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10-Q
FOREST CITY REALTY TRUST, INC. filed this Form 10-Q on 10/30/2018
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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, 2018
¨
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 1-37671 
_____________________________________________________________
FOREST CITY REALTY TRUST, INC.
(Exact name of registrant as specified in its charter) 
_____________________________________________________________
Maryland
(State or other jurisdiction of
incorporation or organization)
 
 
 
47-4113168
(I.R.S. Employer
Identification No.)
 
 
 
 
 
Key Tower
Suite 3100
 
127 Public Square
Cleveland, Ohio
 
44114
(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 every Interactive Data File required to be submitted 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 such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨ 
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark 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 the issuer’s class of common stock, as of the latest practicable date.
Class
Outstanding at October 25, 2018
Class A Common Stock, $.01 par value
271,162,772 shares



Forest City Realty Trust, Inc. and Subsidiaries
Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Forest City Realty Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
 
September 30, 2018
 
 
(Unaudited)
December 31, 2017
 
(in thousands)
Assets
 
 
Real Estate
 
 
Completed rental properties
$
7,413,450

$
7,154,607

Projects under construction and development
435,892

568,552

Land inventory
72,885

57,296

Total Real Estate
7,922,227

7,780,455

Less accumulated depreciation
(1,554,126
)
(1,484,163
)
Real Estate, net – (variable interest entities $1,883.6 million and $2,383.2 million, respectively)
6,368,101

6,296,292

Cash and cash equivalents – (variable interest entities $58.3 million and $55.3 million, respectively)
485,941

204,260

Restricted cash – (variable interest entities $121.6 million and $65.5 million, respectively)
211,572

146,131

Accounts receivable, net – (variable interest entities $57.4 million and $52.6 million, respectively)
224,788

225,022

Notes receivable – (variable interest entities $168.4 million and $132.8 million, respectively)
423,737

398,785

Investments in and advances to unconsolidated entities
533,482

550,362

Other assets – (variable interest entities $60.3 million and $66.6 million, respectively)
299,711

242,435

Assets held for sale
29,014


Total Assets
$
8,576,346

$
8,063,287

Liabilities and Equity
 
 
Liabilities
 
 
Nonrecourse mortgage debt and notes payable, net – (variable interest entities $1,376.0 million and $1,448.2 million, respectively)
$
3,163,987

$
2,998,361

Revolving credit facility


Term loan, net
333,967

333,668

Convertible senior debt, net
31,802

112,637

Accounts payable, accrued expenses and other liabilities – (variable interest entities $225.0 million and $259.9 million, respectively)
578,036

650,022

Cash distributions and losses in excess of investments in unconsolidated entities
84,810

123,882

Liabilities on assets held for sale
10,022


Total Liabilities
4,202,624

4,218,570

Commitments and Contingencies


Equity
 
 
Stockholders’ Equity
 
 
Preferred stock – $.01 par value, respectively; 20,000,000 shares authorized, no shares issued


Class A Common Stock - $.01 par value, 371,000,000 shares authorized, 269,971,834 and 265,343,283 shares issued and outstanding, respectively
2,700

2,653

Additional paid-in capital
2,626,442

2,537,538

Retained earnings
1,516,012

896,806

Accumulated other comprehensive loss
(3,750
)
(8,563
)
Total Stockholders’ Equity
4,141,404

3,428,434

Noncontrolling interest
232,318

416,283

Total Equity
4,373,722

3,844,717

Total Liabilities and Equity
$
8,576,346

$
8,063,287


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

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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
2017
 
2018
2017
 
(in thousands, except per share data)
Revenues
 
 
 
 
 
Rental
167,551

$
167,682

 
$
490,462

$
496,095

Tenant recoveries
30,026

26,671

 
85,245

80,735

Service and management fees
1,911

8,152

 
9,765

29,642

Parking and other
10,822

9,253

 
26,657

34,212

Land sales
7,920

21,786

 
23,359

45,308

Total revenues
218,230

233,544

 
635,488

685,992

Expenses
 
 
 
 
 
Property operating and management
66,337

71,961

 
200,112

228,912

Real estate taxes
25,105

21,748

 
66,147

64,305

Ground rent
4,235

3,837

 
12,013

11,491

Cost of land sales
2,723

13,301

 
7,943

22,996

Corporate general and administrative
9,736

16,480

 
35,331

46,081

Organizational transformation and termination benefits
8,289

2,633

 
29,188

14,021

 
116,425

129,960

 
350,734

387,806

Depreciation and amortization
60,925

60,194

 
170,652

189,496

Write-offs of abandoned development projects and demolition costs


 

1,596

Impairment of real estate

44,288

 

44,288

Total expenses
177,350

234,442

 
521,386

623,186

Operating income (loss)
40,880

(898
)
 
114,102

62,806

 
 
 
 
 
 
Interest and other income
13,296

20,361

 
34,773

40,529

Gain on change in control of interests
219,666


 
337,377


Interest expense
(30,882
)
(31,597
)
 
(86,849
)
(88,473
)
Amortization of mortgage procurement costs
(1,366
)
(1,338
)
 
(3,966
)
(4,067
)
Loss on extinguishment of debt
(19
)

 
(3,995
)
(2,843
)
Earnings (loss) before income taxes and earnings from unconsolidated entities
241,575

(13,472
)
 
391,442

7,952

Earnings from unconsolidated entities
 
 
 
 
 
Equity in earnings
7,369

8,295

 
12,038

23,834

Net gain on disposition of interest in unconsolidated entities
181,504

28,828

 
265,510

81,782

Impairment

(10,600
)
 

(10,600
)
 
188,873

26,523

 
277,548

95,016

Earnings before income taxes
430,448

13,051

 
668,990

102,968

 
 
 
 
 
 
Current income tax expense
2,981

304

 
3,940

4,817

Earnings before gains on disposal of real estate, net of tax
427,467

12,747

 
665,050

98,151

Net gain (loss) on disposition of interest in development project


 
6,227

(113
)
Net gain (loss) on disposition of rental properties
60,931

(256
)
 
84,038

13,573

Net earnings
488,398

12,491

 
755,315

111,611

Noncontrolling interests, gross of tax
 

 
 
 
Earnings from continuing operations attributable to noncontrolling interests
(41,225
)
(7,037
)
 
(39,883
)
(8,487
)
Net earnings attributable to Forest City Realty Trust, Inc.
$
447,173

$
5,454

 
$
715,432

$
103,124

 
 
 
 
 
 
Earnings per common share
 
 
 
 
 
Net earnings attributable to common stockholders - Basic
$
1.65

$
0.02

 
$
2.66

$
0.39

Net earnings attributable to common stockholders - Diluted
$
1.63

$
0.02

 
$
2.62

$
0.39


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

Forest City Realty Trust, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)

 
Three Months Ended September 30,
 
2018
2017
 
(in thousands)
Net earnings
488,398

12,491

Other comprehensive income:
 
 
Unrealized net gains on interest rate derivative contracts
1,046

1,240

Comprehensive income
489,444

13,731

Comprehensive income attributable to noncontrolling interest
(41,229
)
(7,041
)
Total comprehensive income attributable to Forest City Realty Trust, Inc.
$
448,215

$
6,690

 
 
 
 
Nine Months Ended September 30,
 
2018
2017
 
(in thousands)
Net earnings
$
755,315

$
111,611

Other comprehensive income:
 
 
Unrealized net gains on interest rate derivative contracts
4,704

3,790

Comprehensive income
760,019

115,401

Comprehensive income attributable to noncontrolling interest
(39,894
)
(8,498
)
Total comprehensive income attributable to Forest City Realty Trust, Inc.
$
720,125

$
106,903


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


Forest City Realty Trust, Inc. and Subsidiaries
Consolidated Statements of Equity
(Unaudited)

 
 
 
 
 
 
 
Accumulated
 
 
 
Common Stock
Additional
 
Other
 
 
 
Class A
Class B
Paid-In
Retained
Comprehensive
Noncontrolling
 
 
Shares
Amount
Shares
Amount
Capital
Earnings
(Loss) Income
Interest
Total
 
(in thousands)

Balances at December 31, 2016
239,938

$
2,399

18,788

$
188

$
2,483,275

$
812,386

$
(14,410
)
$
501,161

$
3,784,999

Net earnings
 
 
 
 
 
206,030

 
9,006

215,036

Other comprehensive income
 
 
 
 
 
 
5,847

14

5,861

Common stock dividends
 
 
 
 
 
(121,610
)
 
 
(121,610
)
Conversion of Class B common stock to Class A common stock
24,612

246

(18,788
)
(188
)
(58
)
 
 
 

Cost incurred conversion of Class B common stock to Class A common stock
 
 
 
 
(9,305
)
 
 
 
(9,305
)
Restricted stock vested
818

8

 
 
(8
)
 
 
 

Repurchase of Class A common stock
(272
)
(2
)
 
 
(6,080
)
 
 
 
(6,082
)
Exercise of stock options
91

1

 
 
1,497

 
 
 
1,498

Issuance of Class A common stock under the deferred compensation plan for non-employee director
13


 
 
309

 
 
 
309

Stock-based compensation
 
 
 
 
26,884

 
 
 
26,884

Exchange of 2006 Class A Common Units for Class A common stock
143

1

 
 
7,287

 
 
(7,288
)

Exchange of 2006 Class A Common Units for rental property
 
 
 
 
22,805

 
 
(35,037
)
(12,232
)
Issuance of Class A common stock in exchange for 2018 Senior Note


 
 
1

 
 
 
1

Acquisition of partners’ noncontrolling interest in consolidated subsidiaries
 
 
 
 
10,931

 
 
(10,931
)

Contributions from noncontrolling interests
 
 
 
 
 
 
 
23,168

23,168

Distributions to noncontrolling interests
 
 
 
 
 
 
 
(63,810
)
(63,810
)
Balances at December 31, 2017
265,343

$
2,653


$

$
2,537,538

$
896,806

$
(8,563
)
$
416,283

$
3,844,717

Cumulative effect of adoption of accounting guidance on derivatives and hedging activities
 
 
 
 
 
(120
)
120

 

Net earnings
 
 
 
 
 
715,432

 
39,883

755,315

Other comprehensive income
 
 
 
 
 
 
4,693

11

4,704

Common stock dividends
 
 
 
 
 
(96,106
)
 
 
(96,106
)
Restricted and performance shares vested
951

10

 
 
(10
)
 
 
 

Repurchase of Class A common stock
(324
)
(3
)
 
 
(6,842
)
 
 
 
(6,845
)
Stock-based compensation
 
 
 
 
13,256

 
 
 
13,256

Issuance of Class A common stock in exchange for 2018 & 2020 Senior Notes
3,909

39

 
 
81,076

 
 
 
81,115

Exercise of stock options
87

1

 
 
1,307

 
 
 
1,308

Issuance of Class A common stock under the deferred compensation plan for non-employee director
6


 
 
117

 
 
 
117

Deconsolidation of joint venture upon change in control
 
 
 
 
 
 
 
(133,090
)
(133,090
)
Contributions from noncontrolling interests
 
 
 
 
 
 
 
11,159

11,159

Distributions to noncontrolling interests
 
 
 
 
 
 
 
(101,928
)
(101,928
)
Balances at September 30, 2018 (Unaudited)
269,972

$
2,700


$

$
2,626,442

$
1,516,012

$
(3,750
)
$
232,318

$
4,373,722



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

Forest City Realty Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

 
Nine Months Ended September 30,
 
2018
2017
 
(in thousands)
Net earnings
$
755,315

$
111,611

Depreciation and amortization
170,652

189,496

Amortization of mortgage procurement costs
3,966

4,067

Impairment of real estate

44,288

Impairment of unconsolidated entities

10,600

Write-offs of abandoned development projects and demolition costs

1,596

Loss on extinguishment of debt
3,995

2,843

Net (gain) loss on disposition of interest in development projects, net of tax
(6,227
)
113

Net gain on disposition of rental properties, net of tax
(84,038
)
(13,573
)
Gain on change in control of interests
(337,377
)

Equity in earnings
(12,038
)
(23,834
)
Net gain on disposition of interest in unconsolidated entities
(265,510
)
(81,782
)
Stock-based compensation expense
10,200

14,893

Amortization and mark-to-market adjustments of derivative instruments
(1,191
)
773

Operating distributions from unconsolidated entities
42,805

53,388

(Increase) decrease in land inventory
(17,336
)
12,462

Decrease (increase) in accounts receivable
4,210

(15,671
)
Decrease in other assets
15,439

4,487

Decrease in accounts payable, accrued expenses and other liabilities
(66,812
)
(3,472
)
Net cash provided by operating activities
216,053

312,285

Cash flows from investing activities
 
 
Capital expenditures
(241,866
)
(306,937
)
Payment of lease procurement costs
(9,509
)
(9,297
)
Increase in notes receivable
(39,140
)
(31,047
)
Payment on note receivable
125,100


Proceeds from deconsolidation of a rental property
24,000


Cash and restricted cash acquired in a property exchange transaction
19,024


Proceeds from disposition of rental properties or development project
216,953

32,672

Contributions to unconsolidated entities
(147,794
)
(56,590
)
Distributions from unconsolidated entities
259,898

76,942

Net cash provided by (used in) investing activities
206,666

(294,257
)
Cash flows from financing activities
 
 
Proceeds from nonrecourse mortgage debt and notes payable
289,225

163,074

Principal payments on nonrecourse mortgage debt and notes payable
(235,685
)
(57,309
)
Redemption of Senior Notes due 2018
(20
)

Payment of costs incurred for conversion of Class B to Class A common stock

(11,266
)
Payment of deferred financing costs
(3,668
)
(2,264
)
Repurchase of Class A common shares
(6,845
)
(5,598
)
Exercise of stock options
1,308

1,498

Dividends paid to stockholders
(96,106
)
(84,266
)
Contributions from noncontrolling interests
4,485

18,499

Distributions to noncontrolling interests
(28,291
)
(29,619
)
Net cash used in financing activities
(75,597
)
(7,251
)
Net increase in cash, cash equivalents and restricted cash
347,122

10,777

Cash, cash equivalents and restricted cash at beginning of period
350,391

323,919

Cash, cash equivalents and restricted cash at end of period
$
697,513

$
334,696

Beginning of Period
 
 
Cash and cash equivalents
204,260

174,619

Restricted cash
146,131

149,300

Cash, cash equivalents and restricted cash at beginning of period
$
350,391

$
323,919

 
End of Period
 
 
Cash and cash equivalents
485,941

193,675

Restricted cash
211,572

141,021

Cash, cash equivalents and restricted cash at end of period
$
697,513

$
334,696


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

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


A. Accounting Policies
General
Forest City Realty Trust, Inc., a Maryland corporation (with its subsidiaries, the “Company”) principally engages in the operation, development, management and acquisition of office, apartment and retail real estate and land throughout the United States. The Company had approximately $8.6 billion of consolidated assets in 16 states and the District of Columbia at September 30, 2018. The Company’s core markets include Boston, Chicago, Dallas, Denver, Los Angeles, Philadelphia, and the greater metropolitan areas of New York City, San Francisco and Washington, D.C. The Company has regional offices in Boston, Dallas, Denver, Los Angeles, New York City, San Francisco, Washington, D.C., and the Company’s corporate headquarters in Cleveland, Ohio.
On July 30, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Antlia Holdings LLC (“Parent”), and Antlia Merger Sub Inc., a wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which, upon the terms and subject to the conditions set forth therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub were formed by a Brookfield Asset Management Inc. (“Brookfield”) real estate investment fund.
Pursuant to the Merger Agreement, at the effective time of the Merger, each share of Class A common stock issued and outstanding immediately prior to the effective time of the Merger (other than Class A common stock owned by Parent, Merger Sub or any other wholly owned subsidiary of Parent, in each case not held on behalf of third parties, and shares granted in the form of equity awards) will be converted into the right to receive an amount in cash equal to $25.35 (as reduced by the per share amount of any dividends declared after May 15, 2018 and the distribution of one hundred percent (100%) of the Company’s REIT taxable income as reasonably estimated by the Company in cash prior to the completion of the Merger, the “Merger Consideration”).
Consummation of the Merger is subject to the satisfaction or waiver of specified closing conditions, including the approval of the Merger by the affirmative vote of the holders of a majority of the outstanding Class A common stock entitled to vote on such matter at a meeting of the Company’s stockholders scheduled to be held on November 15, 2018 (“the Special Meeting”), and other customary closing conditions for a transaction of this type.
Pursuant to the Merger Agreement, in no event will the consummation of the Merger be required to occur prior to the earliest to occur of (i) a date specified by Parent on no less than three business days’ notice to the Company, (ii) the third business day after receipt of an enumerated list of third party consents and (iii) December 10, 2018.
The Company expects to complete the Merger in the fourth quarter of 2018. Completion of the Merger is, however, subject to various conditions noted above, and it is possible that factors outside the Company’s control could result in the Merger being completed at a later time or not at all. There may be a substantial amount of time between the Special Meeting and the completion of the Merger. The Company hopes to complete the Merger as soon as reasonably practicable following the satisfaction of all applicable conditions. For additional information regarding the Merger or the Merger Agreement, see the Company’s other filings made with the Securities and Exchange Commission (“SEC”), which are available at the SEC’s public reference facilities or on the SEC’s website at www.sec.gov.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and 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, 2017. 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.
Company Operations
The Company is organized as a Real Estate Investment Trust (“REIT”) for federal income tax purposes. The Company holds substantially all of its assets, and conducts substantially all of its business, through Forest City Enterprises, L.P. (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership and, as of September 30, 2018, owns all of the limited partnership interests directly or indirectly in the Operating Partnership.

7

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

The Company holds and operates certain of its assets through one or more taxable REIT subsidiaries (“TRSs”). A TRS is a subsidiary of a REIT subject to applicable corporate income tax. The use of TRSs enable the Company to continue to engage in certain businesses while complying with REIT qualification requirements and allows the Company to retain income generated by these businesses for reinvestment without the requirement of distributing those earnings. The primary businesses held in TRSs during 2018 include 461 Dean Street (sold in March 2018), an apartment building in Brooklyn, New York, Antelope Valley Mall (sold in January 2018), Mall at Robinson (sold in February 2018) and Charleston Town Center, regional malls in Palmdale, California, Pittsburgh, Pennsylvania and Charleston, West Virginia, respectively, Pacific Park Brooklyn project and land development operations. In the future, the Company may elect to reorganize and transfer certain assets or operations from its TRSs to other subsidiaries, including qualified REIT subsidiaries.
Segments
The Company is organized around real estate operations, real estate development and corporate support service functions.
Real Estate Operations represents the performance of the Company’s core rental real estate portfolio and is comprised of the following reportable operating segments:
Office - owns, acquires and operates office and life science buildings.
Apartments - owns, acquires and operates upscale and middle-market apartments and adaptive re-use developments.
Retail - owns, acquires and operates amenity retail within our mixed-use properties, and remaining regional malls and specialty/urban retail centers.
The remaining reportable operating segments consist of the following:
Development - develops and constructs office and life science buildings, apartments, condominiums, amenity retail and mixed-use projects. The Development segment includes recently opened operating properties prior to stabilization and the horizontal development and sale of land to residential, commercial and industrial customers primarily at its Stapleton project in Denver, Colorado.
Corporate - provides executive oversight and various support services for Operations, Development and Corporate employees.
Use of Estimates
The preparation of consolidated financial statements in conformity with 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 made by the Company 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, gain on change of control of interests, impairment of real estate and other-than-temporary impairments on equity method investments. Actual results could differ from those estimates.
Reclassifications
Certain prior period amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation as a result of adopting new accounting guidance on the classification and presentation of changes in restricted cash on the Consolidated Statement of Cash Flows.
Variable Interest Entities
As of September 30, 2018, the Company determined it was the primary beneficiary of 38 VIEs. The creditors of the consolidated VIEs do not have recourse to the Company’s general credit. As of September 30, 2018, the Company determined it was not the primary beneficiary of 23 VIEs and accounts for these interests as equity method investments. The maximum exposure to loss of these unconsolidated VIEs is limited to the Company’s investment balance of $174,000,000 as of September 30, 2018.
In January 2018, our 50% noncontrolling partner at Bayside Village, an apartment community in San Francisco, CA, closed on a transaction where they sold the majority of their 50% ownership interest to an unrelated third party. Prior to this transaction, the Company fully consolidated the property, as the outside partner, in accordance with the partnership agreement, lacked any substantive participating rights. Thus, Bayside Village was presented as a VIE in the parenthetical VIE balances on the Consolidated Balance Sheets. Simultaneously with the sale, the Company amended the partnership agreement to grant substantive participating rights to the new outside partner. The property is adequately capitalized and no longer contains characteristics of a VIE. Based on the substantive participating rights held by the new outside partner, the Company concluded it is appropriate to deconsolidate the entity and account for the Company’s 50% investment in the property using the equity method of accounting. As a result, the Company removed approximately $415,000,000 of real estate, net, $127,000,000 of nonrecourse mortgage debt, net, and $23,300,000 of accounts payable, accrued expenses and other liabilities from the Consolidated Balance Sheet line items and corresponding parenthetical VIE balances.

8

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

New Accounting Guidance
The following accounting pronouncements were adopted during the nine months ended September 30, 2018:
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 that 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. The Company adopted this guidance as of January 1, 2018 using the modified retrospective method and therefore, the comparative information has not been adjusted. The guidance has been applied to contracts that were not completed as of the adoption date. Rental revenue and tenant recoveries from lease contracts represents a significant portion of the Company’s total revenues and is a specific scope exception provided by this guidance. The adoption of this guidance did not result in a material impact on the Company’s consolidated financial statements or disclosures.
In November 2016, the FASB issued an amendment to the accounting guidance on the classification and presentation of changes in restricted cash on the statement of cash flows. The guidance requires restricted cash to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the Consolidated Statement of Cash Flows. The Company adopted this guidance as of January 1, 2018 using the retrospective transition method. The adoption of this guidance significantly increased the combined beginning and ending period cash, cash equivalents and restricted cash balances as of each period presented and removed the effects of the change in restricted cash as previously presented in the Consolidated Statements of Cash Flows for the nine months ended September 30, 2017.
In February 2017, the FASB issued an amendment to the accounting guidance on the derecognition of nonfinancial assets. The guidance clarifies the definition of an in substance nonfinancial asset and the recognition of gains and losses from the transfer of nonfinancial assets and for partial sales of nonfinancial assets, which includes real estate. The Company elected the practical expedient to not apply the guidance on completed contracts. A completed contract is one in which “substantially all” of the revenue from the contract was recognized under the previous accounting guidance. The Company adopted this guidance using the modified retrospective method on January 1, 2018.
In August 2017, the FASB issued an amendment to the accounting guidance on derivatives and hedging activities to better align the financial reporting for hedging activities with their economic objectives. The Company early adopted this guidance on January 1, 2018, using the modified retrospective method requiring a cumulative effect adjustment of $120,000 to recognize the initial application as an adjustment to accumulated other comprehensive income and a corresponding adjustment to beginning retained earnings.
The following new accounting pronouncements will be adopted on their respective effective dates:
In February 2016, the FASB issued an amendment to the accounting guidance on leases. This guidance sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to the current guidance for operating leases. The new guidance requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The new guidance supersedes the previous leases accounting standard. The guidance is effective on January 1, 2019. The adoption of the new guidance is expected to have an impact on the consolidated financial statements as the Company has material ground lease arrangements, as well as other lease agreements. In addition, the Company believes it will be precluded from capitalizing its internal leasing costs, as the costs are not expected to be directly incremental to the successful execution of a lease, as required by the new guidance. The Company is the lessee under several ground leases, as well as leases for office space and some information technology equipment. The Company has continued to work towards the completion of its review and evaluation of the more complex rental adjustments within the ground leases and analyze the impact these adjustments may have when determining the right of use asset and lease liability. The Company has also continued to make progress on the evaluation of appropriate discount rates to be applied to each lease agreement. Therefore, the analysis of the impact the adoption will have on the consolidated financial statements is ongoing. The Company intends to use the practical expedients available to both lessees and lessors upon adoption. For leases in which the Company is the lessor, the Company is in the process of analyzing the various revenue streams from its lease agreements to determine the lease and non-lease components based on the applicable performance obligation associated with the consideration received and when considering the practical expedients available.




9

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

In July, 2018, the FASB approved targeted improvements to the Leases standard that provides lessors with a practical expedient by class of underlying assets to not separate non-lease components from the lease component. Such practical expedient is limited to circumstances in which (i) the timing and pattern of transfer for the non-lease component and the related lease component are the same and (ii) the stand-alone lease component would be classified as an operating lease if accounted for separately. The Company will elect the practical expedient which will allow the Company the ability to account for the combined component based on its predominant characteristic if the underlying asset meets the two criteria defined above.
In June 2016, the FASB issued an amendment on measurement of credit losses on financial assets held by a reporting entity at each reporting date. The guidance requires the use of a new current expected credit loss ("CECL") model in estimating allowances for doubtful accounts with respect to accounts receivable, straight-line rents receivable and notes receivable. The CECL model requires that the Company estimate its lifetime expected credit loss with respect to these receivables and record allowances that, when deducted from the balance of the receivables, represent the estimated net amounts expected to be collected. In August, 2018, the FASB issued a proposed amendment to clarify that operating lease receivables recorded by lessors (including straight-line rent) are explicitly excluded from the scope of this guidance. This guidance is effective for fiscal years, and for interim reporting periods within those fiscal years, beginning after December 15, 2019. The Company is in the process of evaluating the impact of this guidance.
Recognition of Revenues
The Company adopted new accounting guidance for revenue from contracts with customers on January 1, 2018. The adoption of this guidance did not result in a material impact on the Company’s consolidated financial statements at adoption and for the nine months ended September 30, 2018. The following is disclosure of the Company’s revenue recognition policies.
Rental – Lease terms in office buildings, retail centers and certain parking facilities generally range from 1 to 30 years, excluding leases with certain anchor tenants, which typically are longer. Minimum rents are recognized on a straight-line basis over the non-cancelable term of the lease, which include the effects of applicable rent steps and rent abatements. Overage rents are recognized after sales thresholds have been achieved. Apartment lease terms are generally one year.
Tenant Recoveries – Reimbursements from office, apartments and retail tenants for common area maintenance, taxes, insurance, utilities and other property operating expenses as defined in the lease agreements are recognized in the period the applicable costs are incurred.
Service and Management Fees – Management fee revenue in the Office, Apartment and Retail segments is a series of distinct services required to operate a property’s day to day activities with the same pattern of transfer to the customer satisfied over time. Management fee revenue is billed to the customer and recognized as revenue on a monthly basis as management services are rendered. Service fee revenue in the Office, Apartment and Retail segments primarily from leasing, financing, and other real estate services are distinct services billed and recognized in the period the Company’s performance obligation is satisfied. Development fee revenue on long-term fixed-price contracts or cost plus fee contracts are recognized as the Company’s performance obligation is satisfied. The Company applies the practical expedient and, as a result, does not disclose variable consideration attributable to wholly or partially unsatisfied performance obligations as of the end of the reporting period. 
Parking and Other – Revenues derived from monthly and transient tenant parking and other revenue relates primarily to the Office and Apartment segment and is recognized in the period the Company’s performance obligation is satisfied.
Land Sales – Sales of land to residential, commercial and industrial customers, primarily at the Company’s Stapleton project in the Development segment, and sales of commercial outlots adjacent to the Company’s operating property portfolio primarily in the Retail segment are recognized at closing or upon completion of all conditions precedent to the sales contract (whichever is later).
Historic, New Market and Low Income Housing Tax Credit Entities
The Company invests in properties that have received, or the Company believes are entitled to receive, historic preservation tax credits on qualifying expenditures under Internal Revenue Code (“IRC”) section 47, low income housing tax credits on new construction and rehabilitation of existing buildings as low income rental housing under IRC section 42, 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, which entitles the members to tax credits based on qualified expenditures at the time those qualified expenditures are placed in service (collectively “Tax Credits”). The Company typically enters into these investments with sophisticated financial investors. In exchange for the financial investors’ initial contribution into the investment, the financial investor is entitled to substantially all of the benefits derived from the tax credit. Typically, these arrangements have put/call provisions whereby the Company may be obligated (or entitled) to repurchase the financial investors’ interest. The Company has consolidated each of these entities in its consolidated financial statements and has included these investor contributions in accounts payable, accrued expenses and other liabilities.

10

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

The Company guarantees to 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, it will indemnify the financial investor for any recaptured tax credits. The Company initially records a contract liability for the cash received from the financial investor, which represents consideration received prior to transferring services. The Company’s performance obligation is to comply with the recapture rules of the specified tax credit over the recapture period, which is in its control. The financial investor is simultaneously receiving and consuming the benefits provided by the Company’s performance as it complies with the recapture period. Therefore, the Company recognizes revenue in the amount of the contract liability on a straight-line basis over the tax credit recapture period, which range from 0 to 15 years. Income related to the sale of tax credits is recorded in interest and other income within the Corporate segment.
The following table summarizes the Tax Credit contract liabilities:
 
Nine Months Ended September 30,
 
2018
2017
 
(in thousands)
Beginning balance
$
60,851

$
50,790

Tax credit revenue
(9,267
)
(9,265
)
Tax credit contribution
2,913

5,852

Ending balance
$
54,497

$
47,377

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 at the time of the transaction and currently Chairman of Forest City Ratner Companies, 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 apartment operating properties and service companies in the Greater New York City metropolitan area. The Company issued Class A Common Units (“2006 Units”) in a jointly-owned, limited liability company in exchange for their interests. The 2006 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. If the Company elects to pay cash as full or partial consideration in exchange for 2006 Units, the exchanging unit holder(s) may elect to redeem such 2006 Units for an in-kind distribution of one or more properties in lieu of cash, provided certain conditions set forth under the Exchange Rights Agreement adopted pursuant to the Master Contribution Agreement are met. The Company may, in its sole discretion, elect not to proceed with an in-kind redemption if the Company determines in good faith that the Company will suffer any adverse effects from proceeding with the in-kind redemption. The Company has no rights to redeem or repurchase the 2006 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. As of September 30, 2018, air rights for any future residential vertical development at East River Plaza, a specialty retail center in Manhattan, New York, remains the only development asset subject to this agreement.
In connection with the Master Contribution Agreement, the parties entered into the Tax Protection Agreement (the “Tax Protection 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 and expires in November 2018.
Pursuant to the Master Contribution Agreement, 2006 Units not exchanged are entitled to a distribution preference payment equal to the dividends paid on an equivalent number of shares of the Company’s common stock. The Company recorded $0 and $400,000 during the three and nine months ended September 30, 2018, respectively, and $219,000 and $553,000 during the three and nine months ended September 30, 2017, respectively, which is classified as noncontrolling interest expense on the Consolidated Statement of Operations.
In March 2017, certain BCR Entities exchanged 142,879 of the 2006 Units. The Company issued 142,879 shares of its Class A common stock for the exchanged 2006 Units. The Company accounted for the exchange as a purchase of noncontrolling interests, resulting in a reduction of noncontrolling interests of $7,288,000, an increase to Class A common stock of $1,000 and a combined increase to additional paid-in capital of $7,287,000, accounting for the fair value of common stock issued and the difference between the fair value of consideration exchanged and the historical cost basis of the noncontrolling interest balance. At September 30, 2018 and December 31, 2017, 1,111,044 of the 2006 Units were outstanding.

11

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

During the three months ended September 30, 2017, the Company distributed $997,000 to Mr. Ratner, which represented his share of the retainage release of a development fee earned during 2005 on a fee project for building the Kings County Supreme Court for New York City. The retainage was being held until the final certificate of occupancy was issued. The Company obtained the final certificate of occupancy and collected the retainage during the three months ended September 30, 2017, at which time Mr. Ratner’s share was distributed.
In August 2017, certain BCR Entities exchanged 686,865 of the 2006 Units. The Company assigned and transferred its ownership interest in 500 Sterling Place, a previously 100% owned apartment community in Brooklyn, New York, for the exchanged 2006 Units. The agreed upon value of the exchanged property was based on an independent third party appraisal and both parties agreed to use $20 as the basis in determining the number of 2006 Units to be exchanged. The Company accounted for the non-cash exchange as a purchase of noncontrolling interests, resulting in a reduction of noncontrolling interests of $35,037,000, a reduction of completed rental properties, net of $45,044,000, a reduction of nonrecourse mortgage debt of $34,382,000 and an increase to additional paid-in capital of $22,805,000, accounting for the agreed upon value of the exchanged property and the difference between the value of consideration exchanged and the historical cost basis of the noncontrolling interest balance. In September 2017, the Company made a $222,000 payment to the BCR entities for the overpayment of estimated closing costs related to the August 2017 exchange transaction.
As a result of the January 2017 sale of Shops at Bruckner Boulevard, an unconsolidated specialty retail center in Bronx, New York, the Company accrued $482,000 related to a tax indemnity payment due to the BCR Entities in accordance with the terms of the Tax Protection Agreement during the nine months ended September 30, 2017. The Company paid the amount in quarterly installments during the year ended December 31, 2017.
Other Related Party Transactions
In December 2016, the Company’s Board of Directors approved, and the Company entered into a reclassification agreement, with RMS Limited Partnership (“RMS”), the former controlling stockholder of the Company's Class B shares (the “Reclassification Agreement”). The Reclassification Agreement provided that, at the Effective Time, as defined in the Reclassification Agreement, following the satisfaction of the conditions thereto, each share of Class B Common Stock issued and outstanding immediately prior to the Effective Time would be reclassified and exchanged into 1.31 shares of Class A Common Stock, with a right to cash in lieu of fractional shares (the “Reclassification”). At the Company’s Annual Meeting of Stockholders held on June 9, 2017, the stockholders approved the Reclassification. See Note ICapital Stock for additional information.
In October 2016, the Company entered into a Reimbursement Agreement with RMS (the “Reimbursement Agreement”). The Company agreed to reimburse RMS (together with its officers, directors, employees, beneficiaries, trustees, representatives and agents) (“Reimbursed Persons”) for reasonable and documented fees and out-of-pocket expenses of RMS’s financial, legal and public relations advisors incurred in evaluating and negotiating the Reclassification. In addition, the Company agreed to reimburse the Reimbursed Persons for (i) reasonable costs and expenses incurred in connection with any Proceeding (as defined in the Reimbursement Agreement) to which such Reimbursed Person is a party or otherwise involved in and (ii) any losses, damages or liabilities actually and reasonably suffered or incurred in any such Proceeding by a Reimbursed Person. Amounts incurred subject to the Reimbursement Agreement were approximately $4,060,000 for the nine months ended September 30, 2017.
During the three months ended September 30, 2017, Charles A. Ratner, the Company’s former Chairman of the Board and brother of James A. Ratner, the Company’s then current Chairman of the Board, purchased a life insurance policy from the Company for $826,000, which represented the book value and net cash surrender value of the policy at the time of the transaction.
In March, 2018, the Company entered into agreements with Starboard Value LP ("Starboard") and Scopia Capital Management LP ("Scopia"), which, at that time, owned approximately 3.0% and 8.3% of the Company’s outstanding shares, respectively, to reimburse Starboard and Scopia for their reasonable, documented out-of-pocket fees and expenses incurred in connection with their involvement at the Company, including, but not limited to, the negotiation and the execution of their respective stockholder agreements, provided that such reimbursement will not exceed $200,000 in the aggregate for either Starboard or Scopia. During the nine months ended September 30, 2018, the Company reimbursed Starboard $188,000.

12

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

Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of unrealized losses on interest rate swaps accounted for as cash flow hedges (including unrealized losses on interest rate swaps accounted for as hedges held by certain of the Company’s equity method investees), net of noncontrolling interest. Accumulated other comprehensive loss was $3,750,000 and $8,563,000 at September 30, 2018 and December 31, 2017, respectively. See Note G Derivative Instruments and Hedging Activities for detailed information on gains and losses recognized in and reclassified from accumulated other comprehensive loss.
Organizational Transformation and Termination Benefits
The following table summarizes the components of organizational transformation and termination benefits and are reported in the Corporate Segment:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
2017
 
2018
2017
 
(in thousands)
Termination benefits
$
4,095

$
1,764

 
$
12,320

$
10,501

Strategic alternative costs
4,194


 
16,868


Shareholder activism costs

869

 

3,520

Total
$
8,289

$
2,633

 
$
29,188

$
14,021

For the periods presented, the Company experienced workplace reductions and recorded the associated termination benefits expenses (outplacement and severance payments based on years of service and other defined criteria) for each occurrence. The Company records a severance liability during the period in which costs are estimable and notification has been communicated to affected employees.
Strategic alternative costs consist primarily of professional fees (legal and investment banking advisors) incurred related to the Merger and the Board of Directors’ process to consider a broad range of alternatives to enhance stockholder value, including, but not limited to, an accelerated and enhanced operating plan, structural alternatives for the Company’s assets, and potential merger, acquisition or sale transactions. If the Merger is consummated, the Company expects to incur additional third party strategic alternative costs, some of which may be material.
Shareholder activism costs are comprised of advisory, legal and other professional fees associated with activism matters.
The following table summarizes the activity in the accrued severance balance for termination benefits:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
2017
 
2018
2017
 
(in thousands)

Accrued severance benefits, beginning balance
$
12,188

$
11,710

 
$
13,974

$
9,969

Termination benefits expense
4,095

1,764

 
12,320

10,501

Payments
(2,988
)
(4,615
)
 
(12,999
)
(11,611
)
Accrued severance benefits, ending balance
$
13,295

$
8,859

 
$
13,295

$
8,859


13

Forest City Realty Trust, 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 or otherwise extinguished at closing, acquisition of properties from the exchange of ownership interests and the related assumption of the non-recourse mortgage debt, exchanges of 2006 Units or senior notes for Class A common stock, changes in consolidation methods of fully consolidated properties due to the occurrence of triggering events including, but not limited to, disposition of a partial interest in rental properties or change in control transactions, change in construction payables and other capital expenditures, notes receivable from the sale of rental properties and capitalization of stock-based compensation granted to employees directly involved with the development and construction of real estate.
 
Nine Months Ended September 30,
 
2018
2017
 
(in thousands)
Non-cash changes to balance sheet - Investing Activities
 
 
Projects under construction and development
$
(3,698
)
$
(51,996
)
Completed rental properties
164,102

(126,810
)
Notes receivable
113,065

2,500

Investments in and advances to affiliates - due to dispositions or change in control
(105,918
)
603

Investments in and advances to affiliates - other activity
4,026

(218
)
Total
$
171,577

$
(175,921
)
Non-cash changes to balance sheet - Financing Activities
 
 
Nonrecourse mortgage debt and notes payable, net
$
117,943

$
(113,651
)
Convertible senior debt, net
(81,115
)
(1
)
Class A common stock
39

59

Additional paid-in capital
84,249

49,335

Noncontrolling interest
(200,041
)
(54,129
)
Total
$
(78,925
)
$
(118,387
)

B. Notes Receivable
The following table summarizes the interest bearing notes receivable:
 
September 30, 2018
December 31, 2017
Maturity Date
Weighted Average Interest Rate
 
(in thousands)
 
 
Stapleton advances
$
165,195

$
128,676

Various
8.52%
The Nets sale

125,100

January 2021(1)
4.50%
Barclays Center sale
92,600

92,600

January 2019
4.50%
QIC (Regional Mall dispositions)
150,000

36,935

April 2019
4.25%
Other
15,942

15,474

Various
4.97%
Total
$
423,737

$
398,785

 
 
(1) Prior to its contractual due date, the owners of the Brooklyn Nets repaid the note receivable, including unpaid accrued interest, in full during the nine months ended September 30, 2018.


14

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

C. Nonrecourse Mortgage Debt and Notes Payable, Net
The following table summarizes the nonrecourse mortgage debt and notes payable, net maturities (including liabilities on assets held for sale) as of September 30, 2018:
Years Ending December 31,
 
 
(in thousands)
2018
$
97,824

2019
325,594

2020
222,275

2021
195,369

2022
208,678

Thereafter
2,153,782

 
3,203,522

Net unamortized mortgage procurement costs
(29,513
)
Total
$
3,174,009


D. Revolving Credit Facility
The Company’s Revolving Credit Agreement provides for total available borrowings of $600,000,000 and contains an accordion provision, subject to bank approval, allowing the Company to increase total available borrowings to $750,000,000 (“Revolving Credit Facility”).
The Revolving Credit Facility matures in November 2019, and provides for two six-month extension periods, subject to certain conditions. Borrowings bear interest at the Company’s option at either London Interbank Offered Rate (“LIBOR”) (2.26% at September 30, 2018) plus a margin of 1.15% - 1.85% (1.20% at September 30, 2018) or the Prime Rate (5.25% at September 30, 2018) plus a margin of 0.15% - 0.85% (0.20% at September 30, 2018). In addition, the Revolving Credit Facility is subject to an annual facility fee of 0.20% - 0.35% (0.20% at September 30, 2018) of total available borrowings. Up to $150,000,000 of the available borrowings can be used for letters of credit. The applicable margins and annual facility fee are based on the Company’s total leverage ratio (adjusted quarterly, if applicable).
The Revolving Credit Facility has restrictive covenants, including a prohibition on certain types of dispositions, mergers, consolidations, and limitations on lines of business the Company is allowed to conduct. Additionally, the Revolving Credit Facility contains financial covenants, including the maintenance of a maximum total leverage ratio, maximum secured and unsecured leverage ratios, maximum secured recourse leverage ratio, a minimum fixed charge coverage ratio, and a minimum unencumbered interest coverage ratio (all as specified in the Revolving Credit Agreement). At September 30, 2018, the Company was in compliance with all of these financial covenants.
The following table summarizes available credit on the Revolving Credit Facility:
 
September 30, 2018
December 31, 2017
 
(in thousands)
Total available borrowings
$
600,000

$
600,000

Less:
 
 
Outstanding borrowings


Outstanding letters of credit
(23,050
)
(36,439
)
Available credit
$
576,950

$
563,561

As of September 30, 2018 and December 31, 2017, unamortized debt issuance costs related to the Revolving Credit Facility of $1,079,000 and $1,798,000, respectively, are included in other assets on the Consolidated Balance Sheets.


15

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

E. Term Loan, Net
The Company’s Term Loan Credit Agreement provides a $335,000,000 senior unsecured term loan credit facility (“Term Loan”).
The Term Loan matures in May 2021 and bears interest at the Company’s option at either LIBOR (based on the date of the initial borrowings and adjusted monthly thereafter) plus a margin of 1.30% - 2.20% (1.35% at September 30, 2018) or the Prime Rate plus a margin of 0.30% - 1.20% (0.35% at September 30, 2018). The applicable margins are based on the Company’s total leverage ratio. Upon the Company obtaining an investment grade credit rating, established by certain debt rating agencies for the Company’s long term, senior, unsecured non-credit enhanced debt (the “Debt Ratings”), the applicable margin will, at the Company’s election, be based on the Company’s then-current Debt Ratings.
The Term Loan contains identical financial covenants as the Revolving Credit Facility as described in Note DRevolving Credit Facility. Additionally, the Term Loan contains customary events of default provisions, including failure to pay indebtedness, breaches of covenants and bankruptcy or other insolvency events, which could result in the acceleration of all amounts and cancellation of all commitments outstanding under the Term Loan, as well as customary representations and warranties and affirmative and negative covenants.
The following table summarizes outstanding borrowings of the Term Loan, net:
 
September 30, 2018
December 31, 2017
 
(in thousands)
Total outstanding borrowings
$
335,000

$
335,000

Net unamortized debt procurement costs
(1,033
)
(1,332
)
Total
$
333,967

$
333,668


F. Convertible Senior Debt, Net
The following table summarizes the convertible senior debt, net:
 
September 30, 2018
December 31, 2017
 
(in thousands)
4.250% Notes due 2018
$

$
73,215

3.625% Notes due 2020
32,037

40,021

 
32,037

113,236

Net unamortized debt procurement costs
(235
)
(599
)
Total
$
31,802

$
112,637

Convertible Senior Notes due 2018
Holders had the option to convert their 4.250% Convertible Senior Notes due August 15, 2018 (“2018 Senior Notes”) at their option at any time prior to the close of business on the scheduled trading day immediately preceding the maturity date. Initially, upon conversion, a noteholder would have received 46.1425 shares of Class A common stock per $1,000 principal amount of 2018 Senior Notes (“Conversion Rate”), based on a conversion price of approximately $21.67 per share of Class A common stock, subject to adjustment.

During August 2018, holders of $73,188,000 aggregate principal amount of the 2018 Senior Notes initiated conversion based on a Conversion Rate of 48.6555 shares of Class A common stock equating to a conversion price of approximately $20.55. As a result, converting holders received 3,560,990 shares of Class A common stock in the aggregate. The Company redeemed or paid off at maturity the remaining $20,000 aggregate principal amount of the 2018 Senior Notes at par value using cash on hand.

16

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

Convertible Senior Notes due 2020
Holders may convert their 3.625% Convertible Senior Notes due August 15, 2020 (“2020 Senior Notes”) at their option at any time prior to the close of business on the scheduled trading day immediately preceding the maturity date subject to the Company’s option to give notice of their intention to redeem the remaining 2020 Senior Notes as discussed below. Initially, upon conversion, a holder would have received 41.3129 shares of Class A common stock per $1,000 principal amount of 2020 Senior Notes (“Conversion Rate”), based on a conversion price of approximately $24.21 per share of Class A common stock, subject to adjustment.
The following table summarizes the recent required adjustments to the Conversion Rate and approximate Conversion price of the 2020 Senior Notes triggered by the Company’s cash dividends:
Effective Date
Conversion Rate
Conversion Price
 
(in shares)
 
June 9, 2017
42.3105

$
23.63

December 20, 2017
42.8079

$
23.36

June 8, 2018
43.5629

$
22.96


During August 2018, noteholders of $7,980,000 aggregate principal amount of the 2020 Senior Notes initiated conversion and received 347,631 shares of Class A common stock in the aggregate.

On October 12, 2018, the Company gave notice of its intention to redeem the remaining $32,037,000 aggregate principal amount of 2020 Senior Notes for cash plus accrued and unpaid interest, if any, up to but not including November 21, 2018. Holders have the right to convert their 2020 Senior Notes up to the close of business on November 20, 2018. Through October 26, 2018, holders have converted $7,763,000 aggregate principal amount of the remaining 2020 Senior Notes and received 338,376 shares of Class A common stock in the aggregate.
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 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.

G. 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 caps 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. Interest rate swaps are generally for periods of one to ten years. Interest rate caps are generally for periods of one to three years. The use of interest rate caps is consistent with the Company’s risk management objective to reduce or eliminate exposure to variability in future cash flows primarily attributable to increases in interest rates 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.
Changes in the fair value of derivatives designated and qualifying as cash flow hedges are recorded in accumulated OCI and subsequently reclassified into earnings during the period the hedged forecasted transaction affects earnings. As of September 30, 2018, the Company expects it will reclassify $1,282,000 of accumulated other comprehensive loss into interest expense and equity in earnings within the next twelve months. However, the actual amount reclassified could vary due to future changes in the fair value of these derivatives.

17

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

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. The TROR requires the payment of a variable interest rate, generally equivalent to the Securities Industry and Financial Markets Association (“SIFMA”) rate (1.56% at September 30, 2018) 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, 2018, the aggregate notional amount of TROR designated as fair value hedging instruments is $676,466,000. The underlying TROR borrowings are subject to a fair value adjustment.
The following amounts were recorded on the Consolidated Balance Sheets in nonrecourse mortgage debt and notes payable, net related to the hedged borrowings in fair value hedges:
 
September 30, 2018
December 31, 2017
 
(in thousands)
Carrying amount of underlying borrowings
$
676,466

$
605,036

Cumulative fair value adjustments to underlying borrowings
(2,722
)
3,210

Fair value of underlying borrowings
$
673,744

$
608,246

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.
The Company has certain undesignated TROR where the associated debt is held by an unconsolidated affiliate or unrelated third parties. The change in fair value of these TROR is recognized in earnings. At September 30, 2018, the aggregate notional amount of these TROR is $180,321,000.
The following table summarizes the fair values and location in the Consolidated Balance Sheets of all derivative instruments:
 
Fair Value of Derivative Instruments
 
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)
 
September 30, 2018
Derivatives Designated as Hedging Instruments
 
 
 
 
 
Interest rate swaps
$
96,271

$
2,046

 
$

$

TROR
409,151

679

 
267,315

3,401

Total
$
505,422

$
2,725

 
$
267,315

$
3,401

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
Interest rate caps
$
69,518

$

 
$

$

TROR
89,124

2,509

 
91,197

8,619

Total
$
158,642

$
2,509

 
$
91,197

$
8,619

 
 
 
 
 
 
 
December 31, 2017
Derivatives Designated as Hedging Instruments
 
 
 
 
 
Interest rate swaps
$
63,372

$
1,129

 
$
34,078

$
863

TROR
369,021

3,862

 
236,015

652

Total
$
432,393

$
4,991

 
$
270,093

$
1,515

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
Interest rate caps
$
69,518

$

 
$

$

TROR
100,466

4,107

 
36,280

11,330

Total
$
169,984

$
4,107

 
$
36,280

$
11,330


18

Forest City Realty Trust, 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 on accumulated other comprehensive income:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
2017
 
2018
2017
 
(in thousands)
Gain (loss) on interest rate contracts recognized in Accumulated OCI
$
264

$
(49
)
 
$
1,942

$
(385
)
 
 
 
 
 
 
Loss on interest rate contracts reclassified from Accumulated OCI to the Statements of Operations
 
 
 
 
 
Interest expense
$
(389
)
$
(684
)
 
$
(1,425
)
$
(2,194
)
Earnings (loss) from unconsolidated entities
(393
)
(605
)
 
(1,337
)
(1,981
)
 
$
(782
)
$
(1,289
)
 
$
(2,762
)
$
(4,175
)


The following table summarizes the impact of gains and losses related to cash flow and fair value hedging relationships in the Consolidated Statements of Operations:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Location on Consolidated Statements of Operations
2018
2017
 
2018
2017
Cash Flow Hedging Relationships
 
(in thousands)
Loss on interest rate contracts reclassified from Accumulated OCI
Interest expense
$
(389
)
$
(684
)
 
$
(1,425
)
$
(2,194
)
 
 
 
 
 
 
 
Fair Value Hedging Relationships
 
 
 
 
 
 
Gain (loss) on TROR
Interest expense
$
517

$
2,869

 
$
(5,932
)
$
9,367

Gain (loss) on underlying borrowings
Interest expense
(517
)
(2,869
)
 
5,932

(9,367
)
Total Fair Value Hedging Relationships
 
$

$

 
$

$

The following table summarizes the impact of gains and losses related to derivative instruments not designated as cash flow hedges or fair value hedges in the Consolidated Statements of Operations:
 
 
Net Gain (Loss) Recognized
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Location on Consolidated Statements of Operations
2018
2017
 
2018
2017
Derivatives Not Designated as Hedging Instruments
 
(in thousands)
Interest rate caps and interest rate swaps
Interest expense
$

$
(45
)
 
$

$
(45
)
TROR
Interest expense
$
921

$
(432
)
 
$
2,230

$
1,366

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 BBB+, 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 Revolving Credit Agreement 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, 2018, 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.

19

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


H. Fair Value Measurements
Fair Value Measurements on a Recurring Basis
The Company’s financial assets consist of 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 nonrecourse mortgage debt and notes payable, net.
The following table summarizes information about financial assets and liabilities measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:
 
September 30, 2018
 
Level 1
Level 2
Level 3
Total
 
(in thousands)
Interest rate swaps (assets)
$

$
2,046

$

$
2,046

TROR (assets)


3,188

3,188

TROR (liabilities)


(12,020
)
(12,020
)
Fair value adjustment to the borrowings subject to TROR


2,722

2,722

Total
$

$
2,046

$
(6,110
)
$
(4,064
)
 
 
 
 
 
 
December 31, 2017
 
(in thousands)
Interest rate swaps (assets)
$

$
1,129

$

$
1,129

Interest rate swaps (liabilities)

(863
)

(863
)
TROR (assets)


7,969

7,969

TROR (liabilities)


(11,982
)
(11,982
)
Fair value adjustment to the borrowings subject to TROR


(3,210
)
(3,210
)
Total
$

$
266

$
(7,223
)
$
(6,957
)
The following table presents a reconciliation of financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
 
 
Net
TROR
Fair value
adjustment
to the borrowings
subject to TROR
Total
 
(in thousands)
Nine Months Ended September 30, 2018
 
 
 
 
Balance, January 1, 2018
 
$
(4,013
)
$
(3,210
)
$
(7,223
)
Total realized and unrealized gains (losses):
 
 
 
 
Included in earnings
 
 
 
 
Fair market value adjustment
 
(2,799
)
5,029

2,230

Settlement of TROR designated as fair value hedge
 
(903
)
903


Settlement of TROR not designated as a fair value hedge
 
(1,117
)

(1,117
)
Balance, September 30, 2018
 
$
(8,832
)
$
2,722

$
(6,110
)
Nine Months Ended September 30, 2017
 
 
 
 
Balance, January 1, 2017
 
$
(15,573
)
$
7,434

$
(8,139
)
Total realized and unrealized gains (losses):
 
 
 
 
Included in earnings
 
 
 
 
Fair market value adjustment
 
10,733

(9,367
)
1,366

Balance, September 30, 2017
 
$
(4,840
)
$
(1,933
)
$
(6,773
)

20

Forest City Realty Trust, 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, 2018:
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value September 30, 2018
Valuation
Technique
Unobservable
Input
Input Values
 
(in thousands)
 
 
 
TROR
$
(8,832
)
Third party bond pricing
Bond valuation
95.43 - 107.97
Fair value adjustment to the borrowings subject to TROR
$
2,722

Third party bond pricing
Bond valuation
95.43 - 101.22
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 accounts receivable and accounts payable, accrued expenses and other liabilities approximates fair value based upon the short-term nature of the instruments. The carrying amount of notes receivable approximates fair value since the interest rates on these notes approximates current market rates for similar instruments when considering the risk profile and quality of the collateral, if applicable. 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, net (exclusive of the fair value of derivatives), term loan, net and convertible senior debt, net:
 
September 30, 2018
 
December 31, 2017
 
Carrying Value
Fair Value
 
Carrying Value
Fair Value
 
(in thousands)
Nonrecourse mortgage debt and notes payable, net
$
3,174,009

$
3,108,343

 
$
2,998,361

$
2,995,559

Term loan, net
333,967

333,977

 
333,668

333,726

Convertible senior debt, net
31,802

34,976

 
112,637

130,942

Total
$
3,539,778

$
3,477,296

 
$
3,444,666

$
3,460,227


I. Capital Stock
Share Repurchase Authorization
On March 22, 2018, the Board approved an increase in the Company's existing $100,000,000 share repurchase program to an aggregate total of $400,000,000. The shares may be repurchased, in light of prevailing market and economic conditions, to take advantage of investment opportunities at times when the Board and Company management believe the market price of the common stock does not accurately reflect the underlying value of the Company. The Company had not repurchased any shares under this program through July 30, 2018 and pursuant to the Merger Agreement, the Company is not permitted to repurchase shares of its Class A common stock prior to the completion of the proposed Merger.

21

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

Reclassification Agreement
Pursuant to the Reclassification Agreement, the Board submitted a proposal for stockholder approval to eliminate the dual-class share structure at the Company’s 2017 Annual Meeting of Stockholders. This proposal was approved by the stockholders at the Company’s Annual Meeting of Stockholders on June 9, 2017 and became effective following the market close on June 12, 2017. As a result, each of the 18,788,163 shares of Class B common stock issued and outstanding immediately prior to the Effective Time were reclassified into 1.31 shares of Class A common stock. As such, 24,612,495 additional shares of Class A common stock were issued to the prior Class B common stockholders. Upon completion of this transaction, all outstanding shares of common stock are entitled to one vote per share on all matters brought to the Company’s stockholders, including but not limited to, the election of the entire Board of Directors.
During the nine months ended September 30, 2017, certain professional and consulting fees, including investment banking success fees, incurred directly related to the stock conversion were recorded as a $9,305,000 reduction to additional paid-in capital, in accordance with applicable accounting requirements when raising permanent equity. Amounts include costs paid on behalf of RMS in accordance with the Reimbursement Agreement. See the “Other Related Party Transactions” section of Note AAccounting Policies for detailed information on the Reimbursement Agreement.
J. Dividends
The following table summarizes the quarterly cash dividends declared by the Board of Directors on the Company’s common stock (in thousands, except per share data):
Date Declared
Record Date
Payment Date
Amount Per Share
Total Cash Payment
2018
 
 
 
 
May 15, 2018
June 8, 2018
June 22, 2018
$
0.18

$
48,094

February 22, 2018
March 5, 2018
March 16, 2018
0.18

48,012

 
 
Total
$
0.36

$
96,106

2017
 
 
 
 
November 29, 2017
December 20, 2017
December 29, 2017
$
0.14

$
37,344

August 22, 2017
September 5, 2017
September 18, 2017
0.14

37,343

May 17, 2017
June 9, 2017
June 23, 2017
0.09

23,482

March 1, 2017
March 13, 2017
March 27, 2017
0.09

23,441

 
 
Total
$
0.46

$
121,610

Pursuant to the Merger Agreement, the Company has agreed not to pay regular, quarterly distributions to the holders of the Class A common stock prior to the completion of the Merger, except to the extent that dividends and other distributions are necessary for the Company to maintain its status as a REIT. Any payment of dividends prior to the completion of the Merger will result in a corresponding reduction in the Merger Consideration. There were no dividends declared during the three months ended September 30, 2018.
K. Stock-Based Compensation
During the nine months ended September 30, 2018, the Company granted 702,904 shares of restricted stock and 217,548 performance shares under the Company’s 1994 Stock Plan. The restricted stock had a weighted-average fair value of $21.05 per share, based on the closing price of the Class A common stock on the date of grant. The performance shares had a grant-date fair value of $17.44 per share, which was computed using a Monte Carlo simulation.
At September 30, 2018, $15,283,000 of unrecognized compensation cost related to restricted stock is expected to be recognized over a weighted-average period of 24 months and $5,051,000 of unrecognized compensation cost related to performance shares is expected to be recognized over a weighted-average period of 21 months.

22

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

The following table summarizes stock-based compensation costs recognized in the financial statements:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
2017
 
2018
2017
 
(in thousands)
Stock option costs
$

$
126

 
$
84

$
463

Restricted stock costs
3,245

4,494

 
9,909

13,440

Performance share costs
1,116

2,633

 
3,263

7,391

Total stock-based compensation costs
4,361

7,253

 
13,256

21,294

Less amount capitalized into qualifying real estate projects
(1,004
)
(2,101
)
 
(3,056
)
(6,401
)
Amount charged to operating expenses
3,357

5,152

 
10,200

14,893

Depreciation expense on capitalized stock-based compensation
637

216

 
1,220

665

Total stock-based compensation expense
$
3,994

$
5,368

 
$
11,420

$
15,558

The amount of grant-date fair value expensed immediately for awards granted to retirement-eligible grantees during the nine months ended September 30, 2018 and 2017 was $447,000 and $867,000, respectively.
In connection with the vesting of restricted stock and performance shares during the nine months ended September 30, 2018 and 2017, the Company repurchased 324,654 shares and 252,161 shares, respectively, of Class A common stock to satisfy the employees’ related minimum statutory tax withholding requirements. Shares repurchased during the nine months ended September 30, 2018 and 2017 were returned to unissued shares with an aggregate cost basis of $6,845,000 and $5,598,000, respectively.

L. Write-Offs of Abandoned Development Projects and Demolition Costs
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 project exit costs 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. The Company recorded no write-offs of abandoned development projects and demolition costs during the three and nine months ended September 30, 2018. The Company incurred no write-offs of abandoned development projects and demolition costs during the three months ended September 30, 2017 and $1,596,000 during the nine months ended September 30, 2017.
The Company incurred $0 and $6,282,000 as write-offs of abandoned development projects and demolition costs of unconsolidated entities during the three and nine months ended September 30, 2018, respectively, and $1,179,000 and $1,926,000 during the three and nine months ended September 30, 2017, respectively, which is included in equity in earnings and primarily represents non-capitalizable demolition costs at a redevelopment project.

M. 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 determining 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, which are based on current information, are Level 2 or 3 inputs. If the conditions deteriorate or if plans regarding the assets change, additional impairment charges may occur in future periods. There were no impairments of real estate recorded during the three and nine months ended September 30, 2018.
During the three months ended September 30, 2017, the Company began the marketing process of 461 Dean Street, an apartment community in Brooklyn, New York. The initiation of the marketing process triggered management to update its undiscounted cash flow analysis, including its probability weighted estimated holding period. As a result, the estimated probability weighted undiscounted cash flows no longer exceeded the carrying value, requiring the Company to adjust the carrying value to its estimated fair value during the three months ended September 30, 2017, resulting in an impairment charge of $44,288,000. The Company closed on the sale of 461 Dean Street in March 2018.

23

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

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. There were no impairments of unconsolidated entities recorded during the three and nine months ended September 30, 2018.
During the three months ended September 30, 2017, the Company signed a definitive agreement for the sale of Westchester’s Ridge Hill, a regional mall in Yonkers, New York, to its partner. This triggered management to update its impairment analysis, including its estimated selling price. As a result, the estimated fair value no longer exceeded the carrying value, requiring the Company to adjust the carrying value to its estimated fair value during the three months ended September 30, 2017, resulting in an impairment charge of $10,600,000. The Company closed on the sale of Westchester’s Ridge Hill in April 2018.
Impairment - Fair Value Information
The following table presents quantitative information about the significant unobservable inputs used to determine the fair value of the impaired real estate for the nine months ended September 30, 2017:
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value
Valuation Technique
Unobservable Input
Range of Input Values
 
(in thousands)
 
 
 
September 30, 2017
 
 
 
 
Impairment of real estate
$
152,575

Indicative bid
Indicative bid
N/A (1)
Impairment of unconsolidated investments
$
225,890

Indicative bid
Indicative bid
N/A (1)
(1)
This fair value measurement was derived from a bona fide purchase offer from a third party prospective buyer, subject to the Company’s corroboration for reasonableness.

N. Gain on Change in Control of Interests
The following table summarizes the gain on change in control of interests:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
2017
 
2018
2017
 
 
(in thousands)
University Park at MIT
Cambridge, Massachusetts
$
193,674

$

 
$
193,674

$

Apartment Communities:
 
 
 
 
 
 
DKLB BKLN
Brooklyn, New York
25,992


 
25,992


Bayside Village
San Francisco, California


 
117,711


 
 
$
219,666

$

 
$
337,377

$

University Park at MIT
On April 25, 2018, the Company’s jointly owned specialty retail joint venture with Madison International acquired a 50% ownership interest in three life science office buildings located in Cambridge, Massachusetts, for a purchase price of approximately $302,000,000, excluding working capital adjustments and closing costs. Prior to this acquisition, the Company owned the remaining 50% ownership interest in the acquired assets and accounted for this investment on the equity method of accounting. Subsequent to the acquisition, the Company continued to own the remaining 50% ownership interests in the acquired assets and continued to account for this investment on the equity method of accounting as the Madison International joint venture retained the same rights as the previous partner was entitled to. On July 24, 2018, the Company exchanged its preferred ownership interests in nine of the specialty retail assets owned by the joint venture for the acquired assets in a non-cash transaction. Following this exchange, the Company owns approximately 100% of the acquired assets and fully consolidates the properties. In accordance with accounting guidance, the Company recorded the assets received at their fair value (based upon the income approach using current rents and market cap rates and discount rates) and recorded a gain on change in control as noted above.

24

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

DKLB BKLN
On June 27, 2018, the Company’s jointly owned specialty retail joint venture with Madison International acquired a 49% ownership interest in DKLB BKLN, a 365-unit apartment community located in Brooklyn, New York, for a purchase price of approximately $93,500,000, excluding working capital adjustments and closing costs. Prior to this acquisition, the Company owned the remaining 51% ownership interest in the acquired asset and accounted for this investment on the equity method of accounting. Subsequent to the acquisition, the Company continued to own the remaining 51% ownership interest in the acquired asset and accounted for this investment on the equity method of accounting as the Madison International joint venture retained the same rights of which the previous partner was entitled. On September 25, 2018, the Company exchanged its preferred ownership interests in one of the specialty retail assets owned by the joint venture for the acquired asset in a non-cash transaction. Following this exchange, the Company owns 100% of the acquired asset and fully consolidates the property. In accordance with accounting guidance, the Company recorded the asset received at its fair value (based upon the income approach using current rents and market cap rates and discount rates) and recorded a gain on change in control as noted above.
The fair value of the University Park at MIT and DKLB BKLN acquisitions was allocated as follows. All amounts are presented in thousands.
 
University Park at MIT
DKLB BKLN
Total
Real Estate, net
$
538,887

$
188,006

$
726,893

Cash and restricted cash
13,646

5,378

19,024

Other assets (1)
84,315

4,396

88,711

 
636,848

197,780

834,628

Mortgage debt and notes payable, nonrecourse
(269,962
)
(104,442
)
(374,404
)
Other liabilities (2)
(15,431
)
(1,952
)
(17,383
)
Noncontrolling interest
(6,674
)

(6,674
)
Net Assets Acquired
$
344,781

$
91,386

$
436,167

Gains on change in control of interests
$
193,674

$
25,992

$
219,666

Carrying value of previously held equity interests
(35,225
)
21,083

(14,142
)
Fair value of previously held equity interests (3)
158,449

47,075

205,524

Fair value of ownership interests exchanged (4)
186,332

44,311

230,643

Total consideration
$
344,781

$
91,386

$
436,167

(1)
Other assets includes $20,200 of in-place leases and $60,188 of below-market ground leases with weighted-average lives of 6.5 years and 65 years, respectively.
(2)
Other liabilities includes $9,840 of below-market tenant leases with weighted-average lives of 6.5 years.
(3)
The significant assumptions used to value the previously held equity interests in the University Park at MIT and DKLB BKLN assets were determined to be Level 3 inputs. The weighted-average terminal capitalization rate and the weighted-average discount rate applied to cash flows for University Park at MIT were 5.6% and 6.8%, respectively. The weighted-average terminal capitalization rate and the weighted-average discount rate applied to cash flows for DKLB BKLN were 4.5% and 5.5%, respectively.
(4)
Includes the Company’s fair value of the preferred equity interests in the properties exchanged, plus cash contributed to the joint venture.
Bayside Village
In January 2018, our 50% noncontrolling partner at Bayside Village, an apartment community in San Francisco, CA, closed on a transaction where they sold the majority of their 50% ownership interest to an unrelated third party. Prior to this transaction, the Company fully consolidated the property, as the outside partner, in accordance with the partnership agreement, lacked any substantive participating rights. Simultaneously with the sale, the Company amended the partnership agreement to grant substantive participating rights to the new outside partner and received a cash payment of $24,000,000 in connection with such amendment. The joint venture is adequately capitalized and does not contain the characteristics of a VIE. Based on the substantive participating rights held by the new outside partner, the Company concluded it appropriate to deconsolidate the entity and account for the Company’s 50% investment in the property using the equity method of accounting. The Company remeasured its equity interest in the property, as required by the accounting guidance, at fair value (based upon the income approach using current rents and market discount rates). As a result of the deconsolidation and the current estimated fair value, the Company removed approximately $415,000,000 of real estate, net, $127,000,000 of nonrecourse mortgage debt, net, $133,090,000 of noncontrolling interest from the Consolidated Balance Sheet, increased investments in and advances to unconsolidated entities by approximately $227,000,000 and recorded $117,711,000 as a gain on change in control of interests in the Consolidated Statement of Operations for the nine months ended September 30, 2018.

25

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

O. Loss on Extinguishment of Debt
For the three and nine months ended September 30, 2018, the Company recorded $19,000 and $3,995,000, respectively, primarily related to debt refinancings during the six months ended June 30, 2018 at Pavilion and Museum Towers, apartment buildings in Chicago, Illinois and Philadelphia, Pennsylvania, respectively. For the three and nine months ended September 30, 2017, the Company recorded $0 and $2,843,000, respectively, primarily related to Illinois Science and Technology Park, office buildings in Skokie, Illinois that were sold during the first quarter of 2017.

P. Net Gain on Disposition of Interest in Unconsolidated Entities
The following table summarizes the net gain on disposition of interest in unconsolidated entities which are included in earnings (loss) from unconsolidated entities:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
2017
 
2018
2017
 
 
(in thousands)
Specialty Retail - Madison International
Various
$
181,504

$

 
$
181,504

$

Regional Malls - QIC
Various


 
75,107


Federally assisted housing apartments
Various

28,828

 
8,899

73,130

Shops at Bruckner Boulevard (Specialty Retail Center)
Bronx, New York


 

8,183

Other


 

469

 
$
181,504

$
28,828

 
$
265,510

$
81,782

During the three months ended September 30, 2018, the Company exchanged its preferred ownership interests in ten specialty retail properties included in the Madison International joint venture for our partner’s 50% ownership interest in three life science office buildings located in Cambridge, Massachusetts, and our partner’s 49% ownership interest in DKLB BKLN, a 365-unit apartment community located in Brooklyn, New York, in non-cash transactions.
During the nine months ended September 30, 2018, the Company completed the sale of Antelope Valley Mall (Q1 2018), Mall at Robinson (Q1 2018), Shops at Wiregrass (Q1 2018), Victoria Gardens - Bass Pro Shops (Q1 2018) and Westchester’s Ridge Hill (Q2 2018) under our signed definitive agreement with QIC. These 2018 dispositions generated net cash proceeds of approximately $84,671,000 and a note receivable of $113,065,000, which matures in April 2019.
During the nine months ended September 30, 2018, the Company completed the sale of five unconsolidated federally assisted housing (“FAH”) apartment communities. These dispositions resulted in net cash proceeds of $3,013,000. During the nine months ended September 30, 2017, the Company completed the sale of twenty-nine unconsolidated FAH apartment communities. These dispositions resulted in net cash proceeds of $56,969,000.
During the nine months ended September 30, 2017, the Company sold its ownership interest in Shops at Bruckner Boulevard, an unconsolidated specialty retail center in Bronx, New York. The sale generated net cash proceeds of $8,863,000.

Q. Income Taxes
The Company files its U.S. federal tax return as a REIT and the Company’s TRSs file as C corporations. The Company files individual separate income tax returns in various states.
As a REIT, the Company is required to annually distribute to its stockholders an amount equal to at least 90% of its REIT taxable income (computed without regard to the dividends paid deduction and net capital gain and net of any available net operating losses). The Company may be subject to certain state gross income and franchise taxes, as well as taxes on any undistributed income and federal and state corporate taxes on any income earned by its TRSs. In addition, the Company could be subject to corporate income taxes related to assets held by the REIT which are sold during the five year period following the date of conversion (ending December 31, 2020), to the extent such sold assets had a built-in gain on the date of conversion.
Income tax expense was $2,981,000 and $3,940,000 for the three and nine months ended September 30, 2018, respectively, and $304,000 and $4,817,000 for the three and nine months ended September 30, 2017, respectively. The Company did not recognize any federal corporate income tax on its earnings in the REIT for any of the periods presented.

26

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

At December 31, 2017, the TRSs had a federal net operating loss carryforward for tax purposes of $106,505,000 available to use on its tax return expiring in the years ending December 31, 2028 through 2037. At December 31, 2017, the Company had a federal net operating loss carryforward of $77,390,000 available to use on its REIT tax return expiring in the years ending December 31, 2034 and 2035.

R. Net Gain (Loss) on Disposition of Rental Properties, Net of Tax
The following table summarizes the net gain (loss) on disposition of rental properties, net of tax:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
2017
 
2018
2017
 
 
(in thousands)
Specialty Retail Centers:
 
 
 
 
 
 
Brooklyn Commons
Brooklyn, New York
$

$

 
$
25,736

$

Fairmont Cinema
San Jose, California


 

4,128

Avenue at Tower City Center & Tower City Parking
Cleveland, Ohio


 

500

Apartments:
 
 
 
 
 
 
Kapolei Lofts
Kapolei, Hawaii
60,931


 
60,931


461 Dean Street
Brooklyn, New York


 
(3,713
)

Office Building:
 
 
 
 
 
 
Illinois Science & Technology Park (4 buildings)
Skokie, Illinois


 

3,771

Post Office Plaza
Cleveland, Ohio

(1,244
)
 

(1,244
)
Federally assisted housing apartment

375

 
464

375

Other

613

 
750

6,235

 
 
60,931

(256
)
 
84,168

13,765

Income tax effect


 
(130
)
(192
)
 
 
$
60,931

$
(256
)
 
$
84,038

$
13,573

Kapolei Lofts
During the nine months ended September 30, 2018, the Company completed the sale of Kapolei Lofts, an apartment community in Kapolei, Hawaii. The Company received cash proceeds of $26,935,000, net of noncontrolling interest and recorded a gain of $60,931,000 with $43,111,000 representing the amount allocated to noncontrolling interest.
Brooklyn Commons
During the nine months ended September 30, 2018, the Company completed the sale of Brooklyn Commons, a specialty retail center in Brooklyn, New York. The Company received net restricted cash proceeds of $31,523,000, being held by an intermediary at September 30, 2018, which was redeployed in a Section 1031 exchange during October 2018.
461 Dean Street
During the nine months ended September 30, 2018, the Company completed the sale of 461 Dean Street, an apartment community in Brooklyn, New York. The Company received net cash proceeds of $147,193,000.
Illinois Science & Technology Park
During the nine months ended September 30, 2017, the Company completed the sale of Illinois Science & Technology Park, comprised of four life science office buildings in Skokie, Illinois. The Company received net cash proceeds of $16,494,000.

27

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

S. Earnings Per Share
The Company’s restricted stock is considered a participating security pursuant to the two-class method for computing earnings per share (“EPS”). The 2006 Units, which are reflected as noncontrolling interests in the Consolidated Balance Sheets, are considered convertible participating securities as they are entitled to participate in dividends paid to the Company’s common stockholders. The 2006 Units are included in the computation of basic EPS using the two-class method and are included in the computation of diluted EPS using the if-converted method. The Class A common stock issuable in connection with conversion of the 2018 Senior Notes and 2020 Senior Notes is included in the computation of diluted EPS using the if-converted method.
The reconciliation of the basic and diluted EPS computations is shown in the following table:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
2017
 
2018
2017
Numerators (in thousands)
 
 
 
 
 
Net earnings attributable to Forest City Realty Trust, Inc.
$
447,173

$
5,454

 
$
715,432

$
103,124

Distributed and undistributed earnings allocated to participating securities
(3,872
)
(205
)
 
(5,940
)
(720
)
Net earnings attributable to common stockholders ‑ Basic
$
443,301

$
5,249

 
$
709,492

$
102,404

Undistributed earnings allocated to participating securities