|FOREST CITY REALTY TRUST, INC. filed this Form 10-Q on 10/30/2018|
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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:
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.