Tuesday, November 04, 2014

Forest City Enterprises reports lower net earnings/loss, higher FFO, deal with Bruce Ratner

I've reported in other posts today on Forest City Enterprises' filings regarding B2, the sale of the Barclay Center/Brooklyn Nets, and the deal with Greenland Holdings. Here's a bit more

In a press release regarding 2014 Third-Quarter and Year-to-Date Results, Forest City Enterprises reported higher funds from operations (FFO) but lower net earnings in the quarter and a net loss over nine months:
For the three months ended September 30, 2014, the company had net earnings attributable to common shareholders of $0.7 million, or $0.00 per share, compared with net earnings of $241.9 million, or $1.06 per share, for the third quarter of 2013. For the first nine months of 2014, the company had a net loss attributable to common shareholders of $76.8 million, or $0.39 per share, compared with net earnings of $187.1 million, or $0.88 per share, for the nine months ended September 30, 2013. Per-share amounts are on a fully diluted basis.
In addition to the factors mentioned previously related to Operating FFO and FFO, the net earnings variance in the third quarter was negatively impacted by lower gains on disposition of full or partial interests in rental properties of $264.5 million, net of tax, and reduced depreciation and amortization of real estate of $31.7 million. Both of these factors are primarily related to the company's regional mall joint venture with QIC, which closed in the third quarter of 2013.
On the other hand, FFO was up, and Forest City considers that to be a more important measure:
We believe that Funds From Operations (“FFO”), along with net earnings, provides additional information about our core operations. While property dispositions, acquisitions or other factors can affect net earnings in the short-term, we believe FFO presents a more consistent view of the overall financial performance of our business from period-to-period since the core of our business is the recurring operations of our portfolio of real estate assets. FFO is used by the chief operating decision maker and management to assess performance and resource allocations by strategic business unit and on a consolidated basis.....
Operating FFO ]funds from operation] for the three months ended September 30, 2014 was $61.6 million, a 44 percent increase compared with $42.9 million for the three months ended September 30, 2013. For the first nine months of 2014, Operating FFO was $170.3 million, compared with $112.7 million for the nine months ended September 30, 2013. (Note that due to the company's change to a calendar yearend, which was effective December 31, 2013, prior-year third-quarter and year-to-date results referenced in this press release are for the three and nine months ended September 30, 2013, periods not previously reported by the company.)
The deal with Bruce Ratner

The company's 10-Q filing with the Securities and Exchange Commission describes the aftermath of a 2006 deal with Bruce Ratner of Forest City Ratner (emphases added):
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”), an Executive Vice President and Director of the Company, and certain entities and individuals affiliated with Mr. Ratner (the “BCR Entities”) in August 2006 to purchase their interests in a total of 30 retail, office and residential operating properties and service companies in the Greater New York City metropolitan area. The Company issued Class A Common Units (“Units”) in a jointly-owned, limited liability company in exchange for their interests. The Company accounted for the issuance of the Units in exchange for the noncontrolling interests under the purchase method of accounting. The Units may be exchanged for one of the following forms of consideration at the Company’s sole discretion: (i) an equal number of shares of the Company’s Class A common stock or, (ii) cash based on a formula using the average closing price of the Class A common stock at the time of conversion or, (iii) a combination of cash and shares of the Company’s Class A common stock. The Company has no rights to redeem or repurchase the Units. Pursuant to the Master Contribution Agreement, certain projects under development would remain owned jointly until each individual project was completed and achieved “stabilization.” Upon stabilization, each project would be valued and the Company, in its discretion, would choose among various ownership options for the project.
In June 2014, one of the BCR Entities exchanged 673,565 of the Units. The Company issued 673,565 shares of its Class A common stock for the exchanged Units. The Company accounted for the exchange as a purchase of noncontrolling interests, resulting in a reduction of noncontrolling interests of $34,358,000, an increase to Class A common stock of $224,000 and a combined increase to additional paid-in capital of $34,134,000, accounting for the fair value of common stock issued and the difference between the fair value of consideration exchanged and the noncontrolling interest balance. At September 30, 2014 and December 31, 2013, 2,973,190 and 3,646,755 Units, respectively, were outstanding.
Pursuant to the terms of the Master Contribution Agreement, on January 2, 2014, the Company caused certain of its affiliates to acquire the BCR Entities’ interests in 8 Spruce Street, an apartment community in Manhattan, New York, DKLB BKLN, an apartment community in Brooklyn, New York, and East River Plaza, a specialty retail center in Manhattan, New York, for $14,286,000. Prior to the transaction, the Company accounted for the three projects using the equity method of accounting and will continue to account for the projects as equity method investments as the partners continue to have joint control.

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