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10-Q
FOREST CITY ENTERPRISES INC filed this Form 10-Q on 09/05/2013
Entire Document
 
FCE-7.31.2013-10Q
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 July 31, 2013
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to                 
Commission file number 1-4372 
_____________________________________________________________
FOREST CITY ENTERPRISES, INC.
(Exact name of registrant as specified in its charter) 
_____________________________________________________________
Ohio
(State or other jurisdiction of
incorporation or organization)
 
 
 
34-0863886
(I.R.S. Employer
Identification No.)
 
 
 
 
 
Terminal Tower
Suite 1100
 
50 Public Square
Cleveland, Ohio
 
44113
(Address of principal executive offices)
 
(Zip Code)
216-621-6060
Registrant’s telephone number, including area code
(Former name, former address and former fiscal year, if changed since last report)
_____________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding, including unvested restricted stock, of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at August 30, 2013
Class A Common Stock, $.33 1/3 par value
179,690,820 shares
Class B Common Stock, $.33 1/3 par value
20,194,160 shares



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


i


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
 
July 31, 2013
 
 
(Unaudited)
January 31, 2013
 
(in thousands)
Assets
 
 
Real Estate
 
 
Completed rental properties
$
8,719,353

$
8,631,542

Projects under construction and development
1,397,607

1,326,703

Land held for development and sale
62,427

65,059

Total Real Estate
10,179,387

10,023,304

Less accumulated depreciation
(1,748,059
)
(1,654,632
)
Real Estate, net – (variable interest entities $1,363.1 million and $1,416.9 million, respectively)
8,431,328

8,368,672

Cash and equivalents – (variable interest entities $26.0 million and $14.2 million, respectively)
306,943

333,220

Restricted cash and escrowed funds – (variable interest entities $155.3 million and $114.9 million, respectively)
496,968

410,414

Notes and accounts receivable, net
442,947

426,200

Investments in and advances to unconsolidated entities
425,243

456,628

Other assets – (variable interest entities $55.7 million and $92.5 million, respectively)
622,682

614,592

Land held for divestiture
1,990

2,706

Total Assets
$
10,728,101

$
10,612,432

Liabilities and Equity
 
 
Liabilities
 
 
Mortgage debt and notes payable, nonrecourse – (variable interest entities $546.3 million and $624.1 million, respectively)
$
5,762,699

$
5,738,960

Bank revolving credit facility


Senior and subordinated debt – (variable interest entities $0 and $29.0 million, respectively)
1,052,511

1,032,969

Accounts payable, accrued expenses and other liabilities – (variable interest entities $82.4 million and $76.2 million, respectively)
960,461

1,093,963

Cash distributions and losses in excess of investments in unconsolidated entities
288,386

292,727

Deferred income taxes
475,002

474,406

Mortgage debt and notes payable, nonrecourse of land held for divestiture

1,700

Total Liabilities
8,539,059

8,634,725

Redeemable Noncontrolling Interest
231,434

239,136

Commitments and Contingencies


Equity
 
 
Shareholders’ Equity
 
 
Preferred stock – 7.0% Series A cumulative perpetual convertible, without par value, $50 liquidation preference; 6,400,000 shares authorized; 0 and 211,038 shares issued and outstanding, respectively

10,552

Preferred stock – without par value; 13,600,000 shares authorized; no shares issued


Common stock – $.33 1/3 par value
 
 
Class A, 371,000,000 shares authorized, 178,475,158 and 163,729,240 shares issued and 177,525,166 and 163,722,658 shares outstanding, respectively
59,492

54,576

Class B, convertible, 56,000,000 shares authorized, 20,194,160 and 20,235,273 shares issued and outstanding, respectively; 26,257,961 issuable
6,731

6,745

Total common stock
66,223

61,321

Additional paid-in capital
1,124,163

932,045

Retained earnings
540,451

576,285

Less treasury stock, at cost; 949,992 and 6,582 Class A shares, respectively
(16,116
)
(108
)
Shareholders’ equity before accumulated other comprehensive loss
1,714,721

1,580,095

Accumulated other comprehensive loss
(86,043
)
(103,203
)
Total Shareholders’ Equity
1,628,678

1,476,892

Noncontrolling interest
328,930

261,679

Total Equity
1,957,608

1,738,571

Total Liabilities and Equity
$
10,728,101

$
10,612,432








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

2

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

 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2013
2012
 
2013
2012
 
(in thousands, except per share data)
Revenues from real estate operations
$
291,762

$
241,770

 
$
587,911

$
519,016

Expenses
 
 
 
 
 
Operating expenses
191,404

163,612

 
393,527

320,483

Depreciation and amortization
91,857

50,897

 
160,232

100,261

Impairment of real estate
8,055

460

 
8,055

460

Net loss on land held for divestiture activity
8,007

6,458

 
7,555

6,458

 
299,323

221,427

 
569,369

427,662

Interest expense
(91,723
)
(59,354
)
 
(177,974
)
(114,244
)
Amortization of mortgage procurement costs
(2,669
)
(3,361
)
 
(5,326
)
(6,063
)
Gain (loss) on extinguishment of debt
24,669


 
19,431

(719
)
Interest and other income
12,277

13,551

 
23,182

24,077

Net gain on disposition of partial interests in rental properties
4,932


 
4,932


Loss before income taxes
(60,075
)
(28,821
)
 
(117,213
)
(5,595
)
Income tax expense (benefit)
 
 
 
 
 
Current
(20,249
)
(27,376
)
 
(21,433
)
(26,853
)
Deferred
3,998

18,311

 
(10,651
)
26,963

 
(16,251
)
(9,065
)
 
(32,084
)
110

Net gain on change in control of interests
2,762

6,766

 
2,762

6,766

Earnings (loss) from unconsolidated entities, gross of tax
 
 
 
 
 
Equity in earnings
7,491

16,665

 
13,341

20,438

Impairment

(390
)
 

(390
)
Net gain (loss) on land held for divestiture activity
828

(41,887
)
 
681

(41,887
)
 
8,319

(25,612
)
 
14,022

(21,839
)
Loss from continuing operations
(32,743
)
(38,602
)
 
(68,345
)
(20,778
)
Discontinued operations, net of tax:
 
 
 
 
 
Operating earnings from rental properties
1,289

2,377

 
2,255

3,801

Impairment of real estate

(1,659
)
 

(2,504
)
Gain on disposition of rental properties
9,960


 
25,522

5,370

 
11,249

718

 
27,777

6,667

Net loss
(21,494
)
(37,884
)
 
(40,568
)
(14,111
)
Noncontrolling interests
 
 
 
 
 
(Earnings) loss from continuing operations attributable to noncontrolling interests, gross of tax
5,213

(5,319
)
 
10,757

(5,299
)
Earnings from discontinued operations attributable to noncontrolling interests

(514
)
 
(5,838
)
(1,555
)
 
5,213

(5,833
)
 
4,919

(6,854
)
Net loss attributable to Forest City Enterprises, Inc.
(16,281
)
(43,717
)
 
(35,649
)
(20,965
)
Preferred dividends

(3,850
)
 
(185
)
(7,700
)
Net loss attributable to Forest City Enterprises, Inc. common shareholders
$
(16,281
)
$
(47,567
)
 
$
(35,834
)
$
(28,665
)
Basic and diluted earnings (loss) per common share
 
 
 
 
 
Loss from continuing operations attributable to Forest City Enterprises, Inc. common shareholders
$
(0.14
)
$
(0.28
)
 
$
(0.30
)
$
(0.20
)
Earnings from discontinued operations attributable to Forest City Enterprises, Inc. common shareholders
0.06


 
0.11

0.03

Net loss attributable to Forest City Enterprises, Inc. common shareholders
$
(0.08
)
$
(0.28
)
 
$
(0.19
)
$
(0.17
)








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

3

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

 
Three Months Ended July 31,
 
2013
2012
 
(in thousands)
Net loss
$
(21,494
)
$
(37,884
)
Other comprehensive income (loss), net of tax:
 
 
Unrealized net gains on investment securities (net of tax of $(111) and $(9), respectively)
175

15

Foreign currency translation adjustments (net of tax of $0 and $(534), respectively)

842

Unrealized net gains (losses) on interest rate derivative contracts (net of tax of $(10,510) and $2,306, respectively)
16,604

(3,699
)
Total other comprehensive income (loss), net of tax
16,779

(2,842
)
Comprehensive loss
(4,715
)
(40,726
)
Comprehensive income (loss) attributable to noncontrolling interest
4,507

(5,781
)
Total comprehensive loss attributable to Forest City Enterprises, Inc.
$
(208
)
$
(46,507
)
 
 
 
 
Six Months Ended July 31,
 
2013
2012
 
(in thousands)
Net loss
$
(40,568
)
$
(14,111
)
Other comprehensive income (loss), net of tax:
 
 
Unrealized net gains on investment securities (net of tax of $(195) and $(7), respectively)
307

10

Foreign currency translation adjustments (net of tax of $100 and $(623), respectively)
(158
)
984

Unrealized net gains on interest rate derivative contracts (net of tax of $(10,776) and $(1,480), respectively)
17,029

2,289

Total other comprehensive income, net of tax
17,178

3,283

Comprehensive loss
(23,390
)
(10,828
)
Comprehensive income (loss) attributable to noncontrolling interest
4,217

(6,806
)
Total comprehensive loss attributable to Forest City Enterprises, Inc.
$
(19,173
)
$
(17,634
)






























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


4


Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Equity
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
Preferred Stock
 
Common Stock
Additional
 
 
 
Other
 
 
 
Series A
 
Class A
Class B
Paid-In
Retained
Treasury Stock
Comprehensive
Noncontrolling
 
 
Shares
Amount
 
Shares
Amount
Shares
Amount
Capital
Earnings
Shares
Amount
(Loss) Income
Interest
Total
 
(in thousands)
Balances at January 31, 2012
4,400

$
220,000

 
148,336

$
49,445

20,935

$
6,978

$
740,988

$
571,989

108

$
(1,874
)
$
(120,460
)
$
284,806

$
1,751,872

Net earnings, net of $9,785 attributable to redeemable noncontrolling interest
 
 
 
 
 
 
 
 
36,425

 
 
 
9,631

46,056

Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
 
 
17,257

(27
)
17,230

Purchase of treasury stock
 
 
 
 
 
 
 
 
 
129

(1,963
)
 
 
(1,963
)
Conversion of Class B to Class A shares
 
 
 
700

233

(700
)
(233
)
 
 
 
 
 
 

Issuance of Class A shares in exchange for Series A preferred stock
(4,189
)
(209,448
)
 
13,852

4,617

 
 
201,530

(19,069
)
 
 
 
 
(22,370
)
Restricted stock vested
 
 
 
519

173

 
 
(173
)
 
 
 
 
 

Exercise of stock options
 
 
 
322

108

 
 
4,531

 
(230
)
3,729

 
 
8,368

Preferred stock dividends
 
 
 
 
 
 
 
 
(13,060
)
 
 
 
 
(13,060
)
Stock-based compensation
 
 
 
 
 
 
 
14,751

 
 
 
 
 
14,751

Excess income tax deficiency from stock-based compensation
 
 
 
 
 
 
 
(961
)
 
 
 
 
 
(961
)
Redeemable noncontrolling interest adjustment
 
 
 
 
 
 
 
(8,424
)
 
 
 
 
 
(8,424
)
Acquisition of partners’ noncontrolling interest in consolidated subsidiaries
 
 
 
 
 
 
 
(20,197
)
 
 
 
 
(7,138
)
(27,335
)
Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
1,886

1,886

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
(27,680
)
(27,680
)
Change to equity method of accounting for subsidiaries
 
 
 
 
 
 
 
 
 
 
 
 
(724
)
(724
)
Other changes in noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
925

925

Balances at January 31, 2013
211

$
10,552

 
163,729

$
54,576

20,235

$
6,745

$
932,045

$
576,285

7

$
(108
)
$
(103,203
)
$
261,679

$
1,738,571

Net loss, net of $11,787 attributable to redeemable noncontrolling interest
 
 
 
 
 
 
 
 
(35,649
)
 
 
 
6,868

(28,781
)
Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
 
 
17,160

18

17,178

Purchase of treasury stock
 
 
 
 
 
 
 
 
 
180

(3,167
)
 
 
(3,167
)
Conversion of Class B to Class A shares
 
 
 
41

14

(41
)
(14
)
 
 
 
 
 
 

Issuance of Class A shares in exchange for Series A preferred stock
(110
)
(5,489
)
 
363

121

 
 
5,368

 
 
 
 
 

Redemption of Series A preferred stock
(101
)
(5,063
)
 
 
 
 
 
 
 
 
 
 
 
(5,063
)
Proceeds from settlement of equity call hedge related to issuance of preferred stock
 
 
 
 
 
 
 
23,099

 
765

(12,868
)
 
 
10,231

Issuance of Class A shares in exchange for Puttable Equity-Linked Senior Notes due 2014 (See Note Q - Capital Stock)
 
 
 
13,679

4,559

 
 
189,786

 
 
 
 
 
194,345

Restricted stock vested
 
 
 
597

200

 
 
(200
)
 
 
 
 
 

Exercise of stock options
 
 
 
66

22

 
 
993

 
(2
)
27

 
 
1,042

Preferred stock dividends
 
 
 
 
 
 
 
 
(185
)
 
 
 
 
(185
)
Stock-based compensation
 
 
 
 
 
 
 
9,310

 
 
 
 
 
9,310

Excess income tax deficiency from stock-based compensation
 
 
 
 
 
 
 
(133
)
 
 
 
 
 
(133
)
Redeemable noncontrolling interest adjustment
 
 
 
 
 
 
 
(4,085
)
 
 
 
 
 
(4,085
)
Acquisition of partner's noncontrolling interest in consolidated subsidiaries
 
 
 
 
 
 
 
(6,020
)
 
 
 
 
10

(6,010
)
Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
42,149

42,149

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
(6,365
)
(6,365
)
Change to equity method of accounting for subsidiaries
 
 
 
 
 
 
 
 
 
 
 
 
(1,518
)
(1,518
)
Adjustment due to change in ownership of consolidated subsidiaries
 
 
 
 
 
 
 
(26,000
)
 
 
 
 
26,000


Other changes in noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
89

89

Balances at July 31, 2013

$

 
178,475

$
59,492

20,194

$
6,731

$
1,124,163

$
540,451

950

$
(16,116
)
$
(86,043
)
$
328,930

$
1,957,608





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

5

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

 
Six Months Ended July 31,
 
2013
2012
 
(in thousands)
Net loss
$
(40,568
)
$
(14,111
)
Depreciation and amortization
160,232

100,261

Amortization of mortgage procurement costs
5,326

6,063

Impairment of real estate
8,055

460

Impairment of unconsolidated entities

390

Write-offs of abandoned development projects
777

13,659

(Gain) loss on extinguishment of debt
(19,431
)
719

Net loss on land held for divestiture activity
7,555

6,458

Net gain on disposition of partial interests in rental properties
(4,932
)

Net gain on change in control of interests
(2,762
)
(6,766
)
Deferred income tax expense (benefit)
(10,651
)
26,963

Equity in earnings
(13,341
)
(20,438
)
Net (gain) loss on land held for divestiture activity of unconsolidated entities
(681
)
41,887

Stock-based compensation expense
6,135

5,208

Amortization and mark-to-market adjustments of derivative instruments
11,989

(5,262
)
Non-cash interest expense related to Senior Notes
220

186

Cash distributions from operations of unconsolidated entities
29,580

30,119

Discontinued operations:
 
 
Depreciation and amortization
1,987

6,994

Amortization of mortgage procurement costs
50

492

Loss on extinguishment of debt
40


Impairment of real estate

4,090

Deferred income tax expense (benefit)
242

(4,070
)
Gain on disposition of rental properties
(43,103
)
(8,879
)
Cost of sales of land included in projects under construction and development and completed rental properties
6,222

2,875

Decrease (increase) in land held for development and sale
309

(1,811
)
Decrease in land held for divestiture
26

33,479

(Increase) decrease in notes and accounts receivable
(5,782
)
11,355

Decrease in other assets
5,096

2,235

Decrease in accounts payable, accrued expenses and other liabilities
(42,551
)
(14,743
)
Net cash provided by operating activities
60,039

217,813

Cash Flows from Investing Activities
 
 
Capital expenditures
(242,091
)
(442,098
)
Payment of lease procurement costs
(4,763
)
(5,886
)
Increase in other assets
(18,505
)
(19,140
)
(Increase) decrease in restricted cash and escrowed funds used for investing purposes
(11,029
)
187,297

Proceeds from disposition of rental properties
81,841

8,896

Decrease (increase) in investments in and advances to unconsolidated entities
21,966

(11,992
)
Net cash used in investing activities
(172,581
)
(282,923
)
Cash Flows from Financing Activities
 
 
Proceeds from nonrecourse mortgage debt and notes payable
89,054

461,579

Principal payments on nonrecourse mortgage debt and notes payable
(183,107
)
(329,184
)
Borrowings on bank revolving credit facility
225,950

75,000

Payments on bank revolving credit facility
(225,950
)
(75,000
)
Proceeds from issuance of Convertible Senior Notes due 2020, net of $8,750 of issuance costs
291,250


Make-whole premium and inducements related to exchange of Senior Notes due 2014 for Class A common stock
(5,490
)

Transaction costs related to exchange of Senior Notes due 2014 for Class A common stock
(2,300
)

Redemption of Senior Notes due 2015
(53,253
)

Deferred financing costs
(6,996
)
(7,471
)
Increase in restricted cash and escrowed funds used for financing purposes
(75,525
)
(8,208
)
Purchase of treasury stock
(3,167
)
(1,591
)
Exercise of stock options
1,042

13

Redemption of Series A preferred stock
(5,063
)

Proceeds from equity call hedge related to the issuance of Series A preferred stock
10,231


Dividends paid to preferred shareholders
(185
)
(7,700
)
Contributions from noncontrolling interests
42,149

240

Distributions to noncontrolling interests
(6,365
)
(19,188
)
Acquisitions of noncontrolling interests
(6,010
)

Net cash provided by financing activities
86,265

88,490

Net (decrease) increase in cash and equivalents
(26,277
)
23,380

Cash and equivalents at beginning of period
333,220

217,486

Cash and equivalents at end of period
$
306,943

$
240,866

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

6

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

Supplemental Non-Cash Disclosures:
The following table represents a summary of non-cash transactions including, but not limited to, acquisitions of partners' noncontrolling interests, dispositions of properties whereby the nonrecourse mortgage debt is assumed by the buyer, exchange of senior and subordinated debt for Class A common stock, conversion of Series A preferred stock to Class A common stock, changes in consolidation methods due to the occurrence of certain triggering events, change in construction payables, reclassification prior to sale of outlot land parcels from projects under construction and development or completed rental properties to land held for sale and capitalization of stock-based compensation granted to employees directly involved with the development and construction of real estate.
In addition to the transactions noted above, during the three months ended July 31, 2012, the Company issued $125,000,000 of 7.375% Senior Notes due 2034 ($116,792,000, net of discount), which was immediately deposited into a cash escrow account. As a result, this non-cash transaction is included in the increase in senior and subordinated debt and increase in restricted cash and escrowed funds within the Financing Activities section of the table below.
 
Six Months Ended July 31,
 
2013
2012
 
(in thousands)
Operating Activities
 
Increase in land held for development and sale
$
(4,255
)
$
(1,916
)
Decrease (increase) in land held for divestiture
1,661

(5,538
)
(Increase) decrease in notes and accounts receivable
(3,777
)
6,912

Increase in other assets
(29,068
)
(2,435
)
(Decrease) increase in accounts payable, accrued expenses and other liabilities
(30,234
)
6,701

Total effect on operating activities
$
(65,673
)
$
3,724

Investing Activities
 
 
Decrease (increase) in projects under construction and development
$
24,935

$
(14,174
)
Increase in completed rental properties
(49,746
)
(2,995
)
Decrease in restricted cash and escrowed funds

3,624

(Increase) decrease in investments in and advances to affiliates
(5,937
)
9,524

Total effect on investing activities
$
(30,748
)
$
(4,021
)
Financing Activities
 
 
Increase (decrease) in nonrecourse mortgage debt and notes payable
$
116,092

$
(2,561
)
(Decrease) increase in senior and subordinated debt
(218,675
)
118,951

Increase in restricted cash and escrowed funds

(116,792
)
Increase in treasury stock
(12,868
)

Decrease in preferred stock
(5,489
)

Increase in Class A common stock
4,680


Increase (decrease) in additional paid-in capital
183,986

(5,610
)
Increase in redeemable noncontrolling interest
4,085

7,266

Increase (decrease) in noncontrolling interest
24,610

(957
)
Total effect on financing activities
$
96,421

$
297



7

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


A. Accounting Policies
Basis of Presentation
The interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended January 31, 2013, as amended on Form 10-K/A on April 30, 2013. 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 necessary for a fair statement of financial position, results of operations and cash flows at the dates and for the periods presented have been included.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the Company to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. Some of the critical estimates 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, impairment of real estate and other-than-temporary impairments on its equity method investments. As a result of the nature of estimates made by the Company, actual results could differ.
In April 2013, management approved a plan to demolish Ten MetroTech Center, an office building in Brooklyn, New York, to clear the land for its redevelopment or sale. Accordingly, the estimated useful life of Ten MetroTech Center was adjusted to expire at the anticipated scheduled demolition date in September 2013, which resulted in $25,258,000 and $27,283,000 of accelerated depreciation expense recognized in the Consolidated Statements of Operations during the three and six months ended July 31, 2013.
Reclassifications
During the year ended January 31, 2013, the Company determined that Barclays Center (the "Arena"), a sports and entertainment arena located in Brooklyn, New York, met the criteria for a reportable operating segment. Therefore, the segment reporting disclosures related to Barclays Center as of and for the three and six months ended July 31, 2012 have been reclassified from the Commercial Group segment to the Arena segment (see Note PSegment Information). Certain other prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation.
Variable Interest Entities
The Company’s VIEs consist of joint ventures that are engaged in the ownership, development and management of office buildings, regional malls, specialty retail centers, apartment communities, military housing and The Nets, a member of the National Basketball Association (“NBA”). As of July 31, 2013, the Company determined that it was the primary beneficiary of 30 VIEs representing 22 properties, which are consolidated. The creditors of the consolidated VIEs do not have recourse to the Company’s general credit. As of July 31, 2013, the Company held variable interests in 63 VIEs for which it is not the primary beneficiary, which are unconsolidated. The maximum exposure to loss as a result of the ownership of these unconsolidated VIEs is limited to the Company’s applicable investment balances, which approximates $64,000,000 at July 31, 2013.
Accumulated Other Comprehensive Loss
The following table summarizes the components of accumulated other comprehensive income (loss) (“accumulated OCI”):
 
July 31, 2013
January 31, 2013
 
(in thousands)
Unrealized (gains) losses on securities
$
(162
)
$
340

Unrealized (gains) losses on foreign currency translation
189

(69
)
Unrealized losses on interest rate contracts (1)
140,692

168,497

 
140,719

168,768

Income tax benefit
(54,511
)
(65,382
)
Noncontrolling interest
(165
)
(183
)
Accumulated Other Comprehensive Loss
$
86,043

$
103,203

(1)
Included in the amounts as of July 31 and January 31, 2013 are $107,491 and $126,506, respectively, of unrealized losses on an interest rate swap associated with New York Times, an office building in Manhattan, New York, on its nonrecourse mortgage debt with a notional amount of $640,000. This swap effectively fixes the mortgage at an all-in lender interest rate of 6.40% and expires in September 2017.

8

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

The following table summarizes the changes, net of tax and noncontrolling interest, of accumulated OCI by component for the six months ended July 31, 2013:
 
Securities
Foreign Currency Translation
Interest Rate Contracts
Total
 
(in thousands)
Balance, February 1, 2013
$
(208
)
$
42

$
(103,037
)
$
(103,203
)
OCI before reclassifications
307

(158
)
15,451

15,600

Loss reclassified from accumulated OCI


1,560

1,560

Total other comprehensive income
307

(158
)
17,011

17,160

Balance, July 31, 2013
$
99

$
(116
)
$
(86,026
)
$
(86,043
)
The following table summarizes losses reclassified from accumulated OCI and their location on the Consolidated Statements of Operations for the six months ended July 31, 2013:
Accumulated OCI Components
Loss Reclassified from Accumulated OCI
 
Location on Consolidated Statements of Operations
 
(in thousands)
 
 
Interest rate contracts
$
2,504

 
Interest expense
Interest rate contracts
58

 
Equity in earnings
 
2,562

 
Total before income tax and noncontrolling interest
 
(994
)
 
Income tax benefit
 
(8
)
 
Noncontrolling interest
 
$
1,560

 
Loss reclassified from accumulated OCI
Noncontrolling Interest
Interests held by partners in consolidated entities are reflected in noncontrolling interest, which represents the noncontrolling interests’ share of the underlying net assets of the Company’s consolidated subsidiaries. Noncontrolling interest that is not redeemable is reported in the equity section of the Consolidated Balance Sheets.
Noncontrolling interests where the Company may be required to repurchase the noncontrolling interest at fair value under a put option or other contractual redemption requirement are reported in the mezzanine section of the Consolidated Balance Sheets between liabilities and equity, as redeemable noncontrolling interest. The Company adjusts the redeemable noncontrolling interest to redemption value (which approximates fair value) at each balance sheet date with changes recognized as an adjustment to additional paid-in capital (see Note F – Fair Value Measurements).
New Accounting Guidance
The following accounting pronouncements were adopted during the six months ended July 31, 2013:
In July 2013, the Financial Accounting Standards Board ("FASB") issued an amendment to the accounting guidance on the use of benchmark interest rates for hedge accounting. This guidance provides an entity the option to use the Fed Funds Effective Swap Rate, in addition to the rate on United States Treasuries and London Interbank Offered Rate ("LIBOR"), for hedge accounting purposes. The guidance also removes restrictions on using different benchmark rates for similar hedges. This guidance is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this guidance on July 17, 2013 did not have a material impact on the Company's consolidated financial statements.
In February 2013, the FASB issued an amendment to the accounting guidance for the reporting of amounts reclassified out of accumulated OCI. This guidance does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated OCI by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated OCI by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. This guidance is effective prospectively for reporting periods beginning after December 15, 2012. The required disclosures upon adoption of this guidance on February 1, 2013 are included in the Company’s consolidated financial statements.

9

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

In July 2012, the FASB issued an amendment to the accounting guidance on testing indefinite-lived intangible assets for impairment. This guidance provides an entity the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is not more likely than not that the asset is impaired, then the entity is not required to take further action. If an entity concludes otherwise, it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative test by comparing the fair value with the carrying amount. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this guidance on February 1, 2013 did not have a material impact on the Company’s consolidated financial statements.
In December 2011, the FASB issued an amendment to the accounting guidance on derecognition of in substance real estate. This guidance specifies that when a parent company (reporting entity) ceases to have a controlling financial interest (as described in the accounting guidance on consolidation) in a subsidiary that is in substance real estate as a result of a default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance on property, plant and equipment to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness. This guidance is effective for fiscal years and interim reporting periods within those years, beginning on or after June 15, 2012. The adoption of this guidance on February 1, 2013 did not impact the Company’s consolidated financial statements or their comparability to previously issued financial statements as the guidance in this amendment is consistent with the Company's previous accounting policies.
In December 2011, the FASB issued an amendment to the accounting guidance that requires entities to disclose both gross and net information on financial instruments and transactions eligible for offset on the balance sheets and financial instruments and transactions subject to an agreement similar to a master netting arrangement. In January 2013, the FASB issued guidance clarifying that the scope of disclosures about offsetting assets and liabilities should apply only to derivatives and hedging instruments. This guidance is effective for annual and interim reporting periods beginning on or after January 1, 2013. The adoption of this guidance on February 1, 2013 did not have a material impact on the Company’s consolidated financial statements.
The following new accounting pronouncement will be adopted on its respective required effective date:
In July 2013, the FASB issued an amendment to the accounting guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or tax credit carryforward exists. This guidance, which clarifies whether the unrecognized tax benefit should be recorded as a liability or reduction of the related deferred tax asset, is effective for fiscal years and interim reporting periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company does not expect the adoption of this guidance to have a material impact on the Company's consolidated financial statements.

B. Mortgage Debt and Notes Payable, Nonrecourse
The following table summarizes the mortgage debt and notes payable, nonrecourse maturities, as of July 31, 2013:
Fiscal Years Ending January 31,
Total
Maturities
 
(in thousands)
2014
$
579,133

2015
1,018,782

2016
487,247

2017
365,948

2018
1,192,940

Thereafter
2,118,649

Total
$
5,762,699



10

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

C. Bank Revolving Credit Facility
In February 2013, the Company entered into a Fourth Amended and Restated Credit Agreement and a Fourth Amended and Restated Guaranty of Payment of Debt (collectively, the “Credit Facility”) which provided total available borrowings of $465,000,000, subject to certain reserve commitments to be established, as applicable, on certain dates to be used to retire certain of the Company's Senior Notes that become due during the term of the amendment, and provided an accordion provision allowing the Company to increase its total borrowings to $500,000,000 upon satisfaction of certain conditions set forth in the Credit Facility. The Credit Facility matures on February 21, 2016 and provides for one, 12-month extension option, subject to certain conditions. Borrowings bear interest at LIBOR plus 3.50%. Up to $100,000,000 of the available borrowings may be used, in the aggregate, for letters of credit and/or surety bonds. The Credit Facility has a number of restrictive covenants, including a prohibition on certain consolidations and mergers, limitations on the amount of debt, guarantees and property liens that the Company may incur and restrictions on the pledging of ownership interests in subsidiaries. In addition, the amendment permits the Company to repurchase up to $100,000,000 of Class A Common Stock and to declare or pay dividends in an amount not to exceed $24,000,000 in the aggregate in any four fiscal quarter period to Class A or B common shareholders, subject to certain conditions. Additionally, the Credit Facility contains certain development limitations and financial covenants, including the maintenance of minimum liquidity, certain debt yield, debt service and cash flow coverage ratios, and specified levels of shareholders’ equity (all as specified in the Credit Facility). At July 31, 2013, the Company was in compliance with all of these financial covenants.
On July 3, 2013, the Company met the conditions to exercise the accordion provision increasing the total available borrowings under the Credit Facility to $500,000,000.
On July 31, 2013, the Company entered into a First Amendment to the Credit Facility ("First Amendment") that set forth terms and conditions pursuant to which the Company may redeem its 6.500% Senior Notes due 2017 and 7.375% Senior Notes due 2034, including the establishment of reserve commitments, as applicable, upon trigger dates established in accordance with the First Amendment.
The Company also has a Second Amended Pledge Agreement (“Pledge Agreement”) with the banks party to the Credit Facility. The Pledge Agreement secures the Company’s obligations under the Credit Facility by granting a security interest to the bank group in its right, title and interest as a member, partner, shareholder or other equity holder of certain direct subsidiaries, including, but not limited to, its right to receive profits, proceeds, accounts, income, dividends, distributions or return of capital from such subsidiaries, to the extent the granting of such security interest would not result in a default under project level financing or the organizational documents of such subsidiary.
The following table summarizes the available credit on the Credit Facility:
 
July 31, 2013
January 31, 2013
 
(in thousands)
Maximum borrowings
$
500,000

$
450,000

Less outstanding balances:
 
 
Borrowings


Letters of credit
56,920

67,456

Surety bonds


Reserve for retirement of indebtedness (1)
132,144


Available credit
$
310,936

$
382,544

(1)
On August 23, 2013, this reserve for retirement of indebtedness was removed in conjunction with the redemption of the 6.500% Senior Notes due 2017 (See Note D – Senior and Subordinated Debt).


11

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

D. Senior and Subordinated Debt
The following table summarizes the Company’s senior and subordinated debt:
 
July 31, 2013
January 31, 2013
 
(in thousands)
Senior Notes:
 
 
3.625% Puttable Equity-Linked Senior Notes due 2014, net of discount
$
1,112

$
199,457

7.625% Senior Notes due 2015

53,253

5.000% Convertible Senior Notes due 2016
50,000

50,000

6.500% Senior Notes due 2017
132,144

132,144

4.250% Convertible Senior Notes due 2018
350,000

350,000

3.625% Convertible Senior Notes due 2020
300,000


7.375% Senior Notes due 2034, net of discount
219,255

219,115

Total Senior Notes
1,052,511

1,003,969

Subordinated Debt:
 
 
Subordinate Tax Revenue Bonds due 2013

29,000

Total Senior and Subordinated Debt
$
1,052,511

$
1,032,969

On March 29, 2013, in accordance with the terms of the indenture dated as of May 19, 2003, the Company redeemed all of the remaining $53,253,000 principal amount of its outstanding 7.625% Senior Notes due 2015 at par value.
On April 16, 2013, the Company entered into separate, privately negotiated exchange agreements with certain holders of the 3.625% Puttable Equity-Linked Senior Notes due 2014 ("2014 Senior Notes") to exchange such notes for Class A common stock. Under the terms of the agreements, holders agreed to exchange $138,853,000 in aggregate principal amount of 2014 Senior Notes for a total of 9,549,721 shares of Class A common stock and a cash payment of $4,860,000 for additional exchange consideration, accrued interest and in lieu of fractional shares. The number of shares of Class A common stock issued in exchange for the 2014 Senior Notes equaled the number of shares into which the 2014 Senior Notes were convertible. Under the accounting guidance for induced conversions of convertible debt, the additional amounts paid to induce the holders to exchange their 2014 Senior Notes was expensed, resulting in a non-tax deductible loss of $4,762,000 during the six months ended July 31, 2013, which is recorded as extinguishment of debt.
On May 31, 2013, pursuant to the terms of the Indenture governing the 2014 Senior Notes, the Company issued a put termination notice to the noteholders. As of July 12, 2013, the last settlement date for noteholders to put the 2014 Senior Notes to the Company, $60,033,000 aggregate principal amount of the 2014 Senior Notes were put, for which noteholders received 4,128,806 shares of Class A common stock and cash payments totaling $1,088,000 for interest payable to October 15, 2013 and in lieu of fractional shares. Following the settlement of the put transactions, $1,114,000 aggregate principal amount of the 2014 Senior Notes remains outstanding. All terms of the Indenture governing the 2014 Senior Notes, other than the termination of the put rights of the 2014 Senior Notes, remain unchanged.
In July 2013, the Company issued $300,000,000 of 3.625% Convertible Senior Notes due August 15, 2020 (“2020 Senior Notes”) in a private placement. The 2020 Senior Notes were issued at par and accrued interest is payable semi-annually on February 15 and August 15, beginning February 15, 2014. The net cash proceeds from the issuance of the 2020 Senior Notes, after deducting the initial purchaser's discount and estimated offering expenses payable by the Company, were $291,250,000.
Holders may convert their 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. Upon conversion, a note holder would receive 41.3129 shares of Class A common stock per $1,000 principal amount of 2020 Senior Notes converted, based on a conversion price of approximately $24.21 per share of Class A common stock, subject to adjustment. The amount payable upon a conversion of the 2020 Senior Notes is only payable in shares of Class A common stock, except for cash paid in lieu of fractional shares. If the daily volume weighted average price of the Class A common stock has equaled or exceeded 130% ($31.47 at July 31, 2013) of the conversion price then in effect for at least 30 trading days (whether or not consecutive) during any period of 30 consecutive trading days, the Company may, at its option, elect to redeem any or all of the 2020 Senior Notes at any time up to August 15, 2018 at par, plus accrued and unpaid interest. If elected, the Company is required to issue a redemption notice that designates the effective date that the 2020 Senior Notes will be redeemed, which shall be a date at least 30 days (but not more than 60 days) after the mailing of such redemption notice (the “Redemption Date”). Holders electing to convert their 2020 Senior Notes after the mailing of a redemption notice and before the Redemption Date shall in certain circumstances be entitled to receive a make-whole premium payable in additional shares of Class A common stock.
On August 23, 2013, in accordance with the terms of the indenture dated as of January 25, 2005, the Company redeemed all of the remaining $132,144,000 principal amount of its outstanding 6.500% Senior Notes due 2017 at par value.

12

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

All of the Company’s senior notes are unsecured senior obligations and rank equally with all existing and future unsecured indebtedness; however, they are effectively subordinated to all existing and future secured indebtedness and other liabilities of the Company’s subsidiaries to the extent of the value of the collateral securing such other debt, including the Credit Facility. The indentures governing the senior notes contain covenants providing, among other things, limitations on incurring additional debt and payment of dividends. At July 31, 2013, the Company was in compliance with these financial covenants.

E. Derivative Instruments and Hedging Activities
Risk Management Objective of Using Derivatives
The Company maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned impact on earnings and cash flows that may be caused by interest rate volatility. The Company’s strategy includes the use of interest rate swaps and option contracts that have indices related to the pricing of specific balance sheet liabilities. The Company enters into interest rate swaps to convert certain floating-rate debt to fixed-rate long-term debt, and vice-versa, depending on market conditions, or forward starting swaps to hedge the changes in benchmark interest rates on forecasted financings. The Company enters into interest rate swap agreements for hedging purposes for periods that are generally one to ten years. Option products utilized include interest rate caps, floors and Treasury options. The use of these option products is consistent with the Company’s risk management objective to reduce or eliminate exposure to variability in future cash flows primarily attributable to changes in benchmark rates relating to forecasted financings, and the variability in cash flows attributable to increases relating to interest payments on its floating-rate debt. The caps and floors have typical durations ranging from one to three years while the Treasury options are for periods of five to ten years. The Company does not have any forward starting swaps or Treasury options outstanding at July 31, 2013.
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.
The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated OCI and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During both the three and six months ended July 31, 2013, the Company recorded $597,000 as an increase to interest expense related to ineffectiveness arising from the early termination of an interest rate swap. The swap was terminated because the hedged debt was paid off early as a result of an asset sale. The amount of ineffectiveness charged to earnings was insignificant for the three and six months ended July 31, 2012. As of July 31, 2013, the Company expects that within the next twelve months it will reclassify amounts recorded in accumulated OCI into earnings as an increase in interest expense of approximately $25,643,000, net of tax. However, the actual amount reclassified could vary due to future changes in fair value of these derivatives.
Fair Value Hedges of Interest Rate Risk
From time to time, the Company and/or certain of its joint ventures (the “Joint Ventures”) enter into total rate of return swaps (“TRS”) on various tax-exempt fixed-rate borrowings. The TRS convert these borrowings from a fixed rate to a variable rate. In exchange for a fixed rate, the TRS require the Company and/or the Joint Ventures to pay a variable rate, generally equivalent to the Securities Industry and Financial Markets Association ("SIFMA") rate plus a spread. At July 31, 2013, the SIFMA rate was 0.05%. Additionally, the Company and/or the Joint Ventures have guaranteed the fair value of the underlying borrowings. Fluctuation in the value of the TRS is offset by the fluctuation in the value of the underlying borrowings, resulting in minimal financial impact. At July 31, 2013, the aggregate notional amount of TRS that are designated as fair value hedging instruments is $285,845,000. The underlying TRS borrowings are subject to a fair value adjustment (see Note FFair Value Measurements).
Nondesignated Hedges of Interest Rate Risk
The Company entered into derivative contracts that are intended to economically hedge certain interest rate risk, even though the contracts do not qualify for or the Company has elected not to apply hedge accounting. In situations in which hedge accounting is discontinued, or not elected, and the derivative remains outstanding, the Company records the derivative at its fair value and recognizes changes in the fair value in the Consolidated Statements of Operations.

13

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

In instances where the Company enters into separate derivative instruments effectively hedging the same debt for consecutive annual periods, the amount of notional is excluded from the following disclosure in an effort to provide information that enables the financial statement user to understand the Company’s volume of derivative activity. The following table presents the fair values and location in the Consolidated Balance Sheets of all derivative instruments:
  
Fair Value of Derivative Instruments
 
July 31, 2013
  
Asset Derivatives
(included in Other Assets)
 
Liability Derivatives
(included in Accounts Payable, Accrued Expenses and Other Liabilities)
 
Current
Notional
Fair Value
 
Current
Notional
Fair Value
 
(in thousands)
Derivatives Designated as Hedging Instruments
 
 
 
 
 
Interest rate caps
$

$

 
$

$

Interest rate swap agreements


 
1,151,054

108,228

TRS
18,970

903

 
266,875

9,627

Total
$
18,970

$
903

 
$
1,417,929

$
117,855

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
Interest rate caps
$
477,674

$
15

 
$

$

Interest rate swap agreements


 


TRS
140,800

13,888

 
39,521

18,320

Total
$
618,474

$
13,903

 
$
39,521

$
18,320

 
 
 
 
 
 
 
January 31, 2013
 
(in thousands)
Derivatives Designated as Hedging Instruments
 
 
 
 
 
Interest rate caps
$

$

 
$

$

Interest rate swap agreements


 
1,019,920

129,522

TRS
28,000

965

 
238,395

10,915

Total
$
28,000

$
965

 
$
1,258,315

$
140,437

Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
Interest rate caps
$
479,085

$
7

 
$

$

Interest rate swap agreements
18,877

241

 


TRS
140,800

20,101

 
39,562

15,287

Total
$
638,762

$
20,349

 
$
39,562

$
15,287


14

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

The following tables present the impact of gains and losses related to derivative instruments designated as cash flow hedges included in the accumulated OCI section of the Consolidated Balance Sheets and in equity in earnings and interest expense in the Consolidated Statements of Operations:
 
 
 
Gain (Loss) Reclassified from
Accumulated OCI
Derivatives Designated as
Cash Flow Hedging Instruments
Gain (Loss)
Recognized
in OCI
(Effective Portion)
 
Location on Consolidated Statements
of Operations
Effective
Amount
Ineffective
Amount
 
(in thousands)
Three Months Ended July 31, 2013
 
 
 
 
 
Interest rate caps, interest rate swaps and Treasury options
$
25,552

 
Interest expense
$
(953
)
$
(597
)
Interest rate caps, interest rate swaps and Treasury options

 
Equity in earnings
(15
)
2

Total
$
25,552

 
 
$
(968
)
$
(595
)
Six Months Ended July 31, 2013
 
 
 
 
 
Interest rate caps, interest rate swaps and Treasury options
$
25,240

 
Interest expense
$
(1,907
)
$
(597
)
Interest rate caps, interest rate swaps and Treasury options

 
Equity in earnings
(62
)
4

Total
$
25,240

 
 
$
(1,969
)
$
(593
)
Three Months Ended July 31, 2012
 
 
 
 
 
Interest rate caps, interest rate swaps and Treasury options
$
(7,019
)
 
Interest expense
$
(980
)
$

Interest rate caps, interest rate swaps and Treasury options

 
Equity in earnings
(93
)
6

Total
$
(7,019
)
 
 
$
(1,073
)
$
6

Six Months Ended July 31, 2012
 
 
 
 
 
Interest rate caps, interest rate swaps and Treasury options
$
1,706

 
Interest expense
$
(1,947
)
$

Interest rate caps, interest rate swaps and Treasury options

 
Equity in earnings
(181
)
8

Total
$
1,706

 
 
$
(2,128
)
$
8

The following table presents the impact of gains and losses in the Consolidated Statements of Operations related to derivative instruments:
 
Net Gain (Loss) Recognized
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2013
2012
 
2013
2012
 
(in thousands)
Derivatives Designated as Fair Value Hedging Instruments
 
 
 
 
 
TRS (1)
$
1,320

$
(225
)
 
$
1,226

$
(370
)
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
Interest rate caps and interest rate swaps
$

$
(241
)
 
$
(242
)
$
(446
)
TRS
(7,641
)
3,348

 
(9,247
)
7,651

Total
$
(7,641
)
$
3,107

 
$
(9,489
)
$
7,205

(1)
The net gain (loss) recognized in interest expense from the change in fair value of the underlying TRS borrowings was $(1,320) and $(1,226) for the three and six months ended July 31, 2013, respectively, and $225 and $370 for the three and six months ended July 31, 2012, respectively, offsetting the gain (loss) recognized on the TRS (see Note FFair Value Measurements).

15

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

Credit-risk-related Contingent Features
The principal credit risk to the Company through its interest rate risk management strategy is the potential inability of the financial institution from which the derivative financial instruments were purchased to cover its obligations. If a counterparty fails to fulfill its obligation under a derivative contract, the Company’s risk of loss approximates the fair value of the derivative. To mitigate this exposure, the Company generally purchases its derivative financial instruments from the financial institution that issues the related debt, from financial institutions with which the Company has other lending relationships, or from financial institutions with a minimum credit rating of AA at the time the Company enters into the transaction.
The Company has agreements with its derivative counterparties that contain a provision under which the derivative counterparty could terminate the derivative obligations if the Company defaults on its obligations under the Credit Facility and designated conditions are fulfilled. In instances where the Company’s subsidiaries have derivative obligations that are secured by a mortgage, the derivative obligations could be terminated if the indebtedness between the two parties is terminated, either by loan payoff or default of the indebtedness. In addition, the Company has certain derivative contracts which provide that if the Company’s credit rating falls below certain levels, it may trigger additional collateral to be posted with the counterparty up to the full amount of the liability position of the derivative contracts. Also, certain subsidiaries have agreements that contain provisions whereby the subsidiaries must maintain certain minimum financial ratios.
As of July 31, 2013, the aggregate fair value of all derivative instruments in a liability position, prior to the adjustment for nonperformance risk of $9,818,000, is $145,993,000. The Company had posted collateral consisting primarily of cash and notes receivable of $115,730,000 related to all derivative instruments. If all credit risk contingent features underlying these agreements had been triggered on July 31, 2013, the Company would have been required to post collateral of the full amount of the liability position.

F. Fair Value Measurements
The Company’s financial assets and liabilities subject to fair value measurements are interest rate caps, interest rate swap agreements, TRS and borrowings subject to TRS (see Note EDerivative Instruments and Hedging Activities). The Company’s impairment of real estate and unconsolidated entities is also subject to fair value measurements (see Note L – Impairment of Real Estate, Impairment of Unconsolidated Entities and Write-Off of Abandoned Development Projects and Note N – Discontinued Operations and Gain on Disposition of Rental Properties).
Items Measured at Fair Value on a Recurring Basis
The Company’s financial assets consist of interest rate caps, interest rate swap agreements and TRS with positive fair values that are included in other assets. The Company’s financial liabilities consist of interest rate swap agreements and TRS with negative fair values that are included in accounts payable, accrued expenses and other liabilities and borrowings subject to TRS included in mortgage debt and notes payable, nonrecourse. The Company records the redeemable noncontrolling interest related to Brooklyn Arena, LLC at redemption value, which approximates fair value.

16

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

The following table presents information about financial assets and liabilities and redeemable noncontrolling interest that were measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:
 
Fair Value Measurements
 
July 31, 2013
 
Level 1
Level 2
Level 3
Total
 
(in thousands)
Interest rate caps
$

$
15

$

$
15

Interest rate swap agreements (liabilities)

(737
)
(107,491
)
(108,228
)
TRS (assets)


14,791

14,791

TRS (liabilities)


(27,947
)
(27,947
)
Fair value adjustment to the borrowings subject to TRS


8,724

8,724

Redeemable noncontrolling interest


(231,434
)
(231,434
)
Total
$

$
(722
)
$
(343,357
)
$
(344,079
)
 
 
 
 
 
 
January 31, 2013
 
(in thousands)
Interest rate caps
$

$
7

$

$
7

Interest rate swap agreements (assets)

241


241

Interest rate swap agreements (liabilities)

(3,016
)
(126,506
)
(129,522
)
TRS (assets)


21,066

21,066

TRS (liabilities)


(26,202
)
(26,202
)
Fair value adjustment to the borrowings subject to TRS


9,950

9,950

Redeemable noncontrolling interest


(239,136
)
(239,136
)
Total
$

$
(2,768
)
$
(360,828
)
$
(363,596
)
The following table presents a reconciliation of all financial assets and liabilities and redeemable noncontrolling interest measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
 
Fair Value Measurements
 
Redeemable
Noncontrolling
Interest
 
Interest Rate
Swaps
 
Net
TRS
Fair value
adjustment
to the borrowings
subject to TRS
Total TRS
Related
 
Total
 
(in thousands)
Six Months Ended July 31, 2013
 
 
 
 
 
 
 
 
 
Balance, February 1, 2013
$
(239,136
)
 
$
(126,506
)
 
$
(5,136
)
$
9,950

$
4,814

 
$
(360,828
)
Loss attributable to redeemable noncontrolling interest
11,787

 

 



 
11,787

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

 

 
(8,020
)
(1,226
)
(9,246
)
 
(9,246
)
Included in other comprehensive income

 
19,015

 



 
19,015

Included in additional paid-in capital
(4,085
)
 

 



 
(4,085
)
Balance, July 31, 2013
$
(231,434
)
 
$
(107,491
)
 
$
(13,156
)
$
8,724

$
(4,432
)
 
$
(343,357
)
Six Months Ended July 31, 2012
 
 
 
 
 
 
 
 
 
Balance, February 1, 2012
$
(229,149
)
 
$
(143,303
)
 
$
(15,013
)
$
9,180

$
(5,833
)
 
$
(378,285
)
Loss attributable to redeemable noncontrolling interest
4,308

 

 



 
4,308

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

 

 
7,282

370

7,652

 
7,652

Included in other comprehensive income

 
1,463

 



 
1,463

Included in additional paid-in capital
(7,266
)
 

 



 
(7,266
)
Balance, July 31, 2012
$
(232,107
)
 
$
(141,840
)
 
$
(7,731
)
$
9,550

$
1,819

 
$
(372,128
)

17

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

The following table presents quantitative information about the significant unobservable inputs used to estimate the fair value of financial instruments measured on a recurring basis as of July 31, 2013:
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value July 31, 2013
Valuation
Technique
Unobservable
Input
Input Values
 
(in thousands)
 
 
 
Credit valuation adjustment of interest rate swap
$
8,706

Potential future exposure
Credit spread
4.25%
TRS
$
(13,156
)
Bond quote
Discount rate
N/A(1)
 
 
 
Capitalization rate
N/A(1)
Fair value adjustment to the borrowings subject to TRS
$
8,724

Bond quote
Discount rate
N/A(1)
 
 
 
Capitalization rate
N/A(1)
Redeemable noncontrolling interest
$
(231,434
)
Discounted cash flows
Discount rate
9.3%
(1)
The Company does not have access to certain significant unobservable inputs used by these third parties to determine these fair values.
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 Company does not deem the impact of changes in unobservable inputs used to determine the fair market value of the credit valuation adjustment, TRS and fair value adjustment to the borrowings subject to TRS to be significant; however, changes in the discount rate used to determine the fair market value of the redeemable noncontrolling interest could have a significant impact on its fair market value.
Fair Value of Other Financial Instruments
The carrying amount of notes and accounts receivable, excluding the Stapleton advances, and accounts payable, accrued expenses and other liabilities approximates fair value based upon the short-term nature of the instruments. The carrying amount of the Stapleton advances approximates fair value since the interest rates on these advances approximates current market rates. The Company estimates the fair value of its debt instruments by discounting future cash payments at interest rates that 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 and loan to value ratios. The fair value of the Company’s debt instruments is classified as Level 3 in the fair value hierarchy.
The following table summarizes the fair value of nonrecourse mortgage debt and notes payable exclusive of the fair value of derivatives, bank revolving facility, senior and subordinated debt and nonrecourse mortgage debt and notes payable of land held for divestiture:
 
July 31, 2013
 
January 31, 2013
 
Carrying Value
Fair Value
 
Carrying Value
Fair Value
 
(in thousands)
Fixed Rate Debt
$
4,823,275

$
4,971,911

 
$
4,791,113

$
5,147,849

Variable Rate Debt
1,991,935

1,936,726

 
1,982,516

1,940,374

Total
$
6,815,210

$
6,908,637

 
$
6,773,629

$
7,088,223


G. Stock-Based Compensation
During the six months ended July 31, 2013, the Company granted 241,860 stock options, 653,447 shares of restricted stock and 299,460 performance shares under the Company’s 1994 Stock Plan. The stock options had a grant-date fair value of $10.97, which was computed using the Black-Scholes option-pricing model using the following assumptions: expected term of 5.5 years, expected volatility of 74.1%, risk-free interest rate of 0.8%, and expected dividend yield of 0%. The exercise price of the options is $17.60, the closing price of the underlying Class A common stock on the date of grant. The restricted stock had a grant-date fair value of $17.60 per share, the closing price of the Class A common stock on the date of grant. The performance shares had a grant-date fair value of $17.78 per share, which was computed using a Monte Carlo simulation.
At July 31, 2013, there was $4,850,000 of unrecognized compensation cost related to stock options that is expected to be recognized over a weighted-average period of 2.52 years, $22,862,000 of unrecognized compensation cost related to restricted stock that is expected to be recognized over a weighted-average period of 2.77 years, and $8,469,000 of unrecognized compensation cost related to performance shares that is expected to be recognized over a weighted-average period of 2.97 years.

18

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

The amount of stock-based compensation costs and related deferred income tax benefit recognized in the financial statements are as follows:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2013
2012
 
2013
2012
 
(in thousands)
Stock option costs
$
593

$
318

 
$
1,928

$
1,920

Restricted stock costs
2,729

2,522

 
6,135

5,352

Performance share costs
736

458

 
1,247

557

Total stock-based compensation costs
4,058

3,298

 
9,310

7,829

Less amount capitalized into qualifying real estate projects
(1,357
)
(618
)
 
(3,175
)
(2,621
)
Amount charged to operating expenses
2,701

2,680

 
6,135

5,208

Depreciation expense on capitalized stock-based compensation
240

207

 
480

414

Total stock-based compensation expense
$
2,941

$
2,887

 
$
6,615

$
5,622

Deferred income tax benefit
$
1,077

$
1,046

 
$
2,431

$
2,037

The amount of grant-date fair value expensed immediately for awards granted to retirement-eligible grantees during the six months ended July 31, 2013 and 2012 was $973,000 and $726,000, respectively.
In connection with the vesting of restricted stock during the six months ended July 31, 2013 and 2012, the Company repurchased into treasury 179,907 shares and 106,711 shares, respectively, of Class A common stock to satisfy the employees’ related minimum statutory tax withholding requirements. These shares were placed in treasury with an aggregate cost basis of $3,167,000 and $1,591,000, respectively.

H. Commercial Group Land Sale
On January 31, 2011, the Company sold an approximate 10 acre land parcel and air rights to Rock Ohio Caesars Cleveland, LLC for development of a casino in downtown Cleveland for a sales price of $40,000,000. As of January 31, 2012, the Company had received total cash deposits of $7,000,000 of the purchase price. The minimum initial investment still had not been met and accordingly, the cash deposits were recorded as a deposit liability under the deposit method and included in accounts payable, accrued expenses and other liabilities at January 31, 2012.
During the three months ended April 30, 2012, the Company received the remaining cash proceeds of $33,000,000. With receipt of this payment, the buyer’s initial and continuing investment on the sale of this parcel was adequate for gain recognition under the full accrual method. As such, the entire sales price is included in revenues from real estate operations and the related cost of land is included in operating expenses, resulting in a gain on sale of $36,484,000 during the six months ended July 31, 2012.

I. Land Held for Divestiture
On January 31, 2012, the Board of Directors of the Company approved a strategic decision by senior management to reposition portions of the Company's investment in the Land Development Group as part of a greater focus on core rental properties in core markets. Accordingly, the consolidated land assets associated with the land divestiture effort and related nonrecourse mortgage debt have been recorded as land held for divestiture on the Consolidated Balance Sheets at July 31 and January 31, 2013.
During the three months ended April 30, 2012, the Company established an execution strategy relating to the land divestiture effort. For land projects that are not wholly-owned, the initial strategy was to negotiate with current partners to sell the Company's partnership interests to them, or acquire theirs, which would enable the Company to go to market with 100% ownership of the land development opportunity. During 2012, the Company closed on the divestiture of the majority of land projects.
During the six months ended July 31, 2013, the Company continued to divest its remaining land held for divestiture. As of July 31, 2013, the Company has $1,990,000 of remaining carrying value in land held for divestiture. Ongoing negotiations continue on the few remaining land projects.
The Company recorded the land held for divestiture activity for fully consolidated land projects and those accounted for on the equity method of accounting on their own separate financial statement line items in the Consolidated Statements of Operations. These activities primarily represent sales of bulk land projects held for divestiture and the associated cost of sales.

19

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

The following table summarizes the net loss on land held for divestiture activity of consolidated entities:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2013
2012
 
2013
2012
 
(in thousands)
Sales of land held for divestiture
$
1,056

$
34,510

 
$
1,768

$
34,510

Cost of sales of land held for divestiture
(63
)
(25,172
)
 
(323
)
(25,172
)
Net gain on closed transactions of land held for divestiture
993

9,338

 
1,445

9,338

Bad debt expense
(9,000
)

 
(9,000
)

Impairment of land held for divestiture

(15,796
)
 

(15,796
)
Net loss on land held for divestiture activity
$
(8,007
)
$
(6,458
)
 
$
(7,555
)
$
(6,458
)
The Company has a note receivable (the “Note”), related to a 2006 land sale, that was in default at July 31, 2013 and is collateralized by a 1,000 acre land parcel in North Carolina. Negotiations are ongoing to cure the default; however, the Company has no assurance the payee has the intent to pay the Note in full. Accordingly, the Company established a reserve on the Note to reflect the estimated fair value of the underlying collateral of approximately $4,100,000. As a result, bad debt expense of $9,000,000, ($8,300,000, net of noncontrolling interest and $4,980,000, after tax) was recorded during the three and six months ended July 31, 2013.
The net gain on closed transactions of land held for divestiture for the three and six months ended July 31, 2012 primarily relates to the sale of the Company's 51% ownership interest in a land project in Prosper, Texas. The transaction, which had a sale price of $29,800,000, resulted in a gain of approximately $7,600,000 ($3,900,000, net of noncontrolling interest).
Through the competitive bid process and the negotiation process of taking informal expressions of interest to bona fide purchase offers, the Company obtained additional information regarding the value of its specific projects as viewed by current market participants. Based on the various levels of interest from potential buyers and information obtained from preliminary sales contracts, letters of intent and other negotiations on the remaining land projects, the Company reviewed its assumptions used to estimate the fair value of the land held for divestiture. As a result, the Company recorded an impairment charge of $15,796,000 during the three and six months ended July 31, 2012.
The following table presents quantitative information about the significant unobservable inputs used to determine the fair value of impairment of consolidated land held for divestiture for the six months ended July 31, 2012:
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value July 31, 2012
Valuation
Technique
Unobservable
Input
Range
of Input Values
 
(in thousands)
 
 
 
Impairment of land held for divestiture
$
15,663

Indicative bids
Indicative bids
N/A(1)
Impairment of land held for divestiture
$
926

Discounted cash flows(2)
N/A
N/A
(1)
These fair value measurements were developed by third party sources, subject to the Company’s corroboration for reasonableness.
(2)
The Company used a discounted cash flow technique to estimate fair value; however, due to the estimated holding period being less than twelve months, the impact of discounting was deemed immaterial.
The Company also has investments held in unconsolidated entities. The following table summarizes the net gain (loss) on investments in unconsolidated entities which are part of the land divestiture strategy:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2013
2012
 
2013
2012
 
(in thousands)
Net gain (loss) on sales of land held for divestiture of unconsolidated entities
$
828

$
(1,481
)
 
$
681

$
(1,481
)
Impairment of investments in unconsolidated entities

(40,406
)
 

(40,406
)
Net gain (loss) on land held for divestiture activity of unconsolidated entities
$
828

$
(41,887
)
 
$
681

$
(41,887
)
During the three months ended July 31, 2012, the Company received an unsolicited offer to purchase its ownership interest in the remaining land parcels at its Central Station project in downtown Chicago, Illinois for approximately $30,000,000. The Company evaluated the offer and made a decision to divest its equity method investment in Central Station as part of its formal land divestiture activities. The proposed sale would support the continued strategic efforts to focus on core rental products in core markets and delever its balance sheet and as a result, the Company signed a letter of intent. Based on the terms of the letter of intent, the Company recorded an impairment charge of approximately $17,000,000, which is included in impairment of land held for divestiture of unconsolidated entities during the three and six months ended July 31, 2012.

20

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

During the three months ended July 31, 2012, the Company continued to market its equity method ownership interest in a land project in Albuquerque, New Mexico to several potential buyers. Mesa del Sol is a large 3,000 acre development opportunity in the beginning stage of residential land development and is not expected to generate positive cash flow in the near-term due to the expected level of development expenditures needed to prepare the first phase of lots for sale. During the extensive marketing activities, there were few buyers that expressed interest in taking on the long-term development risk, and those that were, expected larger returns than previously estimated. As a result, based on these negotiations and other market information obtained from these potential buyers and other industry data, the Company updated its assumptions used in estimating the fair value of the investment, including discount rates, absorption rates and commercial and residential land pricing. Based on the updated valuation model, the Company recorded an additional impairment charge of approximately $15,000,000, which is included in impairment of land held for divestiture of unconsolidated entities during the three and six months ended July 31, 2012.

J. Net Gain on Disposition of Partial Interests in Rental Properties
On March 29, 2011, the Company entered into joint venture agreements with an outside partner, an affiliated entity of Madison International Realty LLC. The outside partner invested in and received a 49% equity interest in 15 mature retail properties located in the New York City metropolitan area. For its 49% equity interests, the outside partner invested cash and assumed debt of $244,952,000, representing 49% of the nonrecourse mortgage debt on the 15 properties. As of January 31, 2012, the Company received proceeds of $178,286,000, primarily in the form of a loan. Based on the net amount of cash received, the outside partner’s minimum initial investment requirement of 20% was not met. Since the transaction did not qualify for full gain recognition, the installment method of gain recognition was applied and a net gain on disposition of partial interests in rental properties of $9,561,000 was recorded during the year ended January 31, 2012. As of January 31, 2013, the remaining gain of $114,465,000 continued to be deferred and was included in accounts payable, accrued expenses and other liabilities.
During the three months ended July 31, 2013, the Company used distribution proceeds from the joint ventures to pay down a portion of the loan which increases the net cash received for purposes of measuring whether full gain recognition is appropriate. However, the outside partner's investment requirement was still not met and the installment method of gain recognition was applied, resulting in an additional net gain on disposition of partial interests in rental properties of $4,932,000 during the three and six months ended July 31, 2013. As of July 31, 2013, the remaining gain of $109,533,000 continued to be deferred and was included in accounts payable, accrued expenses and other liabilities.

K. Income Taxes
Income tax expense (benefit) for the three months ended July 31, 2013 and 2012 was $(16,251,000) and $(9,065,000), respectively, and $(32,084,000) and $110,000 for the six months ended July 31, 2013 and 2012, respectively. The difference in the recorded income tax expense/benefit versus the income tax expense/benefit computed at the statutory federal income tax rate is primarily attributable to state income taxes, changes in state net operating losses, additional general business credits, changes to the valuation allowances associated with certain deferred tax assets, and various permanent differences between pre-tax GAAP income and taxable income.
The Company applies an estimated annual effective tax rate to its year-to-date earnings from operations to derive its tax provision for the quarter. Certain circumstances may arise which make it difficult for the Company to determine a reasonable estimate of its annual effective tax rate for the year. The Company’s projected marginal operating results, which include the gain related to the Commercial Group’s land sale as described in Note HCommercial Group Land Sale, result in an effective tax rate that changes significantly with small variations in projected income or loss from operations or permanent differences and thus does not provide for a reliable estimate of the estimated annual effective tax rate. Therefore, in computing the Company’s income tax provision for the three and six months ended July 31, 2012, the Company excluded the gain on the Commercial Group’s land sale from its estimated annual effective tax rate calculation and recognized the actual income tax expense related to the gain during the three and six months ended July 31, 2012.
At January 31, 2013, the Company had a federal net operating loss carryforward for tax purposes of $212,271,000 that expires in the years ending January 31, 2026 through January 31, 2033, a charitable contribution deduction carryforward of $27,326,000 that expires in the years ending January 31, 2014 through January 31, 2018, general business credit carryovers of $21,159,000 that expires in the years ending January 31, 2019 through January 31, 2033, and an alternative minimum tax (“AMT”) credit carryforward of $27,452,000 that is available until used to reduce federal tax to the AMT amount.
The Company’s policy is to consider a variety of tax-deferral strategies, including tax deferred exchanges, when evaluating its future tax position. The Company has a full valuation allowance against the deferred tax asset associated with its charitable contributions. The Company has a valuation allowance against its general business credits, other than those general business credits which are eligible to be utilized to reduce future AMT liabilities. The Company has a valuation allowance against certain of its state net operating losses and state bonus depreciation deferred assets. These valuation allowances exist because management believes it is more likely than not that the Company will not realize these benefits.

21

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

The Company applies the “with-and-without” methodology for recognizing excess tax benefits from the deduction of stock-based compensation. The net operating loss available for the tax return, as is noted in the paragraph above, is greater than the net operating loss available for the tax provision due to excess deductions from stock-based compensation reported on the return, as well as the impact of adjustments to the net operating loss under accounting guidance on accounting for uncertainty in income taxes. As of January 31, 2013, the Company has not recorded a net deferred tax asset of approximately $17,299,000 from excess stock-based compensation deductions taken on the tax return for which a benefit has not yet been recognized in the Company’s tax provision.

L. Impairment of Real Estate, Impairment of Unconsolidated Entities and Write-Off of Abandoned Development Projects
Impairment of Real Estate
The Company reviews its real estate portfolio, including land held for development and sale, for impairment whenever events or changes indicate that its carrying value may not be recoverable. In cases where the Company does not expect to recover its carrying costs, an impairment charge is recorded. The impairments recorded during the three and six months ended July 31, 2013 and 2012 represent write-downs to estimated fair value due to a change in events, such as a bona fide third-party purchase offer or changes in certain assumptions, including estimated holding periods and current market conditions and the impact of these assumptions to the properties’ estimated future cash flows, which represents Level 3 inputs.
The following table summarizes the Company's impairment of real estate included in continuing operations:
 
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
 
2013
2012
 
2013
2012
 
 
(in thousands)
Investment in triple net lease retail property
Kansas City, Missouri
$
6,870

$

 
$
6,870

$

Other
1,185

460

 
1,185

460

 
 
$
8,055

$
460

 
$
8,055

$
460

Impairment of Real Estate - Discontinued Operations
The Company had impairments related to consolidated real estate assets that were disposed of during the periods presented. The following table summarizes the Company's impairment of real estate included in discontinued operations: