offered Rate (“LIBOR”) plus 3.50%. Up to $100,000,000 of the available borrowings may be used, in the aggregate, for letters of credit and/or surety bonds. The Credit Facility has restrictive covenants, including a prohibition on certain consolidations and mergers, limitations on the amount of debt, guarantees and property liens and restrictions on the pledging of ownership interests in subsidiaries. The Company may repurchase up to $100,000,000 of Class A common stock and declare or pay dividends in an amount not to exceed $24,000,000 in the aggregate in any four quarter period to Class A or B common shareholders, subject to certain conditions. The Credit Facility contains development limitations and financial covenants, including the maintenance of minimum liquidity, debt yield, debt service and cash flow coverage ratios, and specified levels of shareholders’ equity (all as specified in the Credit Facility). At September 30, 2015, the Company was in compliance with all of these financial covenants.
The following table summarizes available credit on the Credit Facility:
 
September 30, 2015
December 31, 2014
 
(in thousands)
Maximum borrowings
$
500,000

$
500,000

Less outstanding balances:
 
 
Borrowings


Letters of credit
70,276

85,768

Surety bonds


Available credit
$
429,724

$
414,232

In anticipation of the Company’s planned REIT conversion, the Company entered the market to refinance the Credit Facility. To date, discussions have been limited to a select group of banks the Company believes can lead a new facility. Terms are being finalized and loan documents are being drafted with the intent to close on the new facility with a subset of the existing bank group during the three months ended December 31, 2015. The new revolving credit facility, if consummated, is expected to provide at least the same level of borrowings and contain terms including restrictive and/or financial covenants customary for a REIT with a similar credit profile. However, there is no assurance the Company will be able to agree on favorable terms or at all.

D. Convertible Senior Debt
The following table summarizes the Company’s convertible senior debt:
 
September 30, 2015
December 31, 2014
 
(in thousands)
5.000% Notes due 2016
$
1,368

$
50,000

4.250% Notes due 2018
154,526

350,000

3.625% Notes due 2020
116,355

300,000

Total
$
272,249

$
700,000

During the three and nine months ended September 30, 2015, the Company entered into separate, privately negotiated exchange agreements with certain holders of the Company’s convertible senior notes. Under the terms of the agreements, holders agreed to exchange certain notes for shares of Class A common stock and cash payments. The cash payments were primarily for accrued and unpaid interest and in consideration for additional interest payable through maturity. The additional interest payable through maturity was based in part on the daily Volume Weighted Average Price during a 20-trading day measurement period following the agreement date for the 2018 and 2020 Senior Notes exchanges (that occurred in February 2015) and a 5-trading day measurement period commencing July 16, 2015 for the 2018 and 2020 Note exchanges (that occurred in July 2015). Under the accounting guidance for induced conversions of convertible debt, additional amounts paid to induce the holders to exchange the notes were expensed resulting in a non-tax deductible loss on extinguishment of debt. For the three and nine months ended September 30, 2015, the Company recorded $22,653,000 and $57,795,000, respectively, as a loss on extinguishment of debt related to the exchange agreement transactions.

12

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following table summarizes exchange agreement transactions completed during the nine months ended September 30, 2015:
Agreement Date
Issuance
Aggregate Principal
Class A Common Shares Issued
Cash Payments to Noteholders
Loss on Extinguishment
 
 
(in thousands, except share data)
First Quarter-2015
 
 
 
 
 
February 26, 2015
2018 Senior Notes
$
120,087

5,541,115

$
13,641

$
13,372

February 26, 2015
2020 Senior Notes
128,238

5,297,885

19,283

19,038

March 5, 2015
2016 Senior Notes
40,481

2,805,513

6,163

2,732

 
Total
$
288,806

13,644,513

$
39,087

$
35,142

Third Quarter-2015
 
 
 
 
 
July 15, 2015
2016 Senior Notes
$
8,151

555,016

$
1,305

$
489

July 15/16, 2015
2018 Senior Notes
75,387

3,478,511

13,052

11,664

July 15, 2015
2020 Senior Notes
55,407

2,289,013

11,371

10,500

 
Total
$
138,945

6,322,540

$
25,728

$
22,653

Grand Total
$
427,751

19,967,053

$
64,815

$
57,795

Amounts paid to noteholders for consideration of additional interest through maturity are presented as cash used in financing activities in the Consolidated Statement of Cash Flows.
In connection with the 2016 Senior Notes issuance, the Company entered into a convertible note hedge transaction intended to reduce, subject to a limit, the potential dilution with respect to the Company’s Class A common stock upon conversion of the 2016 Senior Notes. On March 3, 2015, the Company terminated and settled the convertible note hedge and received proceeds of $17,818,000 and 258,350 shares of Class A common stock, which the Company initially put into treasury. Under the accounting guidance, the total consideration received was recorded as an increase to additional paid in capital.
All of the senior debt are unsecured senior obligations and rank equally with all existing and future unsecured indebtedness; however, they are effectively subordinated to the Credit Facility and all existing and future secured indebtedness and other liabilities of the Company’s subsidiaries to the extent of the value of the collateral securing that other debt.

E. Derivative Instruments and Hedging Activities
Risk Management Objective of Using Derivatives
The Company maintains an overall interest rate risk management strategy using derivative instruments to minimize significant unplanned impact on earnings and cash flows caused by interest rate volatility. The strategy uses interest rate swaps and option contracts having indices related to the pricing of specific liabilities. The Company enters into interest rate swaps to convert 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. Interest rate swaps are generally for periods of one to ten years. Option products are primarily interest rate caps for periods of one to three years. The use of 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.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. The Company primarily uses interest rate caps and swaps as part of its interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an upfront premium. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

13

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated OCI and is subsequently reclassified into earnings during the period the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value is recognized directly in earnings. Ineffectiveness was insignificant during the three and nine months ended September 30, 2015, and the three months ended September 30, 2014. During the nine months ended September 30, 2014, the Company recorded $3,667,000 as an increase to interest expense primarily related to ineffectiveness from a missed forecasted transaction arising from the early reclassification of accumulated OCI related to debt associated with an entity that was disposed of during the nine months ended September 30, 2014. As of September 30, 2015, the Company expects it will reclassify amounts recorded in accumulated OCI into earnings as an increase in interest expense of approximately $24,512,000, net of tax, within the next twelve months. However, the actual amount reclassified could vary due to future changes in the fair value of these derivatives.
Fair Value Hedges of Interest Rate Risk
The Company enters into total rate of return swaps (“TROR”) on various tax-exempt fixed-rate borrowings. The TROR convert borrowings from a fixed rate to a variable rate. In exchange for a fixed rate, the TROR requires the payment of a variable interest rate, generally equivalent to the Securities Industry and Financial Markets Association (“SIFMA”) rate (0.02% at September 30, 2015) plus a spread. Additionally, the Company has guaranteed the fair value of the underlying borrowings. Fluctuation in the value of the TROR is offset by the fluctuation in the value of the underlying borrowings, resulting in minimal financial impact. At September 30, 2015, the aggregate notional amount of TROR designated as fair value hedging instruments is $471,985,000. The underlying TROR borrowings are subject to a fair value adjustment.
Nondesignated Hedges of Interest Rate Risk
The Company uses derivative contracts to hedge certain interest rate risk, even though the contracts do not qualify for, or the Company has elected not to apply, hedge accounting. In these situations, the derivative is recorded at its fair value with changes reflected in earnings.
In instances where the Company enters into separate derivative instruments effectively hedging the same debt for consecutive annual periods, the duplicate amount of notional is excluded from the following disclosure in an effort to provide information that enables the financial statement user to understand the Company’s volume of derivative activity.

The following table summarizes the fair values and location in the Consolidated Balance Sheets of all derivative instruments:
 
Fair Value of Derivative Instruments
 
September 30, 2015
 
Asset Derivatives
(included in Other Assets)
 
Liability Derivatives
(included in Accounts Payable, Accrued Expenses and Other Liabilities)
 
Current
Notional
Fair Value
 
Current
Notional
Fair Value
 
(in thousands)
Derivatives Designated as Hedging Instruments
 
 
 
 
 
Interest rate caps
$
330,000

$

 
$

$

Interest rate swaps


 
734,497

61,096

TROR
149,200

7,977

 
322,785

10,282

Total
$
479,200

$
7,977

 
$
1,057,282

$
71,378

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
Interest rate caps
$
316,396

$

 
$

$

TROR
101,190

5,435

 
38,356

14,200

Total
$
417,586

$
5,435

 
$
38,356

$
14,200

 
 
 
 
 
 
 
December 31, 2014
Derivatives Designated as Hedging Instruments
 
 
 
 
 
Interest rate caps
$
330,000

$
114

 
$

$

Interest rate swaps


 
869,154

75,281

TROR
149,200

6,379

 
217,785

11,983

Total
$
479,200

$
6,493

 
$
1,086,939

$
87,264

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
Interest rate caps
$
205,522

$
12

 
$

$

TROR
101,410

1,857

 
38,425

15,098

Total
$
306,932

$
1,869

 
$
38,425

$
15,098


14

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following table summarizes 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 earnings (loss) and interest expense in the Consolidated Statements of Operations:
 
 
 
Loss Reclassified from Accumulated OCI
Derivatives Designated as
Cash Flow Hedging Instruments
Gain (Loss) Recognized
in OCI
(Effective Portion)
 
Location on Consolidated Statements
of Operations
Effective
Amount
Ineffective
Amount
 
(in thousands)
Three Months Ended September 30, 2015
 
 
 
 
 
Interest rate caps and interest rate swaps
$
(7,854
)
 
Interest expense
$
(9,759
)
$
(16
)
 
 
 
Net gain on change in control of interests


 
 
 
Earnings (loss) from unconsolidated entities, gross of tax
(885
)

Total
$
(7,854
)
 
 
$
(10,644
)
$
(16
)
Nine Months Ended September 30, 2015
 
 
 
 
 
Interest rate caps and interest rate swaps
$
(15,557
)
 
Interest expense
$
(28,060
)
$
(27
)
 
 
 
Net gain on change in control of interests
900


 
 
 
Earnings (loss) from unconsolidated entities, gross of tax
(2,851
)
(1
)
Total
$
(15,557
)
 
 
$
(30,011
)
$
(28
)
Three Months Ended September 30, 2014
 
 
 
 
 
Interest rate caps and interest rate swaps
$
1,288

 
Interest expense
$
(9,561
)
$
(1
)
 
 
 
Earnings (loss) from unconsolidated entities, gross of tax
(1,002
)

Total
$
1,288

 
 
$
(10,563
)
$
(1
)
Nine Months Ended September 30, 2014
 
 
 
 
 
Interest rate caps and interest rate swaps
$
(10,166
)
 
Interest expense
$
(28,412
)
$
(1
)
 
 
 
Discontinued operations

(3,666
)
 
 
 
Earnings (loss) from unconsolidated entities, gross of tax
(3,005
)

Total
$
(10,166
)
 
 
$
(31,417
)
$
(3,667
)
The following table summarizes the impact of gains and losses related to derivative instruments not designated as cash flow hedges in the Consolidated Statements of Operations:
 
Net Gain (Loss) Recognized
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
2014
 
2015
2014
 
(in thousands)
Derivatives Designated as Fair Value Hedging Instruments
 
 
 
 
 
TROR (1) 
$
848

$
68

 
$
3,299

$
2,279

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
Interest rate caps and interest rate swap
$
(180
)
$
62

 
$
(195
)
$
(41
)
TROR
(1,143
)
(42
)
 
4,476

633

Total
$
(1,323
)
$
20

 
$
4,281

$
592

(1)
The net gain (loss) recognized in interest expense from the change in fair value of the underlying TROR borrowings was $(848) and $(3,299) for the three and nine months ended September 30, 2015, respectively, and $(68) and $(2,279) for the three and nine months ended September 30, 2014, respectively, offsetting the gain (loss) recognized on the TROR.

15

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Credit-risk-related Contingent Features
The principal credit risk of the Company’s interest rate risk management strategy is the potential inability of a counterparty to cover its obligations. If a counterparty fails to fulfill its obligation, the risk of loss approximates the fair value of the derivative. To mitigate this exposure, the Company generally purchases derivative financial instruments from the financial institution that issues the related debt, from financial institutions with which the Company has other lending relationships, or from financial institutions with a minimum credit rating of AA at the time of the transaction.
Agreements with derivative counterparties contain provisions under which the counterparty could terminate the derivative obligations if the Company defaults on its obligations under the Credit Facility and designated conditions are fulfilled. In instances where the Company’s subsidiaries have derivative obligations 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, certain subsidiaries have agreements containing provisions whereby the subsidiaries must maintain certain minimum financial ratios. As of September 30, 2015, the Company does not have any derivative contracts containing credit-risk related contingent features, such as a credit rating downgrade, that may trigger collateral to be posted with a counterparty.
The following table summarizes information about collateral posted for derivatives in liability positions as of September 30, 2015:
 
Collateral Information
 
Notional Amount
Fair Value Prior to Nonperformance Risk
Nonperformance Risk
Collateral Posted
Nature of Collateral
Credit Risk Contingent Feature
 
(in thousands)
 
 
Property Specific Swaps
$
734,497

$
63,553

$
(2,457
)
$

Mortgage liens
None
TROR
361,141

24,426

56

50,569

Restricted cash, notes receivable, letters of credit
None
Total
$
1,095,638

$
87,979

$
(2,401
)
$
50,569

 
 

F. Fair Value Measurements
Fair Value Measurements on a Recurring Basis
The Company’s financial assets consist of interest rate caps, interest rate swaps and TROR with positive fair values included in other assets. The Company’s financial liabilities consist of interest rate swaps and TROR with negative fair values included in accounts payable, accrued expenses and other liabilities and borrowings subject to TROR included in mortgage debt and notes payable, nonrecourse.
For all periods presented, the Company recorded the redeemable noncontrolling interest related to Brooklyn Arena, LLC at historical cost since its initial cost adjusted for contributions, distributions and the allocation of profits or losses, is greater than the estimated redemption value, which approximates fair value. In the event the redemption value of the redeemable noncontrolling interest exceeds historical cost, the Company would be required to record the redeemable noncontrolling interest at redemption value, with a corresponding adjustment to additional paid-in capital.

16

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following table summarizes information about financial assets and liabilities and redeemable noncontrolling interest measured at fair value on a recurring basis (if applicable), and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:
 
September 30, 2015
 
Level 1
Level 2
Level 3
Total
 
(in thousands)
Interest rate swaps (liabilities)
$

$
(2,873
)
$
(58,223
)
$
(61,096
)
TROR (assets)


13,412

13,412

TROR (liabilities)


(24,482
)
(24,482
)
Fair value adjustment to the borrowings subject to TROR


2,305

2,305

Redeemable noncontrolling interest (1)


(168,226
)
(168,226
)
Total
$

$
(2,873
)
$
(235,214
)
$
(238,087
)
 
 
 
 
 
 
December 31, 2014
 
(in thousands)
Interest rate caps (assets)
$

$
126

$

$
126

Interest rate swaps (liabilities)

(1,745
)
(73,536
)
(75,281
)
TROR (assets)


8,236

8,236

TROR (liabilities)


(27,081
)
(27,081
)
Fair value adjustment to the borrowings subject to TROR


5,604

5,604

Redeemable noncontrolling interest (1)


(183,038
)
(183,038
)
Total
$

$
(1,619
)
$
(269,815
)
$
(271,434
)
(1)
Redeemable noncontrolling interest is recorded at historical cost as of the period presented.
The following table presents a reconciliation of financial assets and liabilities and redeemable noncontrolling interest measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
 
Redeemable
Noncontrolling
Interest
 
Interest Rate
Swaps
 
Net
TROR
Fair value
adjustment
to the borrowings
subject to TROR
Total TROR
Related
 
Total
 
(in thousands)
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
Balance, January 1, 2015 (1)
$
(183,038
)
 
$
(73,536
)
 
$
(18,845
)
$
5,604

$
(13,241
)
 
$
(269,815
)
Loss attributable to redeemable noncontrolling interest
14,812

 

 



 
14,812

Total realized and unrealized gains (losses):
 
 
 
 
 
 
 
 
 
Included in earnings

 

 
7,775

(3,299
)
4,476

 
4,476

Included in other comprehensive income

 
15,313

 



 
15,313

Balance, September 30, 2015 (1)
$
(168,226
)
 
$
(58,223
)
 
$
(11,070
)
$
2,305

$
(8,765
)
 
$
(235,214
)
Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
Balance, January 1, 2014
$
(171,743
)
 
$
(97,360
)
 
$
(24,346
)
$
8,869

$
(15,477
)
 
$
(284,580
)
Loss attributable to redeemable noncontrolling interest
13,299

 

 



 
13,299

Total realized and unrealized gains (losses):
 
 
 
 
 
 
 
 
 
Included in earnings

 

 
2,912

(2,279
)
633

 
633

Included in other comprehensive income

 
19,067

 



 
19,067

Included in additional paid-in capital
(28,390
)
 

 



 
(28,390
)
Balance, September 30, 2014 (1)
$
(186,834
)
 
$
(78,293
)
 
$
(21,434
)
$
6,590

$
(14,844
)
 
$
(279,971
)
(1)
Redeemable noncontrolling interest is recorded at historical cost as of the period presented.



17

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following table presents quantitative information about the significant unobservable inputs used to estimate the fair value of financial instruments measured on a recurring basis as of September 30, 2015:
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value September 30, 2015
Valuation
Technique
Unobservable
Input
Input Values
 
(in thousands)
 
 
 
Credit valuation adjustment of interest rate swap
$
2,276

Potential future exposure
Credit spread
4.00%
TROR
$
(11,070
)
Third party bond pricing
Bond valuation
79.59 - 115.87
Fair value adjustment to the borrowings subject to TROR
$
2,305

Third party bond pricing
Bond valuation
79.59 - 115.87
Third party service providers involved in fair value measurements are evaluated for competency and qualifications. Fair value measurements, including unobservable inputs, are evaluated based on current transactions and experience in the real estate and capital markets.
The impact of changes in unobservable inputs used to determine the fair market value of the credit valuation adjustment, TROR and fair value adjustment to the borrowings subject to TROR are not deemed to be significant.
Fair Value of Other Financial Instruments
The carrying amount of notes and accounts receivable, excluding the Stapleton advances, and accounts payable, accrued expenses and other liabilities approximates fair value based upon the short-term nature of the instruments or the prevailing interest rate if long-term. The carrying amount of the Stapleton advances approximates fair value since the interest rates on these advances approximates current market rates. The Company estimates the fair value of its debt instruments by discounting future cash payments at interest rates the Company believes approximate the current market. Estimated fair value is based upon market prices of public debt, available industry financing data, current treasury rates, recent financing transactions, conversion features on convertible senior debt and loan to value ratios. The fair value of the Company’s debt instruments is classified as Level 3 in the fair value hierarchy.
The following table summarizes the fair value of nonrecourse mortgage debt and notes payable (exclusive of the fair value of derivatives), revolving credit facility and convertible senior debt:
 
September 30, 2015
 
December 31, 2014
 
Carrying Value
Fair Value
 
Carrying Value
Fair Value
 
(in thousands)
Fixed Rate Debt
$
2,747,031

$
3,062,517

 
$
2,993,591

$
3,421,373

Variable Rate Debt
2,026,387

2,015,261

 
1,944,610

1,924,823

Total
$
4,773,418

$
5,077,778

 
$
4,938,201

$
5,346,196


G. Capital Stock
In May 2015, the Company issued 37,375,000 shares of its Class A common stock in an underwritten public offering at a price of $22.50 per share, which included the underwriters’ exercise of their over-allotment option in full. The offering generated net proceeds of $806,500,000 after deducting underwriting discounts, commissions and other offering expenses. The Company used $386,156,000 of the net proceeds to finance the June 2015 acquisition of the Company’s partner’s 49% equity interest in seven life science office properties and two parking facilities at University Park at MIT, a mixed-use life science office campus in Cambridge, Massachusetts. Subsequent to the acquisition, the Company owns 100% of these assets. The Company used substantially all of the remaining net proceeds to retire a combination of nonrecourse mortgage debt and revolving credit facility borrowings.
During the three and nine months ended September 30, 2015, the Company issued shares of Class A common stock in connection with the separate, privately negotiated exchange transactions involving a portion of the Company’s 2016, 2018 and 2020 Senior Notes. See Note DConvertible Senior Debt for detailed information on these Class A common stock issuances, as well as the receipt of shares of Class A common stock in connection with the termination of a convertible note hedge related to the 2016 Senior Notes.
In addition, during the three months ended September 30, 2015, the Company issued shares of Class A common stock to certain BCR entities in exchange of Class A Common Units pursuant to the Master Contribution Agreement. See the “Related Party Transactions” section of Note A – Accounting Policies for detailed information on this transaction.


18

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

H. Stock-Based Compensation
During the nine months ended September 30, 2015, the Company granted 28,240 stock options, 826,718 shares of restricted stock and 627,385 performance shares under the Company’s 1994 Stock Plan. The stock options had a grant-date fair value of $7.79, which was computed using the Black-Scholes option-pricing model using the following assumptions: expected term of 5.5 years, expected volatility of 30.8%, risk-free interest rate of 1.71%, and expected dividend yield of 0%. The exercise price of the options is $24.62, the closing price of the underlying Class A common stock on the date of grant. The restricted stock had a grant-date fair value of $24.62 per share, the closing price of the Class A common stock on the date of grant. The performance shares had a weighted-average grant-date fair value of $32.14 per share, which was computed using Monte Carlo simulations.
At September 30, 2015, $1,734,000 of unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 23 months, $23,600,000 of unrecognized compensation cost related to restricted stock is expected to be recognized over a weighted-average period of 27 months, and $18,573,000 of unrecognized compensation cost related to performance shares is expected to be recognized over a weighted-average period of 26 months.
The following table summarizes stock-based compensation costs and related deferred income tax benefit recognized in the financial statements:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
2014
 
2015
2014
 
(in thousands)
Stock option costs
$
320

$
698

 
$
985

$
2,677

Restricted stock costs
3,349

2,833

 
11,950

9,136

Performance share costs
3,541

1,087

 
8,601

3,027

Total stock-based compensation costs
7,210

4,618

 
21,536

14,840

Less amount capitalized into qualifying real estate projects
(1,883
)
(1,490
)
 
(4,967
)
(4,110
)
Amount charged to operating expenses
5,327

3,128

 
16,569

10,730

Depreciation expense on capitalized stock-based compensation
227

139

 
679

586

Total stock-based compensation expense
$
5,554

$
3,267

 
$
17,248

$
11,316

Deferred income tax benefit
$
2,131

$
1,214

 
$
6,642

$
4,235

The amount of grant-date fair value expensed immediately for awards granted to retirement-eligible grantees during the nine months ended September 30, 2015 and 2014 was $1,926,000 and $1,358,000, respectively.
In connection with the vesting of restricted stock during the nine months ended September 30, 2015 and 2014, the Company repurchased 216,700 shares and 205,568 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 $5,412,000 and $3,800,000, respectively.

I. Write-Offs of Abandoned Development Projects and Demolition Costs
On a quarterly basis, the Company reviews each project under development to determine whether it is probable the project will be developed. If management determines the project will not be developed, its project costs and other related expenses are written off as an abandoned development project cost. The Company abandons 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 third party challenges related to entitlements or public financing. In addition, costs expensed to demolish existing structures, if any, are included in these amounts. The Company recorded write-offs of abandoned development projects and demolition costs of $0 and $5,778,000 during the three and nine months ended September 30, 2015 and $456,000 and $1,389,000 during the three and nine months ended September 30, 2014, respectively. The Company recorded write-offs of abandoned development projects of unconsolidated entities of $0 and $10,191,000 during the three and nine months ended September 30, 2015, which is included in equity in earnings (loss). There were no write-offs of abandoned development projects of unconsolidated entities during the three and nine months ended September 30, 2014.


19

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

J. Impairment of Real Estate and Impairment of Unconsolidated Entities
Impairment of Real Estate
The Company reviews its real estate for impairment whenever events or changes indicate its carrying value may not be recoverable. In order to determine whether the carrying costs are recoverable from estimated future undiscounted cash flows, the Company uses various assumptions including future estimated net operating income, estimated holding periods, risk of foreclosure and estimated cash proceeds upon the disposition of the asset. If the carrying costs are not recoverable, the Company records an impairment charge to reduce the carrying value to estimated fair value. The assumptions used to estimate fair value are Level 2 or 3 inputs. The Company’s assumptions are based on current information. If the conditions deteriorate or if the Company’s plans regarding its assets change, additional impairment charges may occur in future periods.
The impairments recorded during the periods presented represent write-downs to estimated fair value due to a change in events, such as a change in strategy for certain assets, bona fide third-party purchase offers or changes in certain assumptions, including estimated holding periods and current market conditions and the impact of these assumptions to the properties’ estimated future cash flows.
The following table summarizes the Company’s impairment of real estate included in continuing operations:
 
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
 
2015
2014
2015
2014
 
 
(in thousands)
Westchester's Ridge Hill (Regional Mall)
Yonkers, New York
$
372,587

$

$
372,587

$

Avenue at Tower City Center (Specialty Retail Center)
Cleveland, Ohio



72,473

Office Buildings:
 
 
 
 
 
Illinois Science and Technology Park
Skokie, Illinois
26,246


26,246


Terminal Tower
Cleveland, Ohio



42,208

Post Office Plaza
Cleveland, Ohio



14,378

Land inventory
Las Vegas, Nevada
16,307


16,307


Other
10,323

966

10,323

1,736

Total
$
425,463

$
966

$
425,463

$
130,795

During the three months ended September 30, 2015, the Company decided to pursue the partial sale, through a joint venture, of three of its consolidated regional malls, including Westchester's Ridge Hill. At September 30, 2015, discussions with a potential joint venture partner are ongoing and remain subject to further negotiation and applicable due diligence periods. The advanced status of the discussions triggered management to update its undiscounted cash flow analysis including its probability weighted estimated holding period of each asset. In each case the Company increased the likelihood of a near-term partial sale to a 70% probability at an estimated selling price equal to that indicated by the potential joint venture partner. The Company assigned a 30% probability that each of these assets would be held long-term. As a result, the updated estimated probability weighted undiscounted cash flows exceeded the carrying value of two of the malls but no longer exceeded the carrying value of Westchester’s Ridge Hill, requiring the Company to adjust the carrying value to its estimated fair value. The Company had been considering strategies to recapitalize Westchester’s Ridge Hill in the past but had not formally marketed or entered into advanced discussions until the three months ended September 30, 2015. The previous undiscounted cash flow analysis assigned a 10% probability of near-term sale. In order to adjust the carrying value of Westchester’s Ridge Hill to its estimated fair value, the Company recorded an impairment charge of $372,587,000 during the three months ended September 30, 2015.
The Company continues to execute its strategy of focusing on core products located in core markets. In executing this strategy, the Company had been marketing for sale all operating assets at Illinois Science & Technology Park in Skokie, Illinois. During 2015, the Company had several interested parties in the assets at pricing that approximated the carrying value of the assets. During the three months ended September 30, 2015, the high bidder withdrew their offer and certain market conditions, including the loss of possible redevelopment incentives, negatively impacted the pricing from other interested parties. At September 30, 2015, discussions with a potential purchaser are ongoing and remain subject to further negotiation. Based on these factors, the Company increased the likelihood of a near-term sale and reduced the pricing in such scenario in its estimated probability weighted undiscounted cash flows. As a result, these estimated undiscounted cash flows no longer exceeds the carrying value of the assets, requiring the Company to adjust the carrying value to its estimated fair value. As such, the Company recorded an impairment charge of $26,246,000 during the three months ended September 30, 2015.

20

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The Company currently owns 13.5 acres of land located in Las Vegas, Nevada, which is included in land inventory on its consolidated balance sheet. The Company has been marketing the land for sale for over twelve months without closing a sale of any of the parcels. During the three months ended September 30, 2015, it became evident the expected sale price was less than originally estimated and lower than carrying value. The Company has a letter of intent for a portion of the land and continues to market the remaining parcels. Using the letter of intent pricing, in addition to other information gathered from other market participants, including verbal bids, the Company adjusted its estimated selling price, less cost to sell, of this land, which was less than its carrying value. As such, the Company recorded an impairment charge of $16,307,000 during the three months ended September 30, 2015.
The Company began negotiations for the sale of several operating assets in Cleveland, Ohio during the three months ended June 30, 2014. At June 30, 2014, discussions with a potential purchaser were at various stages for each of the assets and remained subject to further negotiation and applicable due diligence periods. Based on the advanced status of the discussions, the Company reviewed and adjusted the estimated holding periods of each applicable asset and in each case increased the likelihood of a near term sale. As a result, the estimated probability weighted undiscounted cash flows no longer exceed the carrying value of certain assets, requiring the Company to adjust the carrying value of those assets as described in the above table, to their estimated fair value. During the three months ended September 30, 2014, the negotiations with the potential buyer ceased, as mutually agreeable terms could not be reached.
Impairment of Real Estate - Fair Value Information
The following table presents quantitative information about the significant unobservable inputs used to determine the fair value of the impairment of real estate for the nine months ended September 30, 2015 and 2014:
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value
Valuation Technique
Unobservable Input
Range of Input Values
 
(in thousands)
 
 
 
September 30, 2015
 
 
 
 
Impairment of real estate
$
630,797

Indicative bids
Indicative bids
N/A (1)
Impairment of real estate
$
5,128

Comparable property market analysis
Price per square foot
$18 per square foot
September 30, 2014
 
 
 
 
Impairment of real estate
$
44,200

Discounted cash flows
Market capitalization rate
8.0% - 10.0%
 
 
 
Discount rate
10.5% - 12.0%
Impairment of real estate
$
38,750

Indicative bids
Indicative bids
N/A (1)
(1)
These fair value measurements were derived from bona fide purchase offers from third party prospective buyers, subject to the Company’s corroboration for reasonableness.
Impairment of Unconsolidated Entities
The Company reviews its portfolio of unconsolidated entities for other-than-temporary impairments whenever events or changes indicate its carrying value in the investments may be in excess of fair value. An equity method investment’s value is impaired if management’s estimate of its fair value is less than the carrying value and the difference is deemed to be other-than-temporary. In estimating fair value, assumptions that may be used include comparable sale prices, market discount rates, market capitalization rates and estimated future discounted cash flows specific to the geographic region and property type, all of which are considered Level 3 inputs. For recently opened properties, assumptions also include the timing of initial property lease up. In the event initial property lease up assumptions differ from actual results, estimated future discounted cash flows may vary, resulting in impairment charges in future periods. The Company recorded $1,384,000 of impairments of unconsolidated entities during the three and nine months ended September 30, 2015. There were no impairments of unconsolidated entities recorded during the three and nine months ended September 30, 2014.

K. Net Loss on Disposition of Partial Interest in Development Project
On June 30, 2014, the Company entered into a joint venture with Greenland Atlantic Yards, LLC, a subsidiary of Shanghai-based Greenland Holding Group Company Limited (“Greenland”) to develop Pacific Park Brooklyn, a 22 acre mixed-use project in Brooklyn, New York. Greenland acquired 70% of the joint venture and will share in the total project costs in proportion to their ownership interests. The joint venture intends to co-develop the entire project including the infrastructure and vertical construction of the residential units, excluding Barclays Center arena and the under-construction B2 BKLYN apartment community. For its 70% equity interest, Greenland invested cash and assumed 70% of the nonrecourse mortgage debt on the project. The transaction resulted in net cash proceeds of $208,275,000, net of transaction costs, during the year ended December 31, 2014 and a net loss on disposition of partial interest in development project of $19,590,000 ($16,211,000, net of noncontrolling interests) during the nine months ended September 30, 2014. Upon closing, the Company determined it was not the primary beneficiary of the joint venture. As a result, the Company deconsolidated the Pacific Park Brooklyn development project and accounts for the joint venture on the equity method of accounting.


21

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

L. Net Gain (Loss) on Disposition of Full or Partial Interest in Rental Properties
The following table summarizes the net gain (loss) on disposition of full or partial interest in rental properties:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
2014
 
2015
2014
 
 
(in thousands)
Office Buildings:
 
 
 
 
 
 
Skylight Office Tower
Cleveland, Ohio
$
1,746

$

 
$
1,746

$

Stapleton - 3055 Roslyn
Denver, Colorado

(146
)
 

(146
)
Other
 


 

(467
)
 
 
$
1,746

$
(146
)
 
$
1,746

$
(613
)
Effective April 1, 2014, the Company adopted the new accounting guidance for reporting discontinued operations. As a result, the dispositions summarized above did not qualify for discontinued operations. The gain (loss) on the dispositions is included in net gain (loss) on disposition of full or partial interest in rental properties.

M. Net Gain on Change in Control of Interests
The following table summarizes the net gain on change in control of interests:
 
 
Three Months Ended September 30,