Forest City Realty Trust, Inc. - FORM 10-Q - November 2, 2017

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EX-32.1 - EXHIBIT 32.1 - Forest City Realty Trust, Inc.fcrt-10qex3219302017.htm
EX-31.2 - EXHIBIT 31.2 - Forest City Realty Trust, Inc.fcrt-10qex3129302017.htm
EX-31.1 - EXHIBIT 31.1 - Forest City Realty Trust, Inc.fcrt-10qex3119302017.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
Form 10-Q
_____________________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to                 
Commission file number 1-37671 
_____________________________________________________________
FOREST CITY REALTY TRUST, INC.
(Exact name of registrant as specified in its charter) 
_____________________________________________________________
Maryland
(State or other jurisdiction of
incorporation or organization)
 
 
 
47-4113168
(I.R.S. Employer
Identification No.)
 
 
 
 
 
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 Data 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding, including unvested restricted stock, of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at October 30, 2017
Class A Common Stock, $.01 par value
266,752,551 shares


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


1

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Forest City Realty Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
 
September 30, 2017
 
 
(Unaudited)
December 31, 2016
 
(in thousands)
Assets
 
 
Real Estate
 
 
Completed rental properties
$
7,280,498

$
7,112,347

Projects under construction and development
526,456

734,980

Land inventory
58,664

68,238

Total Real Estate
7,865,618

7,915,565

Less accumulated depreciation
(1,500,128
)
(1,442,006
)
Real Estate, net – (variable interest entities $2,323.0 million and $2,270.3 million, respectively)
6,365,490

6,473,559

Cash and equivalents – (variable interest entities $65.8 million and $59.3 million, respectively)
193,675

174,619

Restricted cash – (variable interest entities $56.7 million and $46.5 million, respectively)
141,021

149,300

Accounts receivable, net – (variable interest entities $62.2 million and $72.2 million, respectively)
201,413

208,563

Notes receivable – (variable interest entities $197.2 million and $154.3 million, respectively)
430,090

383,163

Investments in and advances to unconsolidated entities
543,504

564,779

Other assets – (variable interest entities $59.7 million and $72.2 million, respectively)
243,755

274,614

Total Assets
$
8,118,948

$
8,228,597

Liabilities and Equity
 
 
Liabilities
 
 
Nonrecourse mortgage debt and notes payable, net – (variable interest entities $1,462.6 million and $1,437.8 million, respectively)
$
3,129,289

$
3,120,833

Revolving credit facility
—

—

Term loan, net
333,568

333,268

Convertible senior debt, net
112,523

112,181

Accounts payable, accrued expenses and other liabilities – (variable interest entities $249.3 million and $241.9 million, respectively)
636,094

726,724

Cash distributions and losses in excess of investments in unconsolidated entities
105,719

150,592

Total Liabilities
4,317,193

4,443,598

Commitments and Contingencies
—

—

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

—

Common stock – $.01 par value
 
 
Class A, 371,000,000 shares authorized, 265,307,748 and 239,937,796 shares issued and outstanding, respectively
2,653

2,399

Class B, convertible, 0 and 56,000,000 shares authorized, 0 and 18,788,169 shares issued and outstanding, respectively
—

188

Total common stock
2,653

2,587

Additional paid-in capital
2,532,432

2,483,275

Retained earnings
831,244

812,386

Stockholders’ equity before accumulated other comprehensive loss
3,366,329

3,298,248

Accumulated other comprehensive loss
(10,631
)
(14,410
)
Total Stockholders’ Equity
3,355,698

3,283,838

Noncontrolling interest
446,057

501,161

Total Equity
3,801,755

3,784,999

Total Liabilities and Equity
$
8,118,948

$
8,228,597


The accompanying notes are an integral part of these consolidated financial statements.
2
Forest City Realty Trust, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
2016
 
2017
2016
 
(in thousands, except per share data)
Revenues
 
 
 
 
 
Rental
$
167,682

$
162,257

 
$
496,095

$
487,986

Tenant recoveries
26,671

33,755

 
80,735

93,989

Service and management fees
8,152

17,027

 
29,642

38,220

Parking and other
9,253

14,166

 
34,212

43,564

Land sales
21,786

10,325

 
45,308

22,479

Military Housing
—

—

 
—

3,518

Total revenues
233,544

237,530

 
685,992

689,756

Expenses
 
 
 
 
 
Property operating and management
71,961

87,460

 
228,912

258,815

Real estate taxes
21,748

21,682

 
64,305

67,748

Ground rent
3,837

3,780

 
11,491

10,866

Cost of land sales
13,301

3,148

 
22,996

5,190

Military Housing operating
—

—

 
—

2,730

Corporate general and administrative
16,480

17,917

 
46,081

51,779

Organizational transformation and termination benefits
2,633

8,092

 
14,021

22,493

 
129,960

142,079

 
387,806

419,621

Depreciation and amortization
60,194

62,892

 
189,496

188,521

Write-offs of abandoned development projects and demolition costs
—

10,058

 
1,596

10,058

Impairment of real estate
44,288

142,261

 
44,288

156,825

Total expenses
234,442

357,290

 
623,186

775,025

Operating income (loss)
(898
)
(119,760
)
 
62,806

(85,269
)
 
 
 
 
 
 
Interest and other income
20,361

11,980

 
40,529

32,665

Interest expense
(31,597
)
(34,060
)
 
(88,473
)
(101,130
)
Amortization of mortgage procurement costs
(1,338
)
(1,314
)
 
(4,067
)
(4,395
)
Loss on extinguishment of debt
—

—

 
(2,843
)
(29,084
)
Earnings (loss) before income taxes and earnings from unconsolidated entities
(13,472
)
(143,154
)
 
7,952

(187,213
)
Earnings (loss) from unconsolidated entities
 
 
 
 
 
Equity in earnings
8,295

6,433

 
23,834

25,520

Net gain on disposition of interest in unconsolidated entities
28,828

—

 
81,782

12,613

Impairment
(10,600
)
(306,400
)
 
(10,600
)
(306,400
)
 
26,523

(299,967
)
 
95,016

(268,267
)
Earnings (loss) before income taxes
13,051

(443,121
)
 
102,968

(455,480
)
Income tax expense (benefit) of taxable REIT subsidiaries
 
 
 
 
 
Current
304

525

 
4,817

1,774

Deferred
—

—

 
—

393

 
304

525

 
4,817

2,167

Earnings (loss) before gains on disposal of real estate
12,747

(443,646
)
 
98,151

(457,647
)
Net gain (loss) on disposition of interest in development project
—

—

 
(113
)
136,117

Net gain (loss) on disposition of full or partial interest in rental properties, net of tax
(256
)
14,067

 
13,573

103,085

Earnings (loss) from continuing operations
12,491

(429,579
)
 
111,611

(218,445
)
Discontinued operations, net of tax
 
 
 
 
 
Operating loss from rental property
—

—

 
—

(1,126
)
Gain on disposition of disposal group
—

—

 
—

64,553

Equity in earnings (loss)
—

—

 
—

(822
)
 
—

—

 
—

62,605

Net earnings (loss)
12,491

(429,579
)
 
111,611

(155,840
)
Noncontrolling interests, gross of tax
 

 
 
 
Earnings from continuing operations attributable to noncontrolling interests
(7,037
)
(1,282
)
 
(8,487
)
(5,163
)
Loss from discontinued operations attributable to noncontrolling interests
—

—

 
—

776

 
(7,037
)
(1,282
)
 
(8,487
)
(4,387
)
Net earnings (loss) attributable to Forest City Realty Trust, Inc.
$
5,454

$
(430,861
)
 
$
103,124

$
(160,227
)
 
 
 
 
 
 
Basic earnings per common share
 
 
 
 
 
Earnings (loss) from continuing operations attributable to common stockholders
$
0.02

$
(1.67
)
 
$
0.39

$
(0.87
)
Earnings from discontinued operations attributable to common stockholders
—

—

 
—

0.25

Net earnings (loss) attributable to common stockholders
$
0.02

$
(1.67
)
 
$
0.39

$
(0.62
)
Diluted earnings per common share
 
 
 
 
 
Earnings (loss) from continuing operations attributable to common stockholders
$
0.02

$
(1.67
)
 
$
0.39

$
(0.87
)
Earnings from discontinued operations attributable to common stockholders
—

—

 
—

0.25

Net earnings (loss) attributable to common stockholders
$
0.02

$
(1.67
)
 
$
0.39

$
(0.62
)

The accompanying notes are an integral part of these consolidated financial statements.
3
Forest City Realty Trust, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)

 
Three Months Ended September 30,
 
2017
2016
 
(in thousands)
Net earnings (loss)
$
12,491

$
(429,579
)
Other comprehensive income:
 
 
Foreign currency translation adjustments
—

—

Unrealized net gains on interest rate derivative contracts
1,240

11,302

Total other comprehensive income
1,240

11,302

Comprehensive income (loss)
13,731

(418,277
)
Comprehensive income attributable to noncontrolling interest
(7,041
)
(1,286
)
Total comprehensive income (loss) attributable to Forest City Realty Trust, Inc.
$
6,690

$
(419,563
)
 
 
 
 
Nine Months Ended September 30,
 
2017
2016
 
(in thousands)
Net earnings (loss)
$
111,611

$
(155,840
)
Other comprehensive income:
 
 
Foreign currency translation adjustments
—

95

Unrealized net gains on interest rate derivative contracts
3,790

19,886

Total other comprehensive income
3,790

19,981

Comprehensive income (loss)
115,401

(135,859
)
Comprehensive income attributable to noncontrolling interest
(8,498
)
(4,399
)
Total comprehensive income (loss) attributable to Forest City Realty Trust, Inc.
$
106,903

$
(140,258
)

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

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

Balances at December 31, 2015
238,949

$
2,389

18,805

$
188

$
2,524,420

$
1,059,240

$
(67,905
)
$
456,224

$
3,974,556

Net loss, net of $776 loss attributable to redeemable noncontrolling interest
 
 
 
 
 
(158,402
)
 
6,078

(152,324
)
Other comprehensive income
 
 
 
 
 
 
53,495

15

53,510

Common stock dividends
 
 
 
 
 
(88,452
)
 
 
(88,452
)
Conversion of Class B common stock to Class A common stock
17

—

(17
)
—

 
 
 
 
—

Cost incurred for planned conversion of Class B to Class A common stock
 
 
 
 
(3,896
)
 
 
 
(3,896
)
Restricted stock and performance shares vested
1,267

12

 
 
(12
)
 
 
 
—

Repurchase of Class A common stock
(390
)
(3
)
 
 
(7,942
)
 
 
 
(7,945
)
Exercise of stock options
86

1

 
 
1,157

 
 
 
1,158

Stock-based compensation
 
 
 
 
25,463

 
 
 
25,463

Issuance of Class A common stock in exchange for 2016 Senior Notes
9

—

 
 
186

 
 
 
186

Acquisition of partners’ noncontrolling interest in consolidated subsidiaries
 
 
 
 
(56,101
)
 
 
19,916

(36,185
)
Contributions from noncontrolling interests
 
 
 
 
 
 
 
50,506

50,506

Distributions to noncontrolling interests
 
 
 
 
 
 
 
(31,578
)
(31,578
)
Balances at December 31, 2016
239,938

$
2,399

18,788

$
188

$
2,483,275

$
812,386

$
(14,410
)
$
501,161

$
3,784,999

Net earnings
 
 
 
 
 
103,124

 
8,487

111,611

Other comprehensive income
 
 
 
 
 
 
3,779

11

3,790

Common stock dividends
 
 
 
 
 
(84,266
)
 
 
(84,266
)
Conversion of Class B common stock to Class A common stock
24,612

246

(18,788
)
(188
)
(58
)
 
 
 
—

Cost incurred for conversion of Class B to Class A common stock
 
 
 
 
(9,305
)
 
 
 
(9,305
)
Restricted stock vested
763

8

 
 
(8
)
 
 
 
—

Repurchase of Class A common stock
(252
)
(2
)
 
 
(5,596
)
 
 
 
(5,598
)
Exercise of stock options
91

1

 
 
1,497

 
 
 
1,498

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

—

 
 
309

 
 
 
309

Stock-based compensation
 
 
 
 
21,294

 
 
 
21,294

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

1

 
 
7,287

 
 
(7,288
)
—

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

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

—

 
 
1

 
 
 
1

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

 
 
(10,931
)
—

Contributions from noncontrolling interests
 
 
 
 
 
 
 
18,499

18,499

Distributions to noncontrolling interests
 
 
 
 
 
 
 
(28,845
)
(28,845
)
Balances at September 30, 2017 (Unaudited)
265,308

$
2,653

—

$
—

$
2,532,432

$
831,244

$
(10,631
)
$
446,057

$
3,801,755


The accompanying notes are an integral part of these consolidated financial statements.
5
Forest City Realty Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

 
Nine Months Ended September 30,
 
2017
2016
 
(in thousands)
Net earnings (loss)
$
111,611

$
(155,840
)
Depreciation and amortization
189,496

188,521

Amortization of mortgage procurement costs
4,067

4,395

Impairment of real estate
44,288

156,825

Impairment of unconsolidated entities
10,600

306,400

Write-offs of abandoned development projects
1,596

10,058

Loss on extinguishment of debt
2,843

29,084

Net (gain) loss on disposition of interest in development project
113

(136,117
)
Net gain on disposition of full or partial interest in rental properties, net of tax
(13,573
)
(103,085
)
Deferred income tax expense
—

393

Earnings from unconsolidated entities
(105,616
)
(38,133
)
Stock-based compensation expense
14,893

15,160

Amortization and mark-to-market adjustments of derivative instruments
773

4,162

Operating distributions from unconsolidated entities
53,388

57,256

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

(309
)
Loss from unconsolidated entities included in discontinued operations
—

1,400

Gain on disposition of disposal group included in discontinued operations, net of tax
—

(64,553
)
Decrease (increase) in land inventory
12,462

(4,370
)
Increase in accounts receivable
(15,671
)
(11,743
)
Decrease in other assets
5,056

9,629

Decrease in accounts payable, accrued expenses and other liabilities
(3,472
)
(79,099
)
Net cash provided by operating activities
312,854

190,034

Cash flows from investing activities
 
 
Capital expenditures
(306,937
)
(433,659
)
Capital expenditures of assets included in discontinued operations
—

(690
)
Payment of lease procurement costs
(9,297
)
(9,218
)
Increase in notes receivable
(31,047
)
(43,348
)
Payments on notes receivable
—

58,000

Decrease in restricted cash
11,610

12,897

Cash held at Arena upon disposition
—

(28,041
)
Proceeds from disposition of rental properties or development project
32,672

545,289

Contributions to unconsolidated entities
(56,590
)
(114,139
)
Distributions from unconsolidated entities
76,942

26,756

Net cash (used in) provided by investing activities
(282,647
)
13,847

Cash flows from financing activities
 
 
Proceeds from nonrecourse mortgage debt and notes payable
159,174

260,871

Principal payments on nonrecourse mortgage debt and notes payable
(57,309
)
(85,143
)
Redemption of Senior Notes due 2018 & 2020
—

(157,644
)
Payments to noteholders related to exchange of convertible senior notes
—

(24,376
)
Transaction costs related to exchange of convertible senior notes
—

(2,460
)
Payment of costs incurred for conversion of Class B to Class A common stock
(11,266
)
—

Payment of deferred financing costs
(2,264
)
(5,332
)
Repurchase of Class A common stock
(5,598
)
(7,825
)
Exercise of stock options
1,498

1,158

Dividends paid to stockholders
(84,266
)
(72,832
)
Acquisitions of noncontrolling interests
—

(38,968
)
Contributions from noncontrolling interests
18,499

41,639

Distributions to noncontrolling interests
(29,619
)
(19,476
)
Net cash used in financing activities
(11,151
)
(110,388
)
Net increase in cash and equivalents
19,056

93,493

Cash and equivalents at beginning of period (including cash held for sale - 2016)
174,619

293,720

Cash and equivalents at end of period
$
193,675

$
387,213


The accompanying notes are an integral part of these consolidated financial statements.
6
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)


A. Accounting Policies
General
Forest City Realty Trust, Inc. (with its subsidiaries, the “Company”) principally engages in the operation, development, management and acquisition of office, apartment and retail real estate and land throughout the United States. The Company had approximately $8.1 billion of consolidated assets in 20 states and the District of Columbia at September 30, 2017. The Company’s core markets include Boston, Chicago, Dallas, Denver, Los Angeles, Philadelphia, and the greater metropolitan areas of New York City, San Francisco and Washington D.C. The Company has regional offices in Boston, Dallas, Denver, Los Angeles, New York City, San Francisco, Washington, D.C., and the Company’s corporate headquarters in Cleveland, Ohio.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q, and should be read in conjunction with the consolidated financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2016. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In management’s opinion, all adjustments (consisting solely of normal recurring matters) necessary for a fair statement of financial position, results of operations and cash flows as of and for the periods presented have been included.
Company Operations
The Company is organized as a Real Estate Investment Trust (“REIT”) for federal income tax purposes. The Company holds substantially all of its assets, and conducts substantially all of its business, through Forest City Enterprises, L.P. (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership and, as of September 30, 2017, the Company owns all of the limited partnership interests in the Operating Partnership.
The Company holds and operates certain of its assets through one or more taxable REIT subsidiaries (“TRSs”). A TRS is a subsidiary of a REIT subject to applicable corporate income tax. The Company’s use of TRSs enables it to continue to engage in certain businesses while complying with REIT qualification requirements and allows the Company to retain income generated by these businesses for reinvestment without the requirement of distributing those earnings. The primary businesses held in TRSs include 461 Dean Street, an apartment building in Brooklyn, New York, South Bay Galleria, Antelope Valley Mall and Mall at Robinson, regional malls in Redondo Beach, California, Palmdale, California and Pittsburgh, Pennsylvania, respectively, Pacific Park Brooklyn project, land development operations, Barclays Center arena (sold in January 2016), the Nets (sold in January 2016), and military housing operations (sold in February 2016). In the future, the Company may elect to reorganize and transfer certain assets or operations from its TRSs to other subsidiaries, including qualified REIT subsidiaries.
Segments
The Company is organized around real estate operations, real estate development and corporate support functions.
Real Estate Operations represents the performance of the Company’s core rental real estate portfolio and is comprised of the following reportable operating segments:
•
Office - owns, acquires and operates office and life science buildings.
•
Apartments - owns, acquires and operates upscale and middle-market apartments, adaptive re-use developments and subsidized senior housing.
•
Retail - owns, acquires and operates amenity retail within our mixed-use projects, regional malls and specialty/urban retail centers.
The remaining reportable operating segments consist of the following:
•
Development - develops and constructs office and life science buildings, apartments, condominiums, amenity retail, regional malls, specialty/urban retail centers and mixed-use projects. The Development segment includes recently opened operating properties prior to stabilization and the horizontal development and sale of land to residential, commercial and industrial customers primarily at its Stapleton project in Denver, Colorado.
•
Corporate - provides executive oversight and various support services for Operations, Development and Corporate employees.
•
Other - owned and operated several non-core investments, including the Barclays Center, a sports and entertainment arena located in Brooklyn, New York (“Arena”) (sold in January 2016), the Company’s equity method investment in the Brooklyn Nets (the “Nets”) (sold in January 2016), and military housing operations (sold in February 2016).

7
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Segment Transfers
The Development segment includes projects in development and projects under construction along with recently opened operating properties prior to stabilization. Projects will be reported in their applicable operating segment (Office, Apartments or Retail) beginning on January 1 of the year following stabilization. Therefore, the Development segment will continue to report results from recently opened properties until the year-end following initial stabilization. The Company generally defines stabilized properties as achieving 92% or greater occupancy or having been open and operating for one or two years, depending on the size of the project. Once a stabilized property is transferred to the applicable Operations segment on January 1, it will be considered “comparable” beginning on the following January 1.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. Some of the critical estimates made by the Company include, but are not limited to, determination of the primary beneficiary of variable interest entities (“VIEs”), estimates of useful lives for long-lived assets, reserves for collection on accounts and notes receivable and other investments, gain on change of control of interests, impairment of real estate and other-than-temporary impairments on equity method investments. Actual results could differ from those estimates.
Reclassifications
Certain prior period amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation.
Variable Interest Entities
As of September 30, 2017, the Company determined it was the primary beneficiary of 43 VIEs. The creditors of the consolidated VIEs do not have recourse to the Company’s general credit. As of September 30, 2017, the Company determined it was not the primary beneficiary of 36 VIEs and accounts for these interests as equity method investments. The maximum exposure to loss of these unconsolidated VIEs is limited to the Company’s investment balance of $166,000,000 as of September 30, 2017.
New Accounting Guidance
The following accounting pronouncements were adopted during the nine months ended September 30, 2017:
In March 2016, the Financial Accounting Standards Board (“FASB”) issued an amendment to the accounting guidance to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of this guidance effective January 1, 2017 did not have a material impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued an amendment to the accounting guidance on the classification of certain transactions on the statement of cash flows where diversity in practice currently exists. The guidance addresses certain specific cash flow issues, including, but not limited to, debt prepayment or debt extinguishment costs and distributions received from equity method investments. This guidance is effective for fiscal years, and for interim reporting periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, and the Company has elected to adopt this guidance effective January 1, 2017. The adoption of this guidance did not have a material impact on the Company’s Consolidated Statements of Cash Flows.
In January 2017, the FASB issued an amendment to the accounting guidance for business combinations to clarify the definition of a business. The objective of this guidance is to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted, and the Company has elected to adopt this guidance effective January 1, 2017. The impact on the Company’s consolidated financial statements resulting from the adoption of this guidance will depend on the Company’s level of acquisitions, but will most likely increase the number of acquisitions accounted for as asset acquisitions rather than business combinations.

8
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following new accounting pronouncements will be adopted on their respective effective dates:
In May 2014, the FASB issued an amendment to the accounting guidance for revenue from contracts with customers. The core principle of this guidance is an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance defines steps an entity should apply to achieve the core principle. This guidance is effective for annual reporting periods beginning after December 15, 2017 and interim reporting periods within that annual period and allows for both retrospective and modified retrospective methods of adoption. Early adoption was permitted for annual periods beginning after December 15, 2016. The Company intends to adopt the guidance using the modified retrospective method. Rental revenue from lease contracts represents a significant portion of our total revenues and is a specific scope exception provided by this guidance. However, common area maintenance and other tenant reimbursable expenses provided to the lessee are considered a non-lease component and will be required to be separated from rental revenue and recorded on a separate financial statement line item upon adoption of the new accounting guidance on leases discussed below. The Company has finalized a project plan, including determination of each applicable revenue stream required to be analyzed within the scope of this accounting guidance. The Company has completed its analysis of service and management fee revenues and parking and other revenues and has concluded the adoption will not have any impact on the method of revenue recognition. The Company continues the process of reviewing various contracts (primarily consisting of land and real estate sales) to analyze the overall impact the adoption will have on the Company’s Statement of Operations.
In February 2016, the FASB issued an amendment to the accounting guidance on leases. This guidance sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The guidance is expected to impact the Company’s consolidated financial statements as the Company has certain operating and land lease arrangements for which it is the lessee. The new guidance supersedes the previous leases accounting standard. This guidance is effective for fiscal years, and for interim reporting periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The adoption of the new guidance is expected to have an impact on the consolidated financial statements as the Company has material ground lease arrangements, as well as other lease agreements. In addition, the Company believes it will be precluded from capitalizing its internal leasing costs, as the costs are not expected to be directly incremental to the successful execution of a lease, as required by the new guidance. The Company is in the process of evaluating the impact of this guidance.
In November 2016, the FASB issued an amendment to the accounting guidance on the classification and presentation of changes in restricted cash on the statement of cash flows. The guidance requires restricted cash to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows. This guidance is effective for fiscal years, and for interim reporting periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The guidance should be adopted using a retrospective transition method. The Company is currently in the process of evaluating the impact of adopting this guidance on its Consolidated Statements of Cash Flows.
In February 2017, the FASB issued an amendment to the accounting guidance on the derecognition of nonfinancial assets. The guidance clarifies the definition of an in substance nonfinancial asset and the recognition of gains and losses from the transfer of nonfinancial assets and for partial sales of nonfinancial assets, which would include real estate. This guidance is effective for fiscal years, and for interim reporting periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company is in the process of evaluating the impact of this guidance.
In August 2017, the FASB issued an amendment to the accounting guidance on derivatives and hedging activities. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. The transition method is a modified retrospective approach that will require the Company to recognize the cumulative effect of initially applying the guidance as an adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the update. This guidance is effective for fiscal years, and for interim reporting periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is in the process of evaluating the impact of this guidance.


9
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Related Party Transactions
The Company and certain of its affiliates entered into a Master Contribution and Sale Agreement (the “Master Contribution Agreement”) with Bruce C. Ratner (“Mr. Ratner”), Executive Vice President, and 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 (“2006 Units”) in a jointly-owned, limited liability company in exchange for their interests. The 2006 Units may be exchanged for one of the following forms of consideration at the Company’s sole discretion: (i) an equal number of shares of the Company’s Class A common stock or, (ii) cash based on a formula using the average closing price of the Class A common stock at the time of conversion or, (iii) a combination of cash and shares of the Company’s Class A common stock. If the Company elects to pay cash as full or partial consideration in exchange for 2006 Units, the exchanging unit holder(s) may elect to redeem such 2006 Units for an in-kind distribution of one or more properties in lieu of cash, provided certain conditions set forth under the Exchange Rights Agreement adopted pursuant to the Master Contribution Agreement are met.   The Company may, in its sole discretion, elect not to proceed with an in-kind redemption if the Company determines in good faith that the Company will suffer any adverse effects from proceeding with the in-kind redemption. The Company has no rights to redeem or repurchase the 2006 Units. Pursuant to the Master Contribution Agreement, certain projects under development would remain owned jointly until each project was completed and achieved “stabilization.” Upon stabilization, each project would be valued and the Company, in its discretion, would choose among various ownership options for the project. In connection with the Master Contribution Agreement, the parties entered into the Tax Protection Agreement (the “Tax Protection Agreement”). The Tax Protection Agreement indemnified the BCR Entities included in the initial closing against taxes payable by reason of any subsequent sale of certain operating properties and expires in November 2018.
Pursuant to the Master Contribution Agreement, 2006 Units not exchanged are entitled to a distribution preference payment equal to the dividends paid on an equivalent number of shares of the Company’s common stock. The Company recorded $219,000 and $553,000 during the three and nine months ended September 30, 2017, respectively, and $116,000 and $543,000 during the three and nine months ended September 30, 2016, respectively, related to the distribution preference payment, which is classified as noncontrolling interest expense on the Company’s Consolidated Statement of Operations.
As a result of the January 2017 sale of Shops at Bruckner Boulevard, an unconsolidated specialty retail center in Bronx, New York, the Company accrued $482,000 related to a tax indemnity payment due to the BCR Entities in accordance with the terms of the Tax Protection Agreement. The Company paid the BCR Entities $361,000 during the nine months ended September 30, 2017 and expects to remit the remaining quarterly installment during the three months ended December 31, 2017.
As a result of the January 2016 sale of 625 Fulton Avenue, a development site in Brooklyn, New York, the Company accrued $6,238,000 related to a tax indemnity payment due to the BCR Entities in accordance with the terms of the Tax Protection Agreement. Installments totaling $4,680,000 were paid during the year ended December 31, 2016. The remaining amount was included in accounts payable, accrued expenses and other liabilities at December 31, 2016 and was paid in January 2017.
In August 2017, certain BCR Entities exchanged 686,865 of the 2006 Units. The Company assigned and transferred its ownership interest in 500 Sterling Place, a previously 100% owned apartment community in Brooklyn, New York, for the exchanged 2006 Units. The agreed upon value of the exchanged property was based on an independent third party appraisal and both parties agreed to use $20 as the basis in determining the number of 2006 Units to be exchanged. The Company accounted for the non-cash exchange as a purchase of noncontrolling interests, resulting in a reduction of noncontrolling interests of $35,037,000, a reduction of completed rental properties, net of $45,044,000, a reduction of nonrecourse mortgage debt of $34,382,000 and an increase to additional paid-in capital of $22,805,000, accounting for the agreed upon value of the exchanged property and the difference between the value of consideration exchanged and the historical cost basis of the noncontrolling interest balance. In September 2017, the Company made a $222,000 payment to the BCR entities for the overpayment of estimated closing costs related to the August 2017 exchange transaction. At September 30, 2017 and December 31, 2016, 1,111,044 and 1,940,788 of the 2006 Units were outstanding, respectively.
In March 2017, certain BCR Entities exchanged 142,879 of the 2006 Units. The Company issued 142,879 shares of its Class A common stock for the exchanged 2006 Units. The Company accounted for the exchange as a purchase of noncontrolling interests, resulting in a reduction of noncontrolling interests of $7,288,000, an increase to Class A common stock of $1,000 and a combined increase to additional paid-in capital of $7,287,000, accounting for the fair value of common stock issued and the difference between the fair value of consideration exchanged and the historical cost basis of the noncontrolling interest balance.
During the three months ended September 30, 2017, the Company distributed $997,000 to Mr. Ratner, which represented his share of the retainage release of a development fee earned during 2005 on a fee project for building the Kings County Supreme Court for New York City. The retainage was being held until the final certificate of occupancy was issued. The Company obtained the final certificate of occupancy and collected the retainage during the three months ended September 30, 2017, at which time Mr. Ratner’s share was distributed.


10
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

In December 2016, the Company’s Board of Directors approved, and the Company entered into a reclassification agreement with RMS Limited Partnership (“RMS”), the former controlling stockholder of the Company's Class B shares, (the “Reclassification Agreement”). The Reclassification Agreement provided that, at the Effective Time, as defined in the Reclassification Agreement, following the satisfaction of the conditions thereto, each share of Class B Common Stock issued and outstanding immediately prior to the Effective Time would be reclassified and exchanged into 1.31 shares of Class A Common Stock, with a right to cash in lieu of fractional shares (the “Reclassification”). At the Company’s Annual Meeting of Stockholders held on June 9, 2017, the stockholders approved the Reclassification. See Note I – Capital Stock for additional information.
In October 2016, the Company entered into a Reimbursement Agreement with RMS (the “Reimbursement Agreement”). The Company agreed to reimburse RMS (together with its officers, directors, employees, beneficiaries, trustees, representatives and agents)(“Reimbursed Persons”) for reasonable and documented fees and out-of-pocket expenses of RMS’s financial, legal and public relations advisors incurred in evaluating and negotiating the Reclassification. In addition, the Company agreed to reimburse the Reimbursed Persons for (i) reasonable costs and expenses incurred in connection with any Proceeding (as defined in the Reimbursement Agreement) to which such Reimbursed Person is a party or otherwise involved in and (ii) any losses, damages or liabilities actually and reasonably suffered or incurred in any such Proceeding by a Reimbursed Person. Amounts incurred subject to the Reimbursement Agreement were approximately $4,060,000 and $1,207,000 during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. See Note I – Capital Stock for additional information.
During the three months ended September 30, 2017, Charles A. Ratner, the Company’s former Chairman of the Board and brother of James A. Ratner, the Company’s current Chairman of the Board, purchased a life insurance policy from the Company for $826,000, which represented the book value and net cash surrender value of the policy at the time of the transaction.
Accumulated Other Comprehensive Loss
The following table summarizes the components of accumulated other comprehensive income (loss) (“accumulated OCI”):
 
September 30, 2017
December 31, 2016
 
(in thousands)
Unrealized losses on interest rate derivative contracts (1) 
$
10,683

$
14,473

Noncontrolling interest
(52
)
(63
)
Accumulated Other Comprehensive Loss
$
10,631

$
14,410

(1)
Includes unrealized losses on interest rate swaps accounted for as hedges held by certain of the Company’s equity method investees.
The following table summarizes the changes, net of noncontrolling interest, of accumulated OCI by component:
 
Foreign Currency Translation
Interest Rate Contracts
Total
 
(in thousands)
Nine Months Ended September 30, 2017
 
 
 
Balance, January 1, 2017
$
—

$
(14,410
)
$
(14,410
)
Loss recognized in accumulated OCI
—

(385
)
(385
)
Loss reclassified from accumulated OCI
—

4,164

4,164

Total other comprehensive income
—

3,779

3,779

Balance, September 30, 2017
$
—

$
(10,631
)
$
(10,631
)
Nine Months Ended September 30, 2016
 
 
 
Balance, January 1, 2016
$
(95
)
$
(67,810
)
$
(67,905
)
Gain (loss) recognized in accumulated OCI
95

(10,184
)
(10,089
)
Loss reclassified from accumulated OCI
—

30,058

30,058

Total other comprehensive income
95

19,874

19,969

Balance, September 30, 2016
$
—

$
(47,936
)
$
(47,936
)

11
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following table summarizes losses reclassified from accumulated OCI and their location on the Consolidated Statements of Operations:
Accumulated OCI Components
Loss Reclassified from Accumulated OCI
 
Location on Consolidated Statements of Operations
 
(in thousands)
 
 
Nine Months Ended September 30, 2017
 
 
 
Interest rate contracts
$
2,194

 
Interest expense
Interest rate contracts
1,981

 
Earnings (loss) from unconsolidated entities
 
4,175

 
Total before noncontrolling interest
 
(11
)
 
Noncontrolling interest
 
$
4,164

 
Loss reclassified from accumulated OCI
Nine Months Ended September 30, 2016
 
 
 
Interest rate contracts
$
27,536

 
Interest expense
Interest rate contracts
113

 
Net gain on disposition of full or partial interest in rental properties, net of tax
Interest rate contracts
2,421

 
Earnings (loss) from unconsolidated entities
 
30,070

 
Total before noncontrolling interest
 
(12
)
 
Noncontrolling interest
 
$
30,058

 
Loss reclassified from accumulated OCI

12
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Noncontrolling Interest
During the nine months ended September 30, 2017, the Company exercised a promote option in the Arizona State Retirement System joint venture agreement, whereby the Company increased its ownership in the joint venture from 25.00% to 29.63%, as a result of the joint venture’s cumulative financial performance and estimated value creation. The non-cash transaction resulted in a decrease to noncontrolling interest and a corresponding increase to additional paid-in capital of $10,931,000.
The Company owned an equity interest in Barclays Center arena and the Nets through the Company’s consolidated subsidiary Nets Sports & Entertainment (“NS&E”). During the nine months ended September 30, 2016, subsequent to the sale of Barclays Center and the Nets, the Company purchased NS&E’s partners’ interest for $38,951,000. This cash payment together with the partners’ historical noncontrolling interest debit balance resulted in a decrease to additional paid-in capital as reflected on the Consolidated Statement of Equity.
Organizational Transformation and Termination Benefits
The following table summarizes the components of organizational transformation and termination benefits:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
2016
 
2017
2016
 
(in thousands)
Termination benefits
$
1,764

$
2,710

 
$
10,501

$
10,273

Shareholder activism costs
869

—

 
3,520

—

Reorganization costs
—

5,382

 
—

11,357

REIT conversion costs
—

—

 
—

863

Total
$
2,633

$
8,092

 
$
14,021

$
22,493

For the periods presented, the Company experienced workplace reductions and recorded the associated termination benefits expenses (outplacement and severance payments based on years of service and other defined criteria) for each occurrence.
Shareholder activism costs are comprised of advisory, legal and other professional fees associated with activism matters. Reorganization costs consist primarily of consulting and other professional fees related to the 2016 restructuring of the organization by function (operations, development and corporate support). REIT conversion costs consist primarily of legal, accounting, consulting and other professional fees. The Company has segregated these costs along with termination benefits and reported these amounts as organizational transformation and termination benefits in the Consolidated Statements of Operations and reported in the Corporate segment.
The following table summarizes the activity in the accrued severance balance for termination benefits:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
2016
 
2017
2016
 
(in thousands)

Accrued severance benefits, beginning balance
$
11,710

$
11,277

 
$
9,969

$
16,338

Termination benefits expense
1,764

2,710

 
10,501

10,273

Payments
(4,615
)
(3,394
)
 
(11,611
)
(16,018
)
Accrued severance benefits, ending balance
$
8,859

$
10,593

 
$
8,859

$
10,593


13
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Supplemental Non-Cash Disclosures
The following table summarizes the impact to the applicable balance sheet line items as a result of various non-cash transactions. Non-cash transactions primarily include dispositions of operating properties whereby the nonrecourse mortgage debt is assumed by the buyer or otherwise extinguished at closing, exchanges of 2006 Units or senior notes for Class A common stock or rental property, changes in consolidation methods of fully consolidated properties due to the occurrence of triggering events including, but not limited to, disposition of a partial interest in rental properties, change in construction payables and other capital expenditures, notes receivable from the sale of rental properties or development project, redemption of redeemable noncontrolling interest, adoption of new accounting guidance for debt issuance costs and capitalization of stock-based compensation granted to employees directly involved with the development and construction of real estate.
 
Nine Months Ended September 30,
 
2017
2016
 
(in thousands)
Non-cash changes to balance sheet - Investing Activities
 
 
Projects under construction and development
$
(51,996
)
$
(37,542
)
Completed rental properties
(126,810
)
(1,173,460
)
Restricted cash
3,331

(12,265
)
Notes receivable
2,500

277,050

Investments in and advances to affiliates - due to dispositions or change in control
603

125,741

Investments in and advances to affiliates - other activity
(218
)
2,708

Total non-cash effect on investing activities
$
(172,590
)
$
(817,768
)
Non-cash changes to balance sheet - Financing Activities
 
 
Nonrecourse mortgage debt and notes payable, net
$
(109,751
)
$
(846,965
)
Convertible senior debt, net
(1
)
(125
)
Class A common stock
59

—

Additional paid-in capital
49,335

(12,065
)
Redeemable noncontrolling interest
—

(159,202
)
Noncontrolling interest
(54,129
)
19,059

Total non-cash effect on financing activities
$
(114,487
)
$
(999,298
)

B. Notes Receivable
The following table summarizes the Company’s interest bearing notes receivable:
 
September 30, 2017
December 31, 2016
Maturity Date
Weighted Average Interest Rate
 
(in thousands)
 
 
Stapleton
$
195,846

$
141,034

Various
8.56%
The Nets sale
125,100

125,100

January 2021
4.50%
Barclays Center sale
92,600

92,600

January 2019
4.50%
Other
16,544

24,429

Various
4.94%
Total
$
430,090

$
383,163

 
 


14
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

C. Nonrecourse Mortgage Debt and Notes Payable, Net
The following table summarizes the nonrecourse mortgage debt and notes payable, net maturities as of September 30, 2017:
Years Ending December 31,
 
 
(in thousands)
2017
$
190,767

2018
494,058

2019
474,981

2020
228,929

2021
194,944

Thereafter
1,578,094

 
3,161,773

Net unamortized mortgage procurement costs
(32,484
)
Total
$
3,129,289


D. Revolving Credit Facility
In November 2015, the Company entered into a Revolving Credit Agreement which provided for total available borrowings of $500,000,000 (increased to $600,000,000 in May 2016) and contains an accordion provision, subject to bank approval, allowing the Company to increase total available borrowings to $750,000,000 (“Revolving Credit Facility”).
The Revolving Credit Facility matures in November 2019, and provides for two six-month extension periods, subject to certain conditions. Borrowings bear interest at the Company’s option at either London Interbank Offered Rate (“LIBOR”) (1.23% at September 30, 2017) plus a margin of 1.15% - 1.85% (1.25% at September 30, 2017) or the Prime Rate (4.25% at September 30, 2017) plus a margin of 0.15% - 0.85% (0.25% at September 30, 2017). In addition, the Revolving Credit Facility is subject to an annual facility fee of 0.20% - 0.35% (0.25% at September 30, 2017) of total available borrowings. Up to $150,000,000 of the available borrowings can be used for letters of credit. The applicable margins and annual facility fee are based on the Company’s total leverage ratio (adjusted quarterly, if applicable).
The Revolving Credit Facility has restrictive covenants, including a prohibition on certain types of dispositions, mergers, consolidations, and limitations on lines of business the Company is allowed to conduct. Additionally, the Revolving Credit Facility contains financial covenants, including the maintenance of a maximum total leverage ratio, maximum secured and unsecured leverage ratios, maximum secured recourse leverage ratio, a minimum fixed charge coverage ratio, and a minimum unencumbered interest coverage ratio (all as specified in the Revolving Credit Agreement). At September 30, 2017, the Company was in compliance with all of these financial covenants.
The following table summarizes available credit on the Revolving Credit Facility:
 
September 30, 2017
December 31, 2016
 
(in thousands)
Total available borrowings
$
600,000

$
600,000

Less:
 
 
Outstanding borrowings
—

—

Letters of credit
42,873

44,215

Available credit
$
557,127

$
555,785

As of September 30, 2017 and December 31, 2016, unamortized debt issuance costs related to the Revolving Credit Facility of $2,038,000 and $2,757,000, respectively, are included in other assets on the Consolidated Balance Sheets.


15
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

E. Term Loan, Net
In May 2016, the Company entered into a Term Loan Credit Agreement which provides a $335,000,000 senior unsecured term loan credit facility (“Term Loan”).
The Term Loan matures in May 2021 and bears interest at the Company’s option at either LIBOR (based on the approximate date of the initial borrowings and adjusted monthly thereafter) (1.24% at September 30, 2017) plus a margin of 1.30% - 2.20% (1.45% at September 30, 2017) or the Prime Rate plus a margin of 0.30% - 1.20% (0.45% at September 30, 2017). The applicable margins are based on the Company’s total leverage ratio. Upon the Company obtaining an investment grade credit rating, established by certain debt rating agencies for the Company’s long term, senior, unsecured non-credit enhanced debt (the “Debt Ratings”), the applicable margin will, at the Company’s election, be based on the Company’s then-current Debt Ratings.
The Term Loan contains identical financial covenants as the Revolving Credit Facility as described in Note D – Revolving Credit Facility. Additionally, the Term Loan contains customary events of default provisions, including failure to pay indebtedness, breaches of covenants and bankruptcy or other insolvency events, which could result in the acceleration of all amounts and cancellation of all commitments outstanding under the Term Loan, as well as customary representations and warranties and affirmative and negative covenants.
The following table summarizes outstanding borrowings of the Term Loan, net:
 
September 30, 2017
December 31, 2016
 
(in thousands)
Total outstanding borrowings
$
335,000

$
335,000

Net unamortized debt procurement costs
(1,432
)
(1,732
)
Total
$
333,568

$
333,268


F. Convertible Senior Debt, Net
The following table summarizes the convertible senior debt, net:
 
September 30, 2017
December 31, 2016
 
(in thousands)
4.250% Notes due 2018
$
73,215

$
73,216

3.625% Notes due 2020
40,021

40,021

 
113,236

113,237

Net unamortized debt procurement costs
(713
)
(1,056
)
Total
$
112,523

$
112,181

During the nine months ended September 30, 2016, the Company entered into separate, privately negotiated exchange agreements with certain holders of the Company’s convertible senior notes. Under the terms of the agreements, holders agreed to exchange certain notes for either shares of Class A common stock or cash payments. Under the accounting guidance for induced conversions of convertible debt, additional amounts paid to induce the holders to exchange the notes were expensed resulting in a loss on extinguishment of debt.
The following table summarizes the convertible senior debt transactions completed during the nine months ended September 30, 2016:
Agreement Date
Issuance
Aggregate Principal
Class A Common Shares Issued
Cash Payments to Noteholders
Loss on Extinguishment
 
 
(in thousands, except share data)
January 20, 2016
2016 Senior Notes
$
125

9,298

$
—

$
59

March 14, 2016
2018 Senior Notes
77,310

—

90,958

15,370

March 17, 2016
2018 Senior Notes
4,000

—

4,707

795

March 14, 2016
2020 Senior Notes
76,334

—

86,858

12,823

Total
$
157,769

9,298

$
182,523

$
29,047

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.

16
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

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.
The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated OCI and is subsequently reclassified into earnings during the period the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value is recognized directly in earnings. Ineffectiveness was insignificant during the three and nine months ended September 30, 2017 and 2016. As of September 30, 2017, the Company expects it will reclassify amounts recorded in accumulated OCI into earnings as an increase in interest expense of approximately $4,338,000 within the next twelve months. However, the actual amount reclassified could vary due to future changes in the fair value of these derivatives.
Fair Value Hedges of Interest Rate Risk
The Company enters into total rate of return swaps (“TROR”) on various tax-exempt fixed-rate borrowings. The TROR convert borrowings from a fixed rate to a variable rate. The TROR requires the payment of a variable interest rate, generally equivalent to the Securities Industry and Financial Markets Association (“SIFMA”) rate (0.94% at September 30, 2017) plus a spread. Additionally, the Company has guaranteed the fair value of the underlying borrowings. Fluctuation in the value of the TROR is offset by the fluctuation in the value of the underlying borrowings, resulting in minimal financial impact. At September 30, 2017, the aggregate notional amount of TROR designated as fair value hedging instruments is $555,936,000. The underlying TROR borrowings are subject to a fair value adjustment.

17
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Nondesignated Hedges of Interest Rate Risk
The Company uses derivative contracts to hedge certain interest rate risk, even though the contracts do not qualify for, or the Company has elected not to apply, hedge accounting. In these situations, the derivative is recorded at its fair value with changes reflected in earnings.
The Company has certain undesignated TROR where the associated debt is held by an unconsolidated affiliate or unrelated third parties. The change in fair value of these TROR is recognized in earnings. At September 30, 2017, the aggregate notional amount of these TROR is $137,517,000.
In instances where the Company enters into separate derivative instruments effectively hedging the same debt for consecutive annual periods, the duplicate amount of notional is excluded from the following disclosure in an effort to provide information that enables the financial statement user to understand the Company’s volume of derivative activity.

The following table summarizes the fair values and location in the Consolidated Balance Sheets of all derivative instruments:
 
Fair Value of Derivative Instruments
 
Asset Derivatives
(included in Other Assets)
 
Liability Derivatives
(included in Accounts Payable,
Accrued Expenses and Other Liabilities)
 
Current
Notional
Fair Value
 
Current
Notional
Fair Value
 
(in thousands)
 
September 30, 2017
Derivatives Designated as Hedging Instruments
 
 
 
 
 
Interest rate swaps
$
63,591

$
680

 
$
34,248

$
1,253

TROR
319,921

4,695

 
236,015

2,762

Total
$
383,512

$
5,375

 
$
270,263

$
4,015

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

$
—

 
$
—

$
—

TROR
100,551

5,076

 
36,966

11,849

Total
$
170,069

$
5,076

 
$
36,966

$
11,849

 
 
 
 
 
 
 
December 31, 2016
Derivatives Designated as Hedging Instruments
 
 
 
 
 
Interest rate swaps
$
64,248

$
593

 
$
34,666

$
1,504

TROR
235,970

5,008

 
316,015

12,442

Total
$
300,218

$
5,601

 
$
350,681

$
13,946

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

$
—

 
$
—

$
—

TROR
100,800

4,117

 
37,044

12,256

Total
$
170,318

$
4,117

 
$
37,044

$
12,256


18
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following table summarizes the impact of gains and losses related to derivative instruments designated as cash flow hedges 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:
 
 
 
Loss Reclassified from Accumulated OCI
Derivatives Designated as
Cash Flow Hedging Instruments
Gain (Loss) Recognized
in OCI
(Effective Portion)
 
Location on Consolidated Statements
of Operations
Effective
Amount
Ineffective
Amount
 
(in thousands)
Three Months Ended September 30, 2017
 
 
 
 
 
Interest rate caps and interest rate swaps
$
(49
)
 
Interest expense
$
(683
)
$
(1
)
 
 
 
Earnings (loss) from unconsolidated entities
(605
)
—

Total
$
(49
)
 
 
$
(1,288
)
$
(1
)
Nine Months Ended September 30, 2017
 
 
 
 
 
Interest rate caps and interest rate swaps
$
(385
)
 
Interest expense
$
(2,144
)
$
(50
)
 
 
 
Earnings (loss) from unconsolidated entities
(1,981
)
—

Total
$
(385
)
 
 
$
(4,125
)
$
(50
)
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
 
 
 
 
Interest rate caps and interest rate swaps
$
1,406

 
Interest expense
$
(9,103
)
$
3

 
 
 
Net gain (loss) on disposition of full or partial interest in rental properties, net of tax

—

—

 
 
 
Earnings (loss) from unconsolidated entities
(796
)
—

Total
$
1,406

 
 
$
(9,899
)
$
3

Nine Months Ended September 30, 2016
 
 
 
 
 
Interest rate caps and interest rate swaps
$
(10,184
)
 
Interest expense
$
(27,512
)
$
(24
)
 
 
 
Net gain (loss) on disposition of full or partial interest in rental properties, net of tax

(113
)
—

 
 
 
Earnings (loss) from unconsolidated entities
(2,421
)
—

Total
$
(10,184
)
 
 
$
(30,046
)
$
(24
)

19
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following table summarizes the impact of gains and losses related to derivative instruments not designated as cash flow hedges in the Consolidated Statements of Operations:
 
Net Gain (Loss) Recognized
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
2016
 
2017
2016
 
(in thousands)
Derivatives Designated as Fair Value Hedging Instruments
 
 
 
 
 
TROR (1) 
$
2,869

$
(1,153
)
 
$
9,367

$
(1,776
)
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
Interest rate caps and interest rate swaps
$
(45
)
$
—

 
$
(45
)
$
(94
)
TROR
(432
)
26

 
1,366

(1,955
)
Total
$
(477
)
$
26

 
$
1,321

$
(2,049
)
(1)
The net gain (loss) recognized in interest expense from the change in fair value of the underlying TROR borrowings was $(2,869) and $(9,367) for the three and nine months ended September 30, 2017, respectively, and $1,153 and $1,776 for the three and nine months ended September 30, 2016, respectively, offsetting the gain (loss) recognized on the TROR.
Credit-risk-related Contingent Features
The principal credit risk of the Company’s interest rate risk management strategy is the potential inability of a counterparty to cover its obligations. If a counterparty fails to fulfill its obligation, the risk of loss approximates the fair value of the derivative. To mitigate this exposure, the Company generally purchases derivative financial instruments from the financial institution that issues the related debt, from financial institutions with which the Company has other lending relationships, or from financial institutions with a minimum credit rating of AA at the time of the transaction.
Agreements with derivative counterparties contain provisions under which the counterparty could terminate the derivative obligations if the Company defaults on its obligations under the Revolving Credit Agreement and designated conditions are fulfilled. In instances where the Company’s subsidiaries have derivative obligations secured by a mortgage, the derivative obligations could be terminated if the indebtedness between the two parties is terminated, either by loan payoff or default of the indebtedness. In addition, certain subsidiaries have agreements containing provisions whereby the subsidiaries must maintain certain minimum financial ratios. As of September 30, 2017, the Company does not have any derivative contracts containing credit-risk related contingent features, such as a credit rating downgrade, that may trigger collateral to be posted with a counterparty.
The following table summarizes information about collateral posted for derivatives in liability positions as of September 30, 2017:
 
Collateral Information
 
Notional Amount
Fair Value Prior to Nonperformance Risk
Nonperformance Risk
Collateral Posted
Nature of Collateral
Credit Risk Contingent Feature
 
(in thousands)
 
 
Property Specific Swaps
$
34,248

$
1,314

$
(61
)
$
—

Mortgage liens
None
TROR
272,981

14,590

21

67,806

Restricted cash, notes receivable, letters of credit
None
Total
$
307,229

$
15,904

$
(40
)
$
67,806

 
 

H. Fair Value Measurements
Fair Value Measurements on a Recurring Basis
The Company’s financial assets consist of interest rate caps, interest rate swaps and TROR with positive fair values included in other assets. The Company’s financial liabilities consist of interest rate swaps and TROR with negative fair values included in accounts payable, accrued expenses and other liabilities and borrowings subject to TROR included in nonrecourse mortgage debt and notes payable, net.

20
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following table summarizes information about financial assets and liabilities measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:
 
September 30, 2017
 
Level 1
Level 2
Level 3
Total
 
(in thousands)
Interest rate swaps (assets)
$
—

$
680

$
—

$
680

Interest rate swaps (liabilities)
—

(1,253
)
—

(1,253
)
TROR (assets)
—

—

9,771

9,771

TROR (liabilities)
—

—

(14,611
)
(14,611
)
Fair value adjustment to the borrowings subject to TROR
—

—

(1,933
)
(1,933
)
Total
$
—

$
(573
)
$
(6,773
)
$
(7,346
)
 
 
 
 
 
 
December 31, 2016
 
(in thousands)
Interest rate swaps (assets)
$
—

$
593

$
—

$
593

Interest rate swaps (liabilities)
—

(1,504
)
—

(1,504
)
TROR (assets)
—

—

9,125

9,125

TROR (liabilities)
—

—

(24,698
)
(24,698
)
Fair value adjustment to the borrowings subject to TROR
—

—

7,434

7,434

Total
$
—

$
(911
)
$
(8,139
)
$
(9,050
)
The following table presents a reconciliation of financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
 
Net
TROR
Fair value
adjustment
to the borrowings
subject to TROR
Total
 
(in thousands)
Nine Months Ended September 30, 2017
 
 
 
Balance, January 1, 2017
$
(15,573
)
$
7,434

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

(9,367
)
1,366

Balance, September 30, 2017
$
(4,840
)
$
(1,933
)
$
(6,773
)
Nine Months Ended September 30, 2016
 
 
 
Balance, January 1, 2016
$
(10,785
)
$
2,810

$
(7,975
)
Total realized and unrealized gains (losses):
 
 
 
Included in earnings
(3,731
)
1,776

(1,955
)
Balance, September 30, 2016
$
(14,516
)
$
4,586

$
(9,930
)
The following table presents quantitative information about the significant unobservable inputs used to estimate the fair value of financial instruments measured on a recurring basis as of September 30, 2017:
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value September 30, 2017
Valuation
Technique
Unobservable
Input
Input Values
 
(in thousands)
 
 
 
TROR
$
(4,840
)
Third party bond pricing
Bond valuation
94.85 - 120.73
Fair value adjustment to the borrowings subject to TROR
$
(1,933
)
Third party bond pricing
Bond valuation
94.85 - 102.59
Third party service providers involved in fair value measurements are evaluated for competency and qualifications. Fair value measurements, including unobservable inputs, are evaluated based on current transactions and experience in the real estate and capital markets.
The impact of changes in unobservable inputs used to determine the fair market value of the credit valuation adjustment, TROR and fair value adjustment to the borrowings subject to TROR are not deemed to be significant.

21
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Fair Value of Other Financial Instruments
The carrying amount of accounts receivable and accounts payable, accrued expenses and other liabilities approximates fair value based upon the short-term nature of the instruments. The carrying amount of notes receivable approximates fair value since the interest rates on these notes approximates current market rates for similar instruments when considering the risk profile and quality of the collateral, if applicable. The Company estimates the fair value of its debt instruments by discounting future cash payments at interest rates the Company believes approximate the current market. Estimated fair value is based upon market prices of public debt, available industry financing data, current treasury rates, recent financing transactions, conversion features on convertible senior debt and loan to value ratios. The fair value of the Company’s debt instruments is classified as Level 3 in the fair value hierarchy.
The following table summarizes the fair value of nonrecourse mortgage debt and notes payable, net (exclusive of the fair value of derivatives), term loan, net and convertible senior debt, net:
 
September 30, 2017
 
December 31, 2016
 
Carrying Value
Fair Value
 
Carrying Value
Fair Value
 
(in thousands)
Nonrecourse mortgage debt and notes payable, net
$
3,129,289

$
3,135,150

 
$
3,120,833

$
3,105,587

Term loan, net
333,568

333,686

 
333,268

333,527

Convertible senior debt, net
112,523

134,064

 
112,181

122,795

Total
$
3,575,380

$
3,602,900

 
$
3,566,282

$
3,561,909


I. Capital Stock
Pursuant to the Reclassification Agreement, the Board submitted a proposal for stockholder approval to eliminate the dual-class share structure at the Company’s 2017 Annual Meeting of Stockholders. This proposal was approved by the stockholders at the Company’s Annual Meeting of Stockholders on June 9, 2017 and became effective following the market close on June 12, 2017. As a result, each of the 18,788,163 shares of Class B common stock issued and outstanding immediately prior to the Effective Time were reclassified into 1.31 shares of Class A common stock. As such, 24,612,495 additional shares of Class A common stock were issued to the prior Class B common stockholders. Upon completion of this transaction, all outstanding shares of common stock are entitled to one vote per share on all matters brought to the Company’s stockholders, including but not limited to, the election of the entire Board of Directors.
Certain professional and consulting fees, including investment banking success fees, incurred directly related to the stock conversion were recorded as a $9,305,000 reduction to additional paid-in capital, in accordance with applicable accounting requirements when raising permanent equity. Amounts include costs paid on behalf of RMS in accordance with the Reimbursement Agreement. See the “Related Party Transactions” section of Note A – Accounting Policies for detailed information on the Reimbursement Agreement.

J. Dividends
Prior to the taxable year ended December 31, 2016, our predecessor, Forest City Enterprises, Inc., operated as a C corporation. A REIT is not permitted to retain earnings and profits (“E&P”) accumulated during the periods when the company or its predecessor was taxed as a C corporation or accumulated by the Company’s or its predecessor’s TRS not converted to a qualified REIT subsidiary. The Company was required to make a distribution to its stockholders that equaled or exceeded its accumulated positive E&P. The 2016 E&P dividend summarized below was based on the estimated cumulative positive E&P of the Company’s predecessor.

22
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The following table summarizes cash dividends declared by the Board of Directors on the Company’s common stock (in thousands, except per share data):
Type
Date Declared
Record Date
Payment Date
Amount Per Share
Total Cash Payment
2017
 
 
 
 
 
Quarterly
August 22, 2017
September 5, 2017
September 18, 2017
$
0.14

$
37,343

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

$
23,482

Quarterly
March 1, 2017
March 13, 2017
March 27, 2017
$
0.09

$
23,441

 
 
 
Total
$
0.32

$
84,266

 
 
 
 
 
 
2016
 
 
 
 
 
Quarterly
November 30, 2016
December 12, 2016
December 23, 2016
$
0.06

$
15,620

Quarterly
August 18, 2016
September 2, 2016
September 16, 2016
$
0.06

$
15,621

Quarterly
May 17, 2016
June 10, 2016
June 24, 2016
$
0.06

$
15,623

Quarterly
February 18, 2016
March 4, 2016
March 18, 2016
$
0.06

$
15,596

E&P
February 18, 2016
March 4, 2016
March 18, 2016
$
0.10

$
25,992

 
 
 
Total
$
0.34

$
88,452


K. Stock-Based Compensation
During the nine months ended September 30, 2017, the Company granted 26,112 stock options, 672,876 shares of restricted stock and 243,571 performance shares under the Company’s 1994 Stock Plan. The stock options had a grant-date fair value of $4.79, which was computed using the Black-Scholes option-pricing model using the following assumptions: expected term of 5.5 years, expected volatility of 25.1%, risk-free interest rate of 2.12%, and expected dividend yield of 1.69%. The exercise price of the options is $21.83, the closing price of the underlying Class A common stock on the date of grant. The restricted stock had a weighted average grant-date fair value of $21.85 per share, based on the closing price of the Class A common stock on the respective dates of grant. The performance shares had a grant-date fair value of $24.91 per share, which was computed using a Monte Carlo simulation.
At September 30, 2017, $210,000 of unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 6 months, $16,125,000 of unrecognized compensation cost related to restricted stock is expected to be recognized over a weighted-average period of 23 months, and $7,228,000 of unrecognized compensation cost related to performance shares is expected to be recognized over a weighted-average period of 19 months.
The following table summarizes stock-based compensation costs and related deferred income tax benefit recognized in the financial statements:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
2016
 
2017
2016
 
(in thousands)
Stock option costs
$
126

$
205

 
$
463

$
731

Restricted stock costs
4,494

3,439

 
13,440

11,367

Performance share costs
2,633

2,496

 
7,391

7,213

Total stock-based compensation costs
7,253

6,140

 
21,294

19,311

Less amount capitalized into qualifying real estate projects
(2,101
)
(1,592
)
 
(6,401
)
(4,151
)
Amount charged to operating expenses
5,152

4,548

 
14,893

15,160

Depreciation expense on capitalized stock-based compensation
216

202

 
665

621

Total stock-based compensation expense
$
5,368

$
4,750

 
$
15,558

$
15,781

Deferred income tax benefit
$
152

$
136

 
$
429

$
457

The amount of grant-date fair value expensed immediately for awards granted to retirement-eligible grantees during the nine months ended September 30, 2017 and 2016 was $867,000 and $1,166,000, respectively.
In connection with the vesting of restricted stock and performance shares during the nine months ended September 30, 2017 and 2016, the Company repurchased 252,161 shares and 385,380 shares, respectively, of Class A common stock to satisfy the employees’ related minimum statutory tax withholding requirements. Shares repurchased during the nine months ended September 30, 2017 and 2016 were returned to unissued shares with an aggregate cost basis of $5,598,000 and $7,825,000, respectively.

23
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)


L. Write-Offs of Abandoned Development Projects and Demolition Costs
The Company reviews each project under development to determine whether it is probable the project will be developed. If management determines the project will not be developed, its project costs and other related expenses are written off as an abandoned development project cost. The Company abandons projects under development for a number of reasons, including, but not limited to, changes in local market conditions, increases in construction or financing costs or third party challenges related to entitlements or public financing. The Company recorded no write-offs of abandoned development projects and demolition costs during the three months ended September 30, 2017 and $1,596,000 during the nine months ended September 30, 2017. The Company incurred $10,058,000 as write-offs of abandoned development projects and demolition costs during the three and nine months ended September 30, 2016.
The Company incurred $1,179,000 and $1,926,000 as write-offs of abandoned development projects and demolition costs of unconsolidated entities during the three and nine months ended September 30, 2017, which is included in equity in earnings and primarily represents non-capitalizable demolition costs at a redevelopment property. The Company incurred no write-offs of abandoned development projects and demolition costs of unconsolidated entities for the three and nine months ended September 30, 2016.

M. Impairment of Real Estate and Impairment of Unconsolidated Entities
Impairment of Real Estate
The Company reviews its real estate for impairment whenever events or changes indicate its carrying value may not be recoverable. In determining whether the carrying costs are recoverable from estimated future undiscounted cash flows, the Company uses various assumptions including future estimated net operating income, estimated holding periods, risk of foreclosure and estimated cash proceeds upon the disposition of the asset. If the carrying costs are not recoverable, the Company records an impairment charge to reduce the carrying value to estimated fair value. The assumptions used to estimate fair value, which are based on current information, are Level 2 or 3 inputs. If the conditions deteriorate or if plans regarding the assets change, additional impairment charges may occur in future periods.
The following table summarizes the Company’s impairment of real estate included in continuing operations:
 
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
 
2017
2016
2017
2016
 
 
(in thousands)
461 Dean Street (Apartment)
Brooklyn, New York
$
44,288

$
—

$
44,288

$
—

Regional Malls:
 
 
 
 
 
Shops at Northfield Stapleton
Denver, Colorado
—

68,821

—

68,821

Boulevard Mall
Amherst, New York
—

52,510

—

52,510

Shops at Wiregrass
Tampa, Florida
—

—

—

12,464

Office Buildings:
 
 
 
 
 
Post Office Plaza
Cleveland, Ohio
—

11,800

—

11,800

Illinois Science and Technology Park
Skokie, Illinois
—

7,900

—

7,900

Land inventory
Las Vegas, Nevada
—

1,230

—

1,230

Other
—

—

—

2,100

Total
$
44,288

$
142,261

$
44,288

$
156,825

During the three months ended September 30, 2017, the Company began the marketing process of 461 Dean Street. The initiation of the marketing process triggered management to update its undiscounted cash flow analysis, including its probability weighted estimated holding period. As a result, the estimated probability weighted undiscounted cash flows no longer exceeded the carrying value, requiring the Company to adjust the carrying value to its estimated fair value during the three months ended September 30, 2017. The Company has not entered into any agreements, and can not ensure a transaction can or will be consummated.
During the three months ended September 30, 2016, the Company’s Board of Directors authorized a process to review strategic alternatives for the Company’s retail portfolio and had begun discussions with certain strategic partners and other potential buyers for several of its retail assets. In connection with this review and discussions to date, the Company updated its impairment analysis on its retail assets, including increasing the likelihood of near-term sales. As a result, the estimated probability weighted undiscounted cash flows no longer exceeded the carrying value of the Shops at Northfield Stapleton and Boulevard Mall, requiring the Company to adjust the carrying value to their estimated fair value during the three months ended September 30, 2016. The Company completed the sale of Shops at Northfield Stapleton in October 2017.

24
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

During the year ended December 31, 2015, the Company decided to pursue the partial sale, through a joint venture, of Shops at Wiregrass. At March 31, 2016, negotiations and buyer due diligence were substantially complete and closing of the transaction remained subject to receipt of a third party consent. The advanced status of the transaction at March 31, 2016 triggered management to further update its undiscounted cash flow analysis including its probability weighted estimated holding period. As a result, the estimated probability weighted undiscounted cash flows no longer exceeded the carrying value, requiring the Company to adjust the carrying value to its estimated fair value during the three months ended March 31, 2016. The Company received the third party consent and closed on the disposition of 49% of its equity interest in October 2016.
During the three months ended September 30, 2016, based on the loss of a potential tenant to fill a significant vacancy, the Company updated its undiscounted cash flow analysis including its probability weighted estimated holding period for Post Office Plaza office building. As a result, the estimated probability weighted undiscounted cash flows no longer exceeded the carrying value, requiring the Company to adjust the carrying value to its estimated fair value during the three months ended September 30, 2016. The Company closed on the sale of Post Office Plaza in August 2017.
During the three months ended September 30, 2016, the Company received a letter of intent for the operating assets at Illinois Science & Technology Park. Based on the letter of intent pricing, the Company updated its undiscounted cash flow analysis resulting in the estimated undiscounted cash flows no longer exceeding the carrying value of the assets, requiring the Company to adjust the carrying value to its estimated fair value during the three months ended September 30, 2016. The Company closed on the sale of Illinois Science & Technology Park in January 2017.
Impairment of Unconsolidated Entities
The Company reviews its portfolio of unconsolidated entities for other-than-temporary impairments whenever events or changes indicate its carrying value in the investments may be in excess of fair value. An equity method investment’s value is impaired if management’s estimate of its fair value is less than the carrying value and the difference is deemed to be other-than-temporary. In estimating fair value, assumptions that may be used include comparable sale prices, market discount rates, market capitalization rates and estimated future discounted cash flows specific to the geographic region and property type, all of which are considered Level 3 inputs. For recently opened properties, assumptions also include the timing of initial property lease up. In the event initial property lease up assumptions differ from actual results, estimated future discounted cash flows may vary, resulting in impairment charges in future periods.
The following table summarizes the Company’s other-than-temporary impairment of unconsolidated entities during the three and nine months ended September 30, 2017 and 2016:
 
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
 
2017
2016
2017
2016
 
 
(in thousands)
Westchester’s Ridge Hill
Yonkers, New York
$
10,600

$
—

$
10,600

$
—

Pacific Park Brooklyn
Brooklyn, New York
—

299,300

—

299,300

Other
—

7,100

—

7,100

Total
$
10,600

$
306,400

$
10,600

$
306,400

During the three months ended September 30, 2017, the Company signed a definitive agreement for the sale of Westchester’s Ridge Hill, a regional mall in Yonkers, New York, to its partner. This triggered management to update its impairment analysis, including its estimated selling price. As a result, the estimated fair value no longer exceeded the carrying value, requiring the Company to adjust the carrying value to its estimated fair value during the three months ended September 30, 2017. See the Financial Condition and Liquidity section of the MD&A of this 10-Q for additional information regarding the definitive agreement to sell the Company’s regional mall portfolio.
Pacific Park Brooklyn is a 22 acre mixed-use project in Brooklyn, New York. On June 30, 2014, the Company entered into a joint venture with Greenland Atlantic Yards, LLC, a subsidiary of Shanghai-based Greenland Holding Group Company Limited (“Greenland”), to develop the project. Under the joint venture, Greenland acquired 70% of the project and agreed to co-develop the project with the Company, along with sharing in the entire project costs going forward in proportion to ownership interests. The joint venture was formed to execute on the remaining development rights, including the infrastructure and vertical construction of the residential units, but excluded Barclay’s Center and 461 Dean Street apartment community. Consistent with the approved master plan, the joint venture agreed to develop the remaining portion of Phase I and all of Phase II of the project, including the permanent rail yard. At the time of closing, the remaining portion of Phase I included seven buildings, totaling approximately 3.1 million square feet. Phase II consists of seven buildings totaling approximately 3.3 million square feet and further obligations to complete significant additional infrastructure improvements including a platform over the permanent rail yard.

25
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Upon closing of the partial sale on June 30, 2014, it was determined the Company was not the primary beneficiary of the joint venture and the entity was deconsolidated and subsequently accounted for under the equity method of accounting. The transaction resulted in net cash proceeds of $208,275,000. The basis of the investment at the time approximated fair value as supported by the sales price and underlying discounted cash flow model used by both parties to underwrite the transaction. Due to the nature of the project in terms of size, duration and complexity, the underlying discounted cash flow model included many estimates and assumptions of future events. Key estimates in the discounted cash flow model include horizontal infrastructure costs including, among other things, estimates of completing the permanent rail yard and the platform over the rail yard, rent growth in the rental buildings and sales prices for condominium buildings, trade costs for vertical construction, timing of starting vertical construction and opening buildings, terminal cap rates and the underlying discount rate.
The joint venture broke ground on the first affordable apartment community, 535 Carlton, in December, 2014. In mid-2015, the joint venture commenced construction on two more buildings, 38 Sixth Avenue, an affordable apartment building, and 550 Vanderbilt, a condominium building. From the formation of the joint venture in June 2014 through the quarter ended June 30, 2016, the Company reviewed the estimates and assumptions in the discounted cash flow model and updated them as necessary.
During the three months ended September 30, 2016, it became evident the occupancy and rental rate declines in the Brooklyn market were not temporary as a result of an increased supply of new rental product amplified by the sun-setting and the uncertainty around the 421 A real estate tax abatement program. Also the condominium market in New York had softened, causing the projected sale schedule for 550 Vanderbilt to be adjusted accordingly. Separately, the construction costs across the New York market continued to trend upward, resulting in increased estimated trade costs for certain infrastructure as well as vertical construction. As a result, during the three months ended September 30, 2016, as part of the Company’s formal strategic plan update, a decision was made to revise the overall project schedule for Pacific Park Brooklyn. Accordingly, the Company updated the discounted cash flow model to reflect the updated timing of the project schedule as well as the revenue, expense and cost assumptions. Based on the above, the estimated fair value of the investment no longer exceeded the carrying value. As a result, the Company recorded an other-than-temporary impairment of $299,300,000 during the three months ended September 30, 2016.
Impairment of Real Estate - Fair Value Information
The following table presents quantitative information about the significant unobservable inputs used to determine the fair value of the impairment of real estate for the nine months ended September 30, 2017 and 2016:
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value
Valuation Technique
Unobservable Input
Range of Input Values
 
(in thousands)
 
 
 
September 30, 2017
 
 
 
 
Impairment of real estate
$
152,575

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

Indicative bid
Indicative bid
N/A (1)
September 30, 2016
 
 
 
 
Impairment of real estate
$
371,139

Indicative bids
Indicative bids
N/A (1)
Impairment of real estate
$
18,500

Comparable property market analysis
Price per square foot
$39 per square foot
Impairment of unconsolidated investments
$
—

Discounted cash flows
Discount rate
9.8%
 
 
 
Market capitalization rate
3.9% - 6.0%
Impairment of unconsolidated investments
$
3,600

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


N. Loss on Extinguishment of Debt
For the three and nine months ended September 30, 2017, the Company recorded $0 and $2,843,000, respectively, as loss on extinguishment of debt primarily related to a loss on extinguishment of nonrecourse mortgage debt at Illinois Science and Technology Park, office buildings in Skokie, Illinois that were sold during the three months ended March 31, 2017. For the three and nine months ended September 30, 2016, the Company recorded $0, and $29,084,000, respectively, as loss on extinguishment of debt. The loss on extinguishment of debt recorded for 2016 primarily relates to separate, privately negotiated exchange transactions involving a portion of the Company’s 2016, 2018 and 2020 Senior Notes. See Note F – Convertible Senior Debt, Net for detailed information.


26
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

O. Net Gain on Disposition of Interest in Unconsolidated Entities
The following table summarizes the net gain on disposition of interest in unconsolidated entities which are included in earnings (loss) from unconsolidated entities.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
2016
 
2017
2016
 
 
(in thousands)
Federally assisted housing apartments
Various
$
28,828

$
—

 
$
73,130

$
—

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

—

 
8,183

—

Steinway Street Theaters (Specialty Retail Center)
Queens, New York
—

—

 
—

12,613

Other
—

—

 
469

—

 
$
28,828

$
—

 
$
81,782

$
12,613

During the nine months ended September 30, 2017, the Company completed the sale of unconsolidated federally assisted housing (“FAH”) apartment communities, consisting of 5,227 units. The dispositions resulted in net cash proceeds of $56,969,000.
During the nine months ended September 30, 2017, the Company sold its ownership interest in Shops at Bruckner Boulevard, an unconsolidated specialty retail center in Bronx, New York. The sale generated net cash proceeds of $8,863,000 at the Company’s ownership share.
During the three months ended September 30, 2016, the Company sold its ownership interest in Steinway Street Theaters, an unconsolidated specialty retail center in Queens, New York. The disposition resulted in net cash proceeds of $14,059,000.

P. Income Taxes
The Company has historically filed a consolidated United States federal tax return, which includes all of its wholly owned subsidiaries. For its taxable year ended December 31, 2016, the Company filed as a REIT and the Company’s TRSs filed as C corporations. The Company files individual separate income tax returns in various states.
As a REIT, the Company is required to annually distribute to its stockholders an amount equal to at least 90% of its REIT taxable income (computed without regard to the dividends paid deduction and net capital gain and net of any available net operating losses). The Company may be subject to certain state gross income and franchise taxes, as well as taxes on any undistributed income and federal and state corporate taxes on any income earned by its TRSs. In addition, the Company could be subject to corporate income taxes related to assets held by the REIT which are sold during the five year period following the date of conversion (ending December 31, 2020), to the extent such sold assets had a built-in gain on the date of conversion.
Income tax expense was $304,000 and $4,817,000 for the three and nine months ended September 30, 2017, respectively, and $525,000 and $2,167,000 for the three and nine months ended September 30, 2016, respectively. The Company did not recognize any federal corporate income tax on its earnings in the REIT for any of the periods presented. During the nine months ended September 30, 2016, the Company reversed $83,645,000 of deferred tax assets associated with the Military Housing, Westchester’s Ridge Hill, the Nets and Barclays Center disposals.
At December 31, 2016, the TRSs had a federal net operating loss carryforward for tax purposes of $204,752,000 available to use on their tax returns expiring in the years ending December 31, 2029 through 2036, and a charitable contribution deduction carryforward of $1,940,000 expiring in the years ending December 31, 2017 through 2021. At December 31, 2016, the Company had a federal net operating loss carryforward of $180,698,000 available to use on its REIT tax return expiring in the years ending December 31, 2029 through 2036.

Q. Net Gain (Loss) on Disposition of Interest in Development Project
In January 2016, the Company completed the sale of 625 Fulton Avenue, a development site in Brooklyn, New York. The transaction resulted in net cash proceeds of $151,776,000, of which $93,776,000 was received at closing and the remaining $58,000,000 was received during the three months ended June 30, 2016. The Company recorded a net pre-tax gain on disposition of interest in development project of $136,687,000 during the nine months ended September 30, 2016.


27
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

R. Net Gain on Disposition of Full or Partial Interest in Rental Properties, Net of Tax
The following table summarizes the net gain (loss) on disposition of full or partial interest in rental properties, net of tax:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
2016
 
2017
2016
 
 
(in thousands)
Specialty Retail Centers:
 
 
 
 
 
 
Fairmont Cinema
San Jose, California
$
—

$
—

 
$
4,128

$
—

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

—

 
500

14,207

Office Buildings:
 
 
 
 
 
 
Post Office Plaza
Cleveland, Ohio
(1,244
)
—

 
(1,244
)
—

Terminal Tower
Cleveland, Ohio
—

14,391

 
—

14,391

Illinois Science and Technology Park (4 buildings)
Skokie, Illinois
—

—

 
3,771

—

Brookview Place (Federally Assisted Housing)
Dayton, Ohio
375

—

 
375

—

Military Housing
Various
—

—

 
—

141,675

QIC Joint Venture-Westchester’s Ridge Hill (Regional Mall)
Yonkers, New York
—

—

 
—

343

Other
613

(324
)
 
6,235

(1,118
)
 
 
(256
)
14,067

 
13,765

169,498

Income tax effect
—

—

 
(192
)
(66,413
)
 
 
$
(256
)
$
14,067

 
$
13,573

$
103,085

The 2016 income tax effect on the net gain on disposition of full or partial interest in rental properties, net of tax primarily relates to the deferred taxes recognized upon the partial disposition of Westchester’s Ridge Hill, a formerly wholly owned regional mall in Yonkers, New York, and the disposal of military housing entities, as these assets were held by our TRS and remained subject to federal income tax.
Terminal Tower
During the three months ended September 30, 2016, the Company completed the sale of Terminal Tower, an office building in Cleveland, Ohio. The Company’s corporate headquarters is located in the Terminal Tower and the Company was evaluating options to relocate its headquarters in downtown Cleveland, Ohio. In connection with the sale, the Company entered into an 18 month lease agreement, (minimum initial term) with various options to extend up to 48 months, to provide the Company the necessary time to evaluate and relocate its corporate headquarters. While the Company transferred all risks and rewards of ownership of the property to the buyer, the Company’s expected estimated lease term resulted in more than a minor, but less than substantially all of the use of the asset through the leaseback transaction. As a result, the Company deferred $7,917,000 which will be amortized as an offset to rent expense over the lease term, and recorded a net gain on disposition of $14,391,000 during the three months ended September 30, 2016. The sale generated net cash proceeds of $38,027,000.
Military Housing
During the nine months ended September 30, 2016, the Company completed the sale of its interests in entities that develop and manage military family housing. The sale generated net cash proceeds of $208,305,000. These entities were primarily service providers generating fee revenue. The primary assets acquired by the buyer were intangible assets of approximately $29,000,000 and investments in unconsolidated entities, net, of approximately $14,600,000.
QIC Joint Venture
Westchester’s Ridge Hill
During the nine months ended September 30, 2016, the Company entered into a joint venture agreement with outside partners, affiliated entities of QIC, one of the largest institutional investment managers in Australia. The outside partner invested in and received 51% of our equity interests in Westchester’s Ridge Hill. The Company received net cash proceeds of $75,448,000 along with the buyer assuming debt of $169,369,000, representing 51% of the nonrecourse mortgage debt of the property. Based on the amount of cash received, the outside partner’s minimum initial investment requirement was met and the transaction qualified for full gain recognition related to the partial sale. The property is adequately capitalized and does not contain the characteristics of a VIE. Based on the substantive participating rights in all significant decision making areas held by the outside partner with regards to the joint venture, the Company concluded it appropriate to deconsolidate the entity and account for it under the equity method of accounting.

28
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

Ballston Quarter
On April 1, 2016, the Company formed and entered into a joint venture with outside partners, affiliated entities of QIC. The Company contributed its equity interest in Ballston Quarter, a formerly wholly-owned regional mall in Arlington, Virginia, and certain residential development rights to the joint venture. The outside partner invested $36,269,000 of cash directly into the joint venture and assumed debt of $20,825,000, representing 49% of the nonrecourse mortgage debt of the property. The transaction does not meet the requirements to be recognized as a sale for accounting purposes as the Company formed and entered into a joint venture and has a commitment to re-invest its entire cash proceeds received from the sale as a part of a major redevelopment plan of the asset. Upon closing, the entity was deemed to have insufficient equity and was assessed for consolidation purposes using the VIE model. Based on this and the substantive participating rights in all significant decision making areas of the outside partner, the Company concluded it appropriate to deconsolidate the entity and account for its interest under the equity method of accounting at historical cost.

S. Discontinued Operations
On January 29, 2016, the Company completed the sale of its 55% ownership interest in Barclays Center and 20% equity method ownership interest in the Nets (collectively, the “Disposal Group”). The sales price for our equity interest in Barclays Center was $162,600,000, generating net cash proceeds of $60,924,000 and a note receivable of $92,600,000, which bears interest at 4.50% per annum payable semi-annually and matures in 2019. In addition, the buyer assumed the gross debt totaling $457,745,000. The sales price for our equity interest in the Nets was $125,100,000 payable entirely in the form of a note receivable, which bears interest at 4.50% per annum payable at maturity in 2021.
The following tables summarize the operating results related to discontinued operations:
 
Nine Months Ended September 30, 2016
 
(in thousands)
Revenues
$
14,792

Expenses
 
Operating expenses
12,540

Depreciation and amortization
23

 
12,563

Interest expense
(3,540
)
Amortization of mortgage procurement costs
(61
)
Loss before income taxes and loss from unconsolidated entities
(1,372
)
Loss from unconsolidated entities
(1,400
)
Loss before income taxes
(2,772
)
Income tax benefit
(824
)
Loss before gain on disposal group
(1,948
)
Gain on disposition of disposal group, net of tax
64,553

Earnings from discontinued operations
62,605

Noncontrolling interest
 
Operating loss from disposal group
(776
)
Earnings from discontinued operations attributable to Forest City Realty Trust, Inc.
$
63,381

The following table summarizes the gain on disposition of the Disposal Group, net of tax:
 
Nine Months Ended September 30, 2016
 
(in thousands)
The Nets
$
136,247

Barclays Center
(56,481
)
 
79,766

Income tax effect (1)
(15,213
)
 
$
64,553

(1)
Primarily represents non-cash deferred taxes recognized upon the reversal of the deferred tax asset used to offset the taxable gain on the sales of assets held by the TRS.


29
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

T. Earnings Per Share
The Company’s restricted stock is considered a participating security pursuant to the two-class method for computing earnings per share (“EPS”). The 2006 Units, which are reflected as noncontrolling interests in the Consolidated Balance Sheets, are considered convertible participating securities as they are entitled to participate in dividends paid to the Company’s common stockholders. The 2006 Units are included in the computation of basic EPS using the two-class method and are included in the computation of diluted EPS using the if-converted method. The Class A common stock issuable in connection with conversion of the 2016 Senior Notes, 2018 Senior Notes and 2020 Senior Notes is included in the computation of diluted EPS using the if-converted method. The loss from continuing operations attributable to Forest City Realty Trust, Inc. for the three and nine months ended September 30, 2016 was allocated solely to holders of common stock as the participating security holders do not share in losses.
The reconciliation of the basic and diluted EPS computations is shown in the following table:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
2016
 
2017
2016
Numerators (in thousands)
 
 
 
 
 
Earnings (loss) from continuing operations attributable to Forest City Realty Trust, Inc.
$
5,454

$
(430,861
)
 
$
103,124

$
(223,608
)
Distributed and undistributed earnings allocated to participating securities
(205
)
—

 
(720
)
—

Earnings (loss) from continuing operations attributable to common stockholders ‑ Basic
$
5,249

$
(430,861
)
 
$
102,404

$
(223,608
)
Undistributed earnings allocated to participating securities
—

—

 
125

—

Preferred distribution on Class A Common Units
—

—

 
553

—

Earnings (loss) from continuing operations attributable to common stockholders ‑ Diluted
$
5,249

$
(430,861
)
 
$
103,082

$
(223,608
)
Net earnings (loss) attributable to Forest City Realty Trust, Inc.
$
5,454

$
(430,861
)
 
$
103,124

$
(160,227
)
Distributed and undistributed earnings allocated to participating securities
(205
)
—

 
(720
)
—

Net earnings (loss) attributable to common stockholders ‑ Basic
$
5,249

$
(430,861
)
 
$
102,404

$
(160,227
)
Undistributed earnings allocated to participating securities
—

—

 
125

—

Preferred distribution on Class A Common Units
—

—

 
553

—

Net earnings (loss) attributable to common stockholders ‑ Diluted
$
5,249

$
(430,861
)
 
$
103,082

$
(160,227
)
Denominators
 
 
 
 
 
Weighted average shares outstanding ‑ Basic
265,260,403

258,713,429

 
261,566,151

258,437,586

Effect of stock options and performance shares
1,001,792

—

 
718,584

—

Effect of convertible Class A Common Units
—

—

 
1,757,072

—

Weighted average shares outstanding ‑ Diluted (1) 
266,262,195

258,713,429

 
264,041,807

258,437,586

Earnings Per Share
 
 
 
 
 
Earnings (loss) from continuing operations attributable to common stockholders ‑ Basic
$
0.02

$
(1.67
)
 
$
0.39

$
(0.87
)
Earnings (loss) from continuing operations attributable to common stockholders ‑ Diluted
$
0.02

$
(1.67
)
 
$
0.39

$
(0.87
)
Net earnings (loss) attributable to common stockholders ‑ Basic
$
0.02

$
(1.67
)
 
$
0.39

$
(0.62
)
Net earnings (loss) attributable to common stockholders ‑ Diluted
$
0.02

$
(1.67
)
 
$
0.39

$
(0.62
)
(1)
Incremental shares from restricted stock and convertible securities aggregating 7,453,768 and 5,893,292 for the three and nine months ended September 30, 2017, respectively, were not included in the computation of diluted EPS because their effect is anti-dilutive. Incremental shares from dilutive options, restricted stock, performance shares and convertible securities aggregating 8,157,781 and 10,035,997 for the three and nine months ended September 30, 2016, respectively, were not included in the computation of diluted EPS because their effect is anti-dilutive due to the loss from continuing operations. Weighted-average options, restricted stock and performance shares of 698,333 and 1,375,366 for the three and nine months ended September 30, 2017, respectively, and 2,446,901 and 2,711,273 for the three and nine months ended September 30, 2016, respectively, were not included in the computation of diluted EPS because their effect is anti-dilutive under the treasury stock method.


30
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

U. Segment Information
The following tables summarize financial data for the Company’s reportable operating segments. All amounts are presented in thousands.
 
September 30, 2017
December 31, 2016
 
 
 
 
 
 
 
 
Identifiable Assets
 
 
 
 
 
 
Office
$
3,044,916

$
3,192,840

 
 
 
 
 
 
 
Apartments
2,289,688

2,406,768

 
 
 
 
 
 
 
Retail
496,448

521,015

 
 
 
 
 
 
 
Total Operations
5,831,052

6,120,623

 
 
 
 
 
 
 
Development
1,959,519

1,799,138

 
 
 
 
 
 
 
Corporate
328,377

308,836

 
 
 
 
 
 
 
 
$
8,118,948

$
8,228,597

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2017
2016
2017
2016
 
2017
2016
2017
2016
 
Revenues
 
Operating Expenses
Office
$
108,165

$
116,787

$
339,087

$
352,960

 
$
41,104

$
48,486

$
128,618

$
142,835

Apartments
72,086

74,170

216,498

219,211

 
30,874

33,415

96,968

102,327

Retail
14,009

20,496

43,803

61,622

 
9,532

14,812

30,882

40,877

Total Operations
194,260

211,453

599,388

633,793

 
81,510

96,713

256,468

286,039

Development
39,284

26,077

86,604

52,445

 
29,337

19,357

71,236

56,580

Corporate
—

—

—

—

 
19,113

26,009

60,102

74,272

Other
—

—

—

3,518

 
—

—

—

2,730

 
$
233,544

$
237,530

$
685,992

$
689,756

 
$
129,960

$
142,079

$
387,806

$
419,621

 
 
 
 
 
 
 
 
 
 
 
Depreciation and Amortization
 
Capital Expenditures
Office
$
28,471

$
33,541

$
97,382

$
102,587

 
$
12,831

$
5,749

$
40,132

$
19,774

Apartments
19,442

18,994

57,452

56,345

 
9,264

3,369

19,370

9,070

Retail
2,889

5,384

8,404

17,618

 
912

4,032

3,073

8,473

Total Operations
50,802

57,919

163,238

176,550

 
23,007

13,150

62,575

37,317

Development
8,764

4,669

24,299

10,915

 
80,368

116,673

241,990

396,243

Corporate
628

304

1,959

930

 
2,008

99

2,372

99

Other
—

—

—

126

 
—

—

—

—

 
$
60,194

$
62,892

$
189,496

$
188,521

 
$
105,383

$
129,922

$
306,937

$
433,659

The Company uses Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") to report its operating results by segment. Adjusted EBITDA, a non-GAAP measure, is defined as net earnings excluding the following items at the Company's ownership: i) non-cash charges for depreciation and amortization; ii) interest expense; iii) amortization of mortgage procurement costs; iv) income taxes; v) impairment of real estate; vi) gains or losses from extinguishment of debt; vii) gains or losses on full or partial disposition of rental properties, development projects and other investments; viii) gains or losses on change in control of interests; ix) other transactional items, including organizational transformation and termination benefits; and x) the Nets pre-tax EBITDA.
The Company believes that Adjusted EBITDA is an appropriate measure to assess operating performance by segment as it represents ongoing key operating components of each segment without regard to how the business is financed. The Company’s Chief Executive Officer, the chief operating decision maker, uses Adjusted EBITDA, as presented, to assess performance of the Company’s real estate assets by reportable operating segment because it provides information on the financial performance of the core real estate portfolio operations, development, corporate general and administrative expenses and interest and other income derived from the Company's investments. Adjusted EBITDA measures the profitability of each real estate segment in operations based on the process of collecting rent and paying operating expenses and represents the equivalent of Net Operating Income (“NOI”), a non-GAAP measure, as all property level interest expense is reported in the Corporate segment. NOI by operating segment is discussed in the Net Operating Income section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) of this Form 10-Q. For the development segment, adjusted EBITDA measures the profitability of our land development sales activity and any recently opened unstabilized properties, offset by development expenses that do not qualify for capitalization. Interest expense is monitored and evaluated by the chief operating decision maker on an overall company-wide basis and is not a factor in evaluating individual segment performance.



31
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

The reconciliations of net earnings (loss) to Adjusted EBITDA by segment are shown in the following tables. All amounts are presented in thousands.
Three Months Ended September 30, 2017
Office
Apartments
Retail
Total Operations
Development
Corporate
Other
Total
Net earnings (loss) attributable to Forest City Realty Trust, Inc.
$
39,073

$
50,708

$
12,017

$
101,798

$
(45,620
)
$
(50,724
)
$
—

$
5,454

Depreciation and amortization
29,408

22,347

17,654

69,409

7,814

628

—

77,851

Interest expense
—

—

—

—

—

50,836

—

50,836

Amortization of mortgage procurement costs
—

—

—

—

—

1,807

—

1,807

Income tax expense
—

—

—

—

—

304

—

304

Impairment of consolidated real estate
—

—

—

—

44,288

—

—

44,288

Impairment of unconsolidated real estate
—

—

10,600

10,600

—

—

—

10,600

Net (gain) loss on disposition of full or partial interests in rental properties
1,182

1,876

(517
)
2,541

—

—

—

2,541

Gain on disposition of unconsolidated entities
—

(27,721
)
—

(27,721
)
—

—

—

(27,721
)
Organizational transformation and termination benefits
—

—

—

—

—

2,633

—

2,633

Adjusted EBITDA Attributable to Forest City Realty Trust, Inc.
$
69,663

$
47,210

$
39,754

$
156,627

$
6,482

$
5,484

$
—

$
168,593

 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
Office
Apartments
Retail
Total Operations
Development
Corporate
Other
Total
Net earnings (loss) attributable to Forest City Realty Trust, Inc.
$
30,091

$
27,038

$
(100,889
)
$
(43,760
)
$
(315,806
)
$
(71,295
)
$
—

$
(430,861
)
Depreciation and amortization
33,650

23,413

19,016

76,079

3,259

304

—

79,642

Interest expense
—

—

—

—

—

54,408

—

54,408

Amortization of mortgage procurement costs
—

—

—

—

—

2,239

—

2,239

Income tax expense
—

—

—

—

—

525

—

525

Impairment of consolidated real estate
19,700

—

121,331

141,031

1,230

—

—

142,261

Impairment of unconsolidated real estate
—

—

—

—

306,400

—

—

306,400

Net (gain) loss on disposition of full or partial interests in rental properties
(14,391
)
—

—

(14,391
)
324

—

—

(14,067
)
Organizational transformation and termination benefits
—

—

—

—

—

8,092

—

8,092

Adjusted EBITDA Attributable to Forest City Realty Trust, Inc.
$
69,050

$
50,451

$
39,458

$
158,959

$
(4,593
)
$
(5,727
)
$
—

$
148,639



32
Forest City Realty Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)


Nine Months Ended September 30, 2017
Office
Apartments
Retail
Total Operations
Development
Corporate
Other
Total
Net earnings (loss) attributable to Forest City Realty Trust, Inc.
$
120,967

$
154,712

$
70,411

$
346,090

$
(61,492
)
$
(181,474
)
$
—

$
103,124

Depreciation and amortization
100,039

67,439

50,294

217,772

19,260

1,959

—

238,991

Interest expense
—

—

—

—

—

147,524

—

147,524

Amortization of mortgage procurement costs
—

—

—

—

—

5,548

—

5,548

Income tax expense
—

—

—

—

—

5,009

—

5,009

Impairment of consolidated real estate
—


—

—

44,288

—

—

44,288

Impairment of unconsolidated real estate
—

—

10,600

10,600

—

—

—

10,600

Loss on extinguishment of debt
—

—

—

—

—

4,468

—

4,468

Net (gain) loss on disposition of full or partial interests in rental properties
(2,589
)
(3,746
)
(5,145
)
(11,480
)
—

—


(11,480
)
Gain on disposition of unconsolidated entities
—

(71,835
)
(8,183
)
(80,018
)
—

—

—

(80,018
)
Organizational transformation and termination benefits
—

—

—

—

—

14,021

—

14,021

Adjusted EBITDA Attributable to Forest City Realty Trust, Inc.
$
218,417

$
146,570

$
117,977

$
482,964

$
2,056

$
(2,945
)
$
—

$
482,075

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
Office
Apartments
Retail
Total Operations
Development
Corporate
Other
Total
Net earnings (loss) attributable to Forest City Realty Trust, Inc.
$
102,549

$
76,355

$
(40,430
)
$
138,474

$
(190,377
)
$
(330,512
)
$
222,188

$
(160,227
)
Depreciation and amortization
102,583

69,458

58,144

230,185

7,413

930

302

238,830

Interest expense
—

—

—

—

—

168,023

—

168,023

Amortization of mortgage procurement costs
—

—

—

—

—

6,676

—

6,676

Income tax expense
—

—

—

—

—

83,539

—

83,539

Impairment of consolidated real estate
19,700

2,100

133,795

155,595

1,230

—

—

156,825

Impairment of unconsolidated real estate
—

—

—

—

306,400

—

—

306,400

Loss on extinguishment of debt
—

—

—

—

—

29,933

—

29,933

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

—

—

—

(136,687
)
—

—

(136,687
)
Net (gain) loss on disposition of full or partial interests in rental properties
(13,782
)
—

(14,550
)
(28,332
)
324

—

(141,675
)
(169,683
)
Gain on disposition of unconsolidated entities
—

—

(12,613
)
(12,613
)
—

—

—

(12,613
)
Organizational transformation and termination benefits
—

—

—

—

—

22,493

—

22,493

Discontinued operations:
 
 
 
 
 
 
 
 
Depreciation and Amortization - Real Estate
—

—

—

—

—

—

35

35

Loss on disposition of rental properties
—

—

—

—

—

—

56,481

56,481

Net gain on disposition of partial interest in other investment - Nets
—

—

—

—

—

—

(136,247
)
(136,247
)
Nets pre-tax EBITDA
—

—

—

—

—

—

1,400

1,400

Adjusted EBITDA Attributable to Forest City Realty Trust, Inc.
$
211,050

$
147,913

$
124,346

$
483,309

$
(11,697
)
$
(18,918
)
$
2,484

$
455,178



33

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) of Forest City Realty Trust, Inc. and subsidiaries should be read in conjunction with the financial statements and footnotes thereto contained in the annual report on Form 10-K for the year ended December 31, 2016.
RESULTS OF OPERATIONS
Corporate Description
We principally engage in the operation, development, management and acquisition of office, apartment and retail real estate and land throughout the United States. We have approximately $8.1 billion of consolidated assets in 20 states and the District of Columbia at September 30, 2017. Our core markets include Boston, Chicago, Dallas, Denver, Los Angeles, Philadelphia, and the greater metropolitan areas of New York City, San Francisco and Washington D.C. We have regional offices in Boston, Dallas, Denver, Los Angeles, New York City, San Francisco, Washington, D.C., and our corporate headquarters in Cleveland, Ohio.
Company Milestones
Significant milestones achieved during the third quarter of 2017 include:
•
Commenced a process for the Board of Directors, together with management and in consultation with financial and legal advisors, to consider a broad range of alternatives to enhance stockholder value, including, but not limited to, an accelerated and enhanced operating plan, structural alternatives for the Company’s assets, and potential merger, acquisition or sale transactions (there can be no assurance that this review will result in a strategic change or any transaction being announced or agreed upon);
•
Signed definitive agreements with QIC on 10 regional malls in which QIC has agreed to acquire our ownership interest. The overall transaction values the 10 regional malls at approximately $1.55 billion at our share;
•
Signed definitive agreements with Madison International for the disposition of our ownership interest in a 2.1 million square foot, 12-asset retail portfolio located throughout Manhattan, Brooklyn, Queens, the Bronx, Staten Island and Northern New Jersey, for a gross value of approximately $450,000,000 at our share;
•
Declared and paid a $0.14 per share cash dividend on our common stock for the third quarter of 2017, representing an increase of $0.05 per share (55%) from the second quarter of 2017;
•
Property openings (including phased openings):
◦
Axis, an apartment community in Los Angeles, California;
◦
38 Sixth Avenue, an apartment community in Brooklyn, New York;
◦
VYV, an apartment community in Jersey City, New Jersey;
◦
Eliot on 4th, an apartment community in Washington, D.C.; and
◦
The Yards - District Winery, a retail property in Washington, D.C.
•
Completed the sale of eight of our federally assisted housing (“FAH”) apartment communities, consisting of 1,484 units. These dispositions resulted in net cash proceeds of $3,491,000. With the third quarter of 2017 sales, year to date 2017 FAH sales total thirty apartment communities, consisting of 5,459 units, and have generated $57,013,000 of net cash proceeds;
•
Completed the sale of Post Office Plaza, an office building in Cleveland, Ohio. The sale generated net cash proceeds of $1,224,000; and
•
Assigned and transferred our ownership interest in 500 Sterling Place, a previously 100% owned apartment community in Brooklyn, New York, for 686,865 Class A Common Units from Bruce C. Ratner and certain entities affiliated with him.
In addition, subsequent to September 30, 2017, we achieved the following significant milestones:
•
Completed the sale of Shops at Northfield at Stapleton in Denver, Colorado, the first of 10 regional malls to be sold to QIC. The disposition generated net cash proceeds of approximately $50,019,000 and a note receivable of $36,935,000 which matures in 2019; and
•
Paid off the maturing $61,000,000 nonrecourse mortgage which encumbered Eleven MetroTech Center, an office building in Brooklyn, New York, using cash on hand.



34

Net Operating Income
Net Operating Income (“NOI”), a non-GAAP measure, reflects our share of the core operations of our rental real estate portfolio, prior to any financing activity. NOI is defined as revenues less operating expenses at our ownership within our Office, Apartments, Retail, and Development segments, except for revenues and cost of sales associated with sales of land held in these segments. The activities of our Corporate and Other segments do not involve the operations of our rental property portfolio and therefore are excluded from our NOI. Our historical total NOI dollars included our partner’s noncontrolling interest in the revenues and operating expenses of our consolidated subsidiaries. Beginning in the three months ended December 31, 2016, we began excluding these noncontrolling interest amounts to only report total NOI dollars at our ownership share. The prior period was adjusted for comparability purposes. We had consistently removed NOI from non-controlling interests from our comparable NOI percentage calculation, so this calculation does not require adjustment.
We believe NOI provides important information about our core operations and, along with earnings before income taxes, is necessary to understand our business and operating results. Because NOI excludes general and administrative expenses, interest expense, depreciation and amortization, revenues and cost of sales associated with sales of land, other non-property income and losses, and gains and losses from property dispositions, it provides a performance measure that, when compared year over year, reflects the revenues and expenses directly associated with owning and operating office, apartment and retail real estate and the impact to operations from trends in occupancy rates, rental rates and operating costs, providing a perspective on operations not immediately apparent from net income. We use NOI to evaluate our operating performance on a portfolio basis since NOI allows us to evaluate the impact that factors such as occupancy levels, lease structure, rental rates, and tenant mix have on our financial results. Investors can use NOI as supplementary information to evaluate our business. In addition, management believes NOI provides useful information to the investment community about our financial and operating performance when compared to other REITs since NOI is generally recognized as a standard measure of performance in the real estate industry. NOI is not intended to be a performance measure that should be regarded as an alternative to, or more meaningful than, our GAAP measures, and may not be directly comparable to similarly-titled measures reported by other companies.

35

Reconciliation of Earnings (Loss) Before Income Taxes (GAAP) to Net Operating Income (non-GAAP) (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
2016
 
2017
2016
Earnings (loss) before income taxes (GAAP)
$
13,051

$
(443,121
)
 
$
102,968

$
(455,480
)
(Earnings) loss from unconsolidated entities
(26,523
)
299,967

 
(95,016
)
268,267

Earnings (loss) before income taxes and earnings from unconsolidated entities
(13,472
)
(143,154
)
 
7,952

(187,213
)
Land sales
(21,786
)
(10,325
)
 
(45,308
)
(22,479
)
Cost of land sales
13,301

3,148

 
22,996

5,190

Other land development revenues
(1,781
)
(2,636
)
 
(4,748
)
(6,780
)
Other land development expenses
2,977

1,993

 
7,575

6,738

Corporate general and administrative expenses
16,480

17,917

 
46,081

51,779

Organizational transformation and termination benefits
2,633

8,092

 
14,021

22,493

Depreciation and amortization
60,194

62,892

 
189,496

188,521

Write-offs of abandoned development projects and demolition costs
—

10,058

 
1,596

10,058

Impairment of real estate
44,288

142,261

 
44,288

156,825

Interest and other income
(20,361
)
(11,980
)
 
(40,529
)
(32,665
)
Interest expense
31,597

34,060

 
88,473

101,130

Amortization of mortgage procurement costs
1,338

1,314

 
4,067

4,395

Loss on extinguishment of debt
—

—

 
2,843

29,084

NOI related to unconsolidated entities (1)
51,738

53,259

 
160,467

164,757

NOI related to noncontrolling interest (2)
(10,583
)
(9,862
)
 
(30,737
)
(27,384
)
NOI related to discontinued operations (3)
—

—

 
—

1,198

Net Operating Income (Non-GAAP)
$
156,563

$
157,037

 
$
468,533

$
465,647

 


 
 
 
(1) NOI related to unconsolidated entities:
 
 
 
 
 
Equity in earnings (GAAP)
$
8,295

$
6,433

 
$
23,834

$
25,520

Exclude non-NOI activity from unconsolidated entities:
 
 
 
 
 
Land and non-rental activity, net
(4,001
)
(478
)
 
(5,580
)
(3,149
)
Interest and other income
(2,117
)
(592
)
 
(4,093
)
(1,347
)
Write offs of abandoned development projects and demolition costs
1,179

—

 
1,926

—

Depreciation and amortization
24,558

23,642

 
71,585

68,785

Interest expense and extinguishment of debt
23,824

24,254

 
72,795

74,948

NOI related to unconsolidated entities
$
51,738

$
53,259

 
$
160,467

$
164,757

 
 
 
 
 
 
(2) NOI related to noncontrolling interest:
 
 
 
 
 
Earnings from continuing operations attributable to noncontrolling interests (GAAP)
$
(7,037
)
$
(1,282
)
 
$
(8,487
)
$
(5,163
)
Exclude non-NOI activity from noncontrolling interests:
 
 
 
 
 
Land and non-rental activity, net
3,565

911

 
4,943

1,973

Interest and other income
514

382

 
1,486

1,151

Depreciation and amortization
(6,432
)
(5,967
)
 
(20,609
)
(16,216
)
Interest expense and extinguishment of debt
(4,585
)
(3,906
)
 
(12,119
)
(8,944
)
Gain (loss) on disposition of full or partial interests in rental properties and interest in unconsolidated entities
3,392

—

 
4,049

(185
)
NOI related to noncontrolling interest
$
(10,583
)
$
(9,862
)
 
$
(30,737
)
$
(27,384
)
 
 
 
 
 
 
(3) NOI related to discontinued operations:
 
 
 
 
 
Operating loss from discontinued operations, net of tax (GAAP)
$
—

$
—

 
$
—

$
(1,126
)
Less loss from discontinued operations attributable to noncontrolling interests
—

—

 
—

776

Exclude non-NOI activity from discontinued operations (net of noncontrolling interest):
 
 
 
 
 
Depreciation and amortization
—

—

 
—

56

Interest expense
—

—

 
—

1,738

Income tax benefit
—

—

 
—

(246
)
NOI related to discontinued operations
$
—

$
—

 
$
—

$
1,198


36

Comparable NOI
We use comparable NOI, a non-GAAP measure, as a metric to evaluate the performance of our office, apartment and retail properties. This measure provides a same-store comparison of operating results of all stabilized properties that are open and operating in all periods presented. Non-capitalizable development costs and unallocated management and service company overhead, net of service fee revenues, are not directly attributable to an individual operating property and are considered non-comparable NOI. In addition, certain income and expense items at the property level, such as lease termination income, real estate tax assessments or rebates, certain litigation expenses incurred and any related legal settlements and NOI impacts of changes in ownership percentages, are excluded from comparable NOI. Retained properties in lease-up or are otherwise considered non-comparable are disclosed in the Segment Operating Results of the MD&A of this Form 10-Q. Other properties and activities such as Arena, federally assisted housing, military housing, straight-line rent adjustments and participation payments as a result of refinancing transactions are not evaluated on a comparable basis and the NOI from these properties and activities is considered non-comparable NOI.
Comparable NOI is an operating statistic defined as NOI from stabilized properties operated in all periods presented. We believe comparable NOI is useful because it measures the performance of the same properties on a period-to-period basis and is used to assess operating performance and resource allocation of the operating properties. While property dispositions, acquisitions or other factors impact net earnings in the short term, we believe comparable NOI presents a consistent view of the overall performance of our operating portfolio from period to period.
The following is a reconciliation of comparable NOI to total NOI.
 
Net Operating Income (in thousands)
 
 
Three Months Ended September 30, 2017
 
Three Months Ended September 30, 2016
Comparable
 
Comparable
Non-Comparable
Total
 
Comparable
Non-Comparable
Total
NOI % Change
Office
$
64,783

$
2,099

$
66,882

 
$
62,090

$
4,187

$
66,277

4.3
 %
Apartments
46,693

531

47,224

 
44,485

439

44,924

5.0
 %
Retail
37,076

2,622

39,698

 
36,971

3,220

40,191

0.3
 %
Product Type NOI
$
148,552

$
5,252

$
153,804

 
$
143,546

$
7,846

$
151,392

 
Federally Assisted Housing
—

1,532

1,532

 
—

4,622

4,622

 
Other NOI (1):
 
 
 
 
 
 
 
 
Straight-line rent adjustments
—

2,133

2,133

 
—

2,441

2,441

 
Other Operations
—

(165
)
(165
)
 
—

550

550

 
 
148,552

8,752

157,304

 
143,546

15,459

159,005

3.5
 %
Recently-Opened Properties/Redevelopment
—

2,803

2,803

 
—

1,523

1,523

 
Development Segment (2)
—

(3,544
)
(3,544
)
 
—

(3,491
)
(3,491
)
 
Grand Total
$
148,552

$
8,011

$
156,563

 
$
143,546

$
13,491

$
157,037

3.5
 %
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
Comparable
 
Comparable
Non-Comparable
Total
 
Comparable
Non-Comparable
Total
NOI % Change
Office
$
195,654

$
13,753

$
209,407

 
$
192,262

$
14,143

$
206,405

1.8
 %
Apartments
138,678

1,448

140,126

 
135,597

(115
)
135,482

2.3
 %
Retail
111,420

7,239

118,659

 
111,900

11,193

123,093

(0.4
)%
Product Type NOI
$
445,752

$
22,440

$
468,192

 
$
439,759

$
25,221

$
464,980

 
Federally Assisted Housing
—

9,813

9,813

 
—

14,961

14,961

 
Other NOI (1):
 
 
 
 
 
 
 
 
Straight-line rent adjustments
—

8,776

8,776

 
—

7,421

7,421

 
Other Operations
—

(3,140
)
(3,140
)
 
—

(3,898
)
(3,898
)
 
 
445,752

37,889

483,641

 
439,759

43,705

483,464

1.4
 %
Recently-Opened Properties/Redevelopment
—

1,739

1,739

 
—

2,405

2,405

 
Development Segment (2)
—

(16,847
)
(16,847
)
 
—

(22,724
)
(22,724
)
 
Other Segment
—

—

—

 
—

2,502

2,502

 
Grand Total
$
445,752

$
22,781

$
468,533

 
$
439,759

$
25,888

$
465,647

1.4
 %

(1)
Includes straight-line rent adjustments, participation payments as a result of refinancing transactions on our properties and management and service company overhead, net of service fee revenue.
(2)
Includes straight-line adjustments, non-capitalizable development overhead and other costs on our development projects.

37

Percentage of NOI by Product Type (dollars in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
2016
 
2017
2016
 
NOI
% of Total
NOI
% of Total
 
NOI
% of Total
NOI
% of Total
Office Segment
$
66,882

43.5
%
$
66,277

43.8
%
 
$
209,407

44.7
%
$
206,405

44.4
%
Apartment Segment
47,224

30.7
%
44,924

29.7
%
 
140,126

29.9
%
135,482

29.1
%
Retail Segment
39,698

25.8
%
40,191

26.5
%
 
118,659

25.4
%
123,093

26.5
%
Total Product Type NOI
$
153,804

 
$
151,392

 
 
$
468,192

 
$
464,980

 




38

Core Market NOI
(dollars in thousands)
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
coremarketpiea04.jpg
Product Type NOI
$
468,192

 
Product Type NOI
$
464,980

Federally Assisted Housing
9,813

 
Federally Assisted Housing
14,961

Other NOI (3):
 
 
Other NOI (3):
 
Straight-line rent adjustments
8,776

 
Straight-line rent adjustments
7,421

Other Operations
(3,140
)
 
Other Operations
(3,898
)
 
5,636

 
 
3,523

Recently-Opened Properties/Redevelopment
1,739

 
Recently-Opened Properties/Redevelopment
2,405

Development Segment (4)
(16,847
)
 
Development Segment (4)
(22,724
)
Other Segment
—

 
Other Segment
2,502

Grand Total NOI
$
468,533

 
Grand Total NOI
$
465,647

(1)
Includes Richmond, Virginia.
(2)
Represents Regional Malls located in Non-Core Markets. Regional Malls located in Core Markets are included in their applicable Core Markets.
(3)
Includes straight-line rent adjustments, participation payments as a result of refinancing transactions on our properties and management and service company overhead, net of service fee revenues.
(4)
Includes straight-line adjustments, non-capitalizable development overhead and other costs on our development projects.

39

FFO
Funds From Operations (“FFO”), a non-GAAP measure, along with net earnings, provides an investor important information about our core operations. While property dispositions, acquisitions or other factors impact net earnings in the short-term, we believe FFO presents a 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. Management believes that the exclusion from FFO of gains and losses from the sale of operating real estate assets allows investors and analysts to readily identify the operating results of the Company’s core assets and assists in comparing those operating results between periods. Implicit in historical cost accounting for real estate assets in accordance with GAAP is the assumption that the value of real estate assets diminishes ratably over time. Since real estate values have historically risen or fallen with market conditions, many real estate investors and analysts have considered presentations of operating results for real estate companies using historical cost accounting alone to be insufficient. Because FFO excludes depreciation and amortization of real estate assets and impairment of depreciable real estate, management believes that FFO, along with the required GAAP presentations, provides another measurement of the Company’s performance relative to its competitors and an additional basis on which to make decisions involving operating, financing and investing activities than the required GAAP presentations alone would provide.
FFO is defined by NAREIT as net earnings excluding the following items at our ownership: i) gain (loss) on full or partial disposition of rental properties, divisions and other investments (net of tax); ii) non-cash charges for real estate depreciation and amortization; iii) impairment of depreciable real estate (net of tax); and iv) cumulative or retrospective effect of change in accounting principle (net of tax).
The table below reconciles net earnings, the most comparable GAAP measure, to FFO, a non-GAAP measure.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
2016
 
2017
2016
 
(in thousands)
Net earnings (loss) attributable to Forest City Realty Trust, Inc. (GAAP)
$
5,454

$
(430,861
)
 
$
103,124

$
(160,227
)
Depreciation and Amortization—real estate (2) 
77,164

78,880

 
236,913

236,530

Gain on disposition of full or partial interests in rental properties
(25,180
)
(14,067
)
 
(91,498
)
(125,815
)
Impairment of depreciable rental properties
54,888

141,031

 
54,888

155,595

Income tax expense adjustment — current and deferred (3):
 
 
 
 
 
Gain on disposition of full or partial interests in rental properties
232

—

 
4,874

55,272

FFO attributable to Forest City Realty Trust, Inc. (Non-GAAP)
$
112,558

$
(225,017
)
 
$
308,301

$
161,355

 
 
 
 
 
 
FFO Per Share - Diluted
 
 
 
 
 
Numerator (in thousands):
 
 
 
 
 
FFO attributable to Forest City Realty Trust, Inc.
$
112,558

$
(225,017
)
 
$
308,301

$
161,355

If-Converted Method (adjustments for interest):
 
 
 
 
 
4.250% Notes due 2018
778

—

 
2,334

—

3.625% Notes due 2020
363

—

 
1,088

—

FFO for per share data
$
113,699

$
(225,017
)
 
$
311,723

$
161,355

Denominator:
 
 
 
 
 
Weighted average shares outstanding—Basic
265,260,403

258,713,429

 
261,566,151

258,437,586

Effect of stock options, restricted stock and performance shares
1,735,881

—

 
1,458,634

1,221,719

Effect of convertible debt
5,153,214

—

 
5,153,242

—

Effect of convertible 2006 Class A Common Units
1,566,465

—

 
1,757,072

1,940,788

Weighted average shares outstanding - Diluted (1)
273,715,963

258,713,429

 
269,935,099

261,600,093

FFO Per Share - Diluted
$
0.42

$
(0.87
)
 
$
1.15

$
0.62


40

(1)
For the three months ended September 30, 2016, the effect of 8,157,781 shares of dilutive securities was not included in the computation of diluted FFO per share because their effect is anti-dilutive due to the negative FFO for the quarter. For the nine months ended September 30, 2016, weighted-average shares issuable upon the conversion of convertible debt of 6,873,490 were not included in the computation of diluted FFO per share because their effect is anti-dilutive under the if-converted method. As a result, adjustments to FFO are not required for interest expense of $1,141,000 and $4,671,000 for the three and nine months September 30, 2016, respectively, related to these securities.

(2)
The following table provides detail of depreciation and amortization:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
2016
 
2017
2016
 
(in thousands)
Full Consolidation
$
60,194

$
62,892

 
$
189,496

$
188,521

Non-Real Estate
(687
)
(762
)
 
(2,078
)
(2,335
)
Real Estate Full Consolidation
59,507

62,130

 
187,418

186,186

Real Estate related to noncontrolling interest
(6,079
)
(5,889
)
 
(19,628
)
(15,679
)
Real Estate Unconsolidated
23,736

22,639

 
69,123

65,988

Real Estate Discontinued Operations
—

—

 
—

35

Real Estate at Company share
$
77,164

$
78,880

 
$
236,913

$
236,530

(3)
The following table provides detail of income tax expense (benefit):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
2016
 
2017
2016
 
(in thousands)
Income tax expense on FFO
 
 
 
 
 
Operating Earnings:
 
 
 
 
 
Current taxes
$
72

$
525

 
$
135

$
4,245

Deferred taxes
—

—

 
—

24,022

Total income tax expense on FFO
72

525

 
135

28,267

 
 
 
 
 
 
Income tax expense (benefit) on non-FFO
 
 
 
 
 
Disposition of full or partial interests in rental properties:
 
 
 
 
 
Current taxes
$
232

$
—

 
$
4,874

$
(4,351
)
Deferred taxes
—

—

 
—

59,623

Total income tax expense on non-FFO
232

—

 
4,874

55,272

Grand Total
$
304

$
525

 
$
5,009

$
83,539



41

Operating FFO
Operating FFO, a non-GAAP measure, is an additional measure an investor may use to evaluate our operating performance. We believe it is appropriate to adjust FFO for significant items driven by transactional activity and factors relating to the financial and real estate markets, rather than factors specific to the on-going operating performance of our properties. We use Operating FFO as an indicator of continuing operating results in planning and executing our business strategy. Operating FFO should not be considered to be an alternative to net earnings computed under GAAP as an indicator of our operating performance and may not be directly comparable to similarly titled measures reported by other companies.
We define Operating FFO as FFO adjusted to exclude: i) impairment of non-depreciable real estate; ii) write-offs of abandoned development projects and demolition costs; iii) income recognized on state and federal historic and other tax credits; iv) gains or losses from extinguishment of debt; v) change in fair market value of nondesignated hedges; vi) gains or losses on change in control of interests; vii) the adjustment to recognize rental revenues and rental expense using the straight-line method; viii) participation payments to ground lessors on refinancing of our properties; ix) other transactional items; x) the Nets pre-tax FFO; and xi) income taxes on FFO.
The table below reconciles FFO to Operating FFO.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
2016
 
2017
2016
 
(in thousands)
FFO attributable to Forest City Realty Trust, Inc.
$
112,558

$
(225,017
)
 
$
308,301

$
161,355

Impairment of non-depreciable real estate
—

307,630

 
—

307,630

Write-offs of abandoned development projects and demolition costs
1,179

10,058

 
3,522

10,058

Tax credit income
(3,916
)
(3,081
)
 
(9,128
)
(9,025
)
Loss on extinguishment of debt
—

—

 
4,468

29,933

Change in fair market value of nondesignated hedges
416

(42
)
 
(1,387
)
1,944

Net gain on disposition of interest in development project
—

—

 
—

(136,687
)
Net gain on disposition of partial interest in other investment - Nets
—

—

 
—

(136,247
)
Straight-line rent adjustments
(2,797
)
(2,758
)
 
(9,732
)
(7,969
)
Organizational transformation and termination benefits
2,633

8,092

 
14,021

22,493

Nets pre-tax FFO
—

—

 
—

1,400

Income tax expense on FFO
72

525

 
135

28,267

Operating FFO attributable to Forest City Realty Trust, Inc.
$
110,145

$
95,407

 
$
310,200

$
273,152

 
 
 
 
 
 
If-Converted Method (adjustments for interest) (in thousands):
 
 
 
 
 
4.250% Notes due 2018
778

778

 
2,334

3,028

3.625% Notes due 2020
363

363

 
1,088

1,643

Operating FFO attributable to Forest City Realty Trust, Inc. (If-Converted)
$
111,286

$
96,548

 
$
313,622

$
277,823

 
 
 
 
 
 
Weighted average shares outstanding—Basic
265,260,403

258,713,429

 
261,566,151

258,437,586

Effect of stock options, restricted stock and performance shares
1,735,881

1,185,240

 
1,458,634

1,221,719

Effect of convertible debt
5,153,214

5,031,753

 
5,153,242

6,873,490

Effect of convertible 2006 Class A Common Units
1,566,465

1,940,788

 
1,757,072

1,940,788

Weighted average shares outstanding - Diluted
273,715,963

266,871,210

 
269,935,099

268,473,583

Operating FFO per share - Diluted
$
0.41

$
0.36

 
$
1.16

$
1.03



42

Operations

Office and Retail
Comparable leased occupancy is 96.8% and 93.8% for office and retail, respectively, as of September 30, 2017 compared with 96.9% and 94.9%, respectively, as of September 30, 2016. Leased occupancy percentage is calculated by dividing the sum of the total tenant occupied space under the lease and vacant space under lease by total gross leasable area (“GLA”). Retail and office occupancy as of September 30, 2017 and 2016 represents leased occupancy at the end of the quarter. Occupancy data includes leases with original terms of one year or less. Comparable occupancy relates to stabilized properties opened and operated in both the three months ended September 30, 2017 and 2016.
We monitor office and retail leases expiring in the short to mid-term. Management’s plan to obtain lease renewals for expiring retail and office leases includes signing of lease extensions, if available, and active marketing for available or soon to be available space to new or existing tenants in the normal course of business.
Office Buildings
The following table represents those new leases and GLA signed on the same space in which there was a former tenant and existing tenant renewals along with all other new leases signed within the rolling 12-month period.
 
Same-Space Leases
 
Other New Leases
 
 
Quarter
Number
of Leases
Signed
GLA
Signed
Contractual
Rent Per
SF (1)
Expired 
Rent Per
SF (1)
Cash Basis 
% Change
over Prior
Rent
 
Number
of Leases
Signed
GLA
Signed
Contractual
Rent Per
SF (1)
 
Total GLA
Signed
Q4 2016
12

88,740

$
20.36

$
21.46

(5.1
)%
 
3

3,549

$
25.27

 
92,289

Q1 2017
15

148,260

$
62.17

$
51.85

19.9
 %
 
5

13,128

$
25.04

 
161,388

Q2 2017
20

290,759

$
64.60

$
57.69

12.0
 %
 
5

27,326

$
42.07

 
318,085

Q3 2017
7

53,516

$
35.23

$
31.42

12.1
 %
 
2

6,209

$
18.34

 
59,725

Total
54

581,275

$
54.52

$
48.22

13.1
 %
 
15

50,212

$
33.50

 
631,487

 
 
 
 
 
 
 
 
 
 
 
 
Retail Centers
The following tables represent those new leases and GLA signed and rent per square foot (“SF”) on the same space in which there was a former tenant and existing tenant renewals.
Regional Malls
Quarter
Number
of Leases
Signed
 
GLA
Signed
 
Contractual
Rent Per SF (1)
 
Expired Rent 
Per SF (1)
 
Cash Basis %
Change over
Prior Rent
 
Q4 2016
14

 
53,130

 
$
153.75

 
$
137.47

 
11.8
%
 
Q1 2017
12

 
36,475

 
$
140.81

 
$
110.97

 
26.9
%
 
Q2 2017
22

 
70,685

 
$
69.77

 
$
58.09

 
20.1
%
 
Q3 2017
17

 
33,986

 
$
100.22

 
$
87.42

 
14.6
%
 
Total
65

 
194,276

 
$
111.40

 
$
94.86

 
17.4
%
 
 
 
 
 
 
 
 
 
 
 
 

(1)
Office and Retail contractual rent per square foot includes base rent and fixed additional charges for common area maintenance and real estate taxes as of rental commencement. Retail contractual rent per square foot also includes fixed additional marketing/promotional charges. For all expiring leases, contractual rent per square foot includes any applicable escalations.

43

Apartments
Comparable economic occupancy for Apartments is 94.1% and 94.3% for the nine months ended September 30, 2017 and 2016, respectively. Economic apartment occupancy is calculated by dividing gross potential rent (“GPR”) less vacancy by GPR. GPR is calculated based on actual rents per lease agreements for occupied apartment units and at market rents for vacant apartment units. Market rental rates are determined using a variety of factors which include availability of specific apartment unit types (one bedroom, two bedroom, etc.), seasonality factors and rents offered by competitive properties for similar apartment types in the same geographic market. Comparable economic occupancy relates to stabilized properties that operated in both the nine months ended September 30, 2017 and 2016.
The following tables present leasing information of our apartment communities. Prior period amounts may differ from data as reported in previous quarters since the properties that qualify as comparable change from period to period.
Quarterly Comparison
 
 
 
Monthly Average Apartment Rental Rates (2)
 
Economic Apartment Occupancy
Comparable Apartment
Leasable Units
 
Three Months Ended September 30,
 
 
Three Months Ended September 30,
 
Communities (1)
at Company % (3)
 
2017
2016
% Change
 
2017
2016
% Change
Core Markets
8,735

 
$
2,035

$
2,007

1.4
%
 
94.3
%
94.3
%
0.0
%
Non-Core Markets
7,954

 
$
1,013

$
992

2.1
%
 
93.5
%
93.4
%
0.1
%
Total Comparable Apartments
16,689

 
$
1,548

$
1,522

1.7
%
 
94.1
%
94.0
%
0.1
%
 
 
 
 
 
 
 
 
 
 

Year-to-Date Comparison
 
 
 
Monthly Average Apartment Rental Rates (2)
 
Economic Apartment Occupancy
Comparable Apartment
Leasable Units
 
Nine Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
Communities (1)
at Company % (3)
 
2017
2016
% Change
 
2017
2016
% Change
Core Markets
8,735

 
$
2,016

$
1,992

1.2
%
 
94.6
%
95.0
%
(0.4
)%
Non-Core Markets
7,954

 
$
1,002

$
981

2.1
%
 
92.9
%
92.8
%
0.1
%
Total Comparable Apartments
16,689

 
$
1,532

$
1,509

1.5
%
 
94.1
%
94.3
%
(0.2
)%
 
 
 
 
 
 
 
 
 
 

Sequential Comparison
 
 
 
Monthly Average Apartment Rental Rates (2)
 
Economic Apartment Occupancy
 
 
 
Three Months Ended
 
 
Three Months Ended
 
Comparable Apartment
Leasable Units
 
September 30,
June 30,
 
 
September 30,
June 30,
 
Communities (1)
at Company % (3)
 
2017
2017
% Change
 
2017
2017
% Change
Core Markets
8,735

 
$
2,035

$
2,013

1.1
%
 
94.3
%
95.2
%
(0.9
)%
Non-Core Markets
7,954

 
$
1,013

$
999

1.4
%
 
93.5
%
93.5
%
0.0
%
Total Comparable Apartments
16,689

 
$
1,548

$
1,530

1.2
%
 
94.1
%
94.7
%
(0.6
)%
 
 
 
 
 
 
 
 
 
 

(1)
Includes stabilized apartment communities completely opened and operated in the periods presented. These apartment communities include units leased at affordable apartment rates which provide a discount from average market rental rates. For the three months ended September 30, 2017, 15.2% of leasable units in core markets and 4.9% of leasable units in non-core markets were affordable housing units. Excludes limited-distribution federally assisted housing units.
(2)
Represents GPR less concessions.
(3)
Leasable units represent our share of comparable leasable units at the apartment community.


44

Segment Operating Results - Quarterly Comparison
The following tables present revenues, operating expenses and equity in earnings by segment for the three months ended September 30, 2017 compared with the three months ended September 30, 2016. Other results of operations are discussed on a consolidated basis. All amounts in the following tables are presented in thousands.
 
Office
Apartments
Retail
Total Operations
Development
Total
Revenues for the three months ended September 30, 2016
$
116,787

$
74,170

$
20,496

$
211,453

$
26,077

$
237,530

Increase (decrease) due to:
 
 
 
 
 
 
Comparable portfolio
(2,147
)
1,088

(457
)
(1,516
)
—

(1,516
)
Non-comparable properties (1) 
(1,391
)
630

(94
)
(855
)
7,128

6,273

Change in consolidation method due to partial sale or acquisition
—

—

(3,080
)
(3,080
)
—

(3,080
)
Recently disposed properties
(7,946
)
(2,342
)
79

(10,209
)
—

(10,209
)
Land sales
—

—

—

—

11,461

11,461

Other
2,862

(1,460
)
(2,935
)
(1,533
)
(5,382
)
(6,915
)
Revenues for the three months ended September 30, 2017
$
108,165

$
72,086

$
14,009

$
194,260

$
39,284

$
233,544

 
Office
Apartments
Retail
Total Operations
Development
Corporate
Total
Operating expenses for the three months ended September 30, 2016
$
48,486

$
33,415

$
14,812

$
96,713

$
19,357

$
26,009

$
142,079

Increase (decrease) due to:
 
 
 
 
 
 
 
Comparable portfolio
(4,302
)
(1,505
)
7

(5,800
)
—

—

(5,800
)
Non-comparable properties (1) 
(201
)
195

(228
)
(234
)
1,775

—

1,541

Change in consolidation method due to partial sale or acquisition
—

—

(1,327
)
(1,327
)
—

—

(1,327
)
Recently disposed properties
(5,492
)
(598
)
(239
)
(6,329
)
—

—

(6,329
)
Land cost of sales
—

—

—

—

10,153

—

10,153

Organizational transformation and termination benefits
—

—

—

—

—

(5,459
)
(5,459
)
Development, management, corporate and other
2,613

(633
)
(3,493
)
(1,513
)
(1,948
)
(1,437
)
(4,898
)
Operating expenses for the three months ended September 30, 2017
$
41,104

$
30,874

$
9,532

$
81,510

$
29,337

$
19,113

$
129,960

 
Office
Apartments
Retail
Total Operations
Development
Corporate
Total
Equity in earnings (loss) for the three months ended September 30, 2016
$
2,285

$
9,453

$
20,142

$
31,880

$
(781
)
$
(24,666
)
$
6,433

Increase (decrease) due to:
 
 
 
 
 
 
 
Comparable portfolio
1,620

(775
)
(224
)
621

—

—

621

Non-comparable properties (1)
1,272

—

—

1,272

(2,663
)
—

(1,391
)
Recently disposed equity method properties
—

729

29

758

—

—

758

Change in consolidation method due to partial sale or acquisition
—

—

606

606

—

—

606

Land
—

—

—

—

(372
)
—

(372
)
Subsidized senior housing
—

48

—

48

—

—

48

Other
(38
)
335

(42
)
255

784

553

1,592

Equity in earnings (loss) for the three months ended September 30, 2017
$
5,139

$
9,790

$
20,511

$
35,440

$
(3,032
)
$
(24,113
)
$
8,295



45

(1)
The following table presents the increases (decreases) in revenues, operating expenses and equity in earnings (loss) for properties in lease-up or recently stabilized but not comparable and other consolidated non-comparable properties:
 
 
Three Months Ended September 30, 2017 vs. 2016
Property
Quarter Opened
Revenues
Operating Expenses
Equity in Earnings (Loss)
Operations
 
 
 
 
Office:
 
 
 
 
Properties recently stabilized:
 
 
 
 
300 Massachusetts Ave
Q1-16
$
—

$
—

$
1,272

Non-comparable property:
 
 
 
 
26 Landsdowne Street (1)
(1,391
)
(201
)
—

Total Office
$
(1,391
)
$
(201
)
$
1,272

 
 
 
 
 
Apartments:
 
 
 
 
Properties recently stabilized:
 
 
 
 
Aster Town Center North
Q4-15/Q1-16
$
630

$
195

$
—

Total Apartments
$
630

$
195

$
—

 
 
 
 
 
Retail:
 
 
 
 
Non-comparable property:
 
 
 
 
Boulevard Mall (2)
$
(94
)
$
(228
)
$
—

Total Retail
$
(94
)
$
(228
)
$
—

 
 
 
 
 
Development
 
 
 
 
Properties in lease-up:
 
 
 
 
1812 Ashland Ave
Q2-16
$
(241
)
$
136

$
—

535 Carlton
Q1-17/Q2-17
—

—

(269
)
461 Dean Street
Q3-16/Q1-17
1,120

(199
)
—

38 Sixth Ave
Q3-17/Q4-17
—

—

(182
)
Axis
Q3-17/Q2-18
21

604

—

Blossom Plaza
Q2-16
1,088

205

—

Eliot on 4th
Q1-17/Q3-17
537

685

—

Kapolei Lofts
Q3-15/Q3-16
942

(43
)
—

NorthxNorthwest
Q4-16/Q1-17
287

261

—

The Bixby
Q3-16/Q2-17
—

—

167

The Bridge at Cornell Tech
Q2-17
2,525

611

—

The Yards - Arris
Q1-16
1,325

(219
)
—

The Yards - District Winery
Q3-17
129

—

—

VYV
Q3-17
—

—

(366
)
Non-comparable property:
 
 
 
 
Ballston Quarter (3)
—

(15
)
(872
)
Transfers from development (2016) to operations (2017):
 
 
 
 
300 Massachusetts Ave
Q1-16
—

—

(1,141
)
Aster Town Center North
Q4-15/Q1-16
(605
)
(251
)
—

Total Development
$
7,128

$
1,775

$
(2,663
)
(1)
26 Landsdowne Street, an office building in Cambridge, Massachusetts, is classified as a non-comparable property due to its planned redevelopment, which began in Q3 2017.
(2)
Boulevard Mall, a regional mall in Amherst, New York, is classified as a non-comparable property due to our intention to execute a deed-in-lieu transaction with the Special Servicer who currently holds the nonrecourse mortgage on the property.
(3)
Effective April 1, 2016, Ballston Quarter, a regional mall in Arlington, Virginia, changed from the full consolidation method of accounting to the equity method of accounting. Ballston Quarter is classified as a non-comparable property due to its current redevelopment.

46


Office
The decreases in revenues and operating expenses related to recent disposals are primarily due to the sale of Illinois Science & Technology Park, office buildings in Skokie, Illinois (Q1-2017), and Terminal Tower (Q3-2016) and Post Office Plaza (Q3-2017), office buildings in Cleveland, Ohio.
Apartments
The decreases in revenues and operating expenses related to recent disposals are primarily due to the sale of Grand Lowry Lofts, an apartment community in Denver, Colorado (Q4-2016), and 500 Sterling Place, an apartment community in Brooklyn, New York (Q3-2017).
Retail
The decreases in revenues and operating expenses along with the increase in equity in earnings related to the change in consolidation method are due to the change from full consolidation to equity method accounting upon the formation of a joint venture with an outside partner for Shops at Wiregrass, a regional mall in Tampa, Florida (Q4-2016).
Development
The decrease in other revenues relates to a $5,500,000 development fee related to the redevelopment project of Ballston Quarter, a regional mall in Arlington, Virginia, recognized in 2016 upon achievement of certain milestones on the project. The decrease in operating expenses related to the development management and service functions is primarily due to reduced overhead costs as a result of our recent reorganization.
Corporate
The decrease in organizational transformation and termination benefits is a result of the transactional nature of these project costs and workplace reduction events. See additional information on termination benefits in the following Segment Operating Results - Year to Date Comparison discussion.
The decrease in other operating expenses is primarily due to general and administrative overhead reduction. The equity in earnings (loss) reported in the Corporate segment relates solely to interest expense on our equity method investments, as all interest expense is reported in the Corporate segment.

47

Segment Operating Results - Year-to-Date Comparison
The following tables present revenues, operating expenses and equity in earnings by segment for the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016. Other results of operations are discussed on a consolidated basis. All amounts in the following tables are presented in thousands.
 
Office
Apartments
Retail
Total Operations
Development
Other
Total
Revenues for the nine months ended September 30, 2016
$
352,960

$
219,211

$
61,622

$
633,793

$
52,445

$
3,518

$
689,756

Increase (decrease) due to:
 
 
 
 
 
 
 
Comparable portfolio
8,276

2,577

808

11,661

—

—

11,661

Non-comparable properties (1) 
(996
)
1,835

(1,070
)
(231
)
16,169

—

15,938

Change in consolidation method due to partial sale or acquisition
—

—

(13,314
)
(13,314
)
—

—

(13,314
)
Recently disposed properties
(22,244
)
(3,512
)
(4,617
)
(30,373
)
—

(3,518
)
(33,891
)
Land sales
—

—

—

—

22,829

—

22,829

Other
1,091

(3,613
)
374

(2,148
)
(4,839
)
—

(6,987
)
Revenues for the nine months ended September 30, 2017
$
339,087

$
216,498

$
43,803

$
599,388

$
86,604

$
—

$
685,992

 
Office
Apartments
Retail
Total Operations
Development
Corporate
Other
Total
Operating expenses for the nine months ended September 30, 2016
$
142,835

$
102,327

$
40,877

$
286,039

$
56,580

$
74,272

$
2,730

$
419,621

Increase (decrease) due to:
 
 
 
 
 
 
 
 
Comparable portfolio
474

(608
)
429

295

—

—

—

295

Non-comparable properties (1) 
(365
)
594

(404
)
(175
)
5,292

—

—

5,117

Change in consolidation method due to partial sale or acquisition
—

—

(5,384
)
(5,384
)
—

—

—

(5,384
)
Recently disposed properties
(14,226
)
(2,022
)
(5,100
)
(21,348
)
—

—

(2,730
)
(24,078
)
Land cost of sales
—

—

—

—

17,806

—

—

17,806

Organizational transformation and termination benefits
—

—

—

—

—

(8,472
)
—

(8,472
)
Development, management, corporate and other
(100
)
(3,323
)
464

(2,959
)
(8,442
)
(5,698
)
—

(17,099
)
Operating expenses for the nine months ended September 30, 2017
$
128,618

$
96,968

$
30,882

$
256,468

$
71,236

$
60,102

$
—

$
387,806

 
Office
Apartments
Retail
Total Operations
Development
Corporate
Other
Total
Equity in earnings (loss) for the nine months ended September 30, 2016
$
5,948

$
30,279

$
63,074

$
99,301

$
2,295

$
(76,398
)
$
322

$
25,520

Increase (decrease) due to:
 
 
 
 
 
 
 
 
Comparable portfolio
1,939

(149
)
(754
)
1,036

—

—

—

1,036

Non-comparable properties (1)
3,669

—

—

3,669

(8,059
)
—

—

(4,390
)
Recently disposed equity method properties
—

151

(1,086
)
(935
)
—

—

(322
)
(1,257
)
Change in consolidation method due to partial sale or acquisition
—

—

2,559

2,559

—

—

—

2,559

Land
—

—

—

—

(2,761
)
—

—

(2,761
)
Subsidized senior housing
—

362

—

362

—

—

—

362

Other
881

110

(628
)
363

(1,248
)
3,650

—

2,765

Equity in earnings (loss) for the nine months ended September 30, 2017
$
12,437

$
30,753

$
63,165

$
106,355

$
(9,773
)
$
(72,748
)
$
—

$
23,834



48

(1)
The following table presents the increases (decreases) in revenues, operating expenses and equity in earnings (loss) for properties in lease-up or recently stabilized but not comparable and other consolidated non-comparable properties:
 
 
Nine Months Ended September 30, 2017 vs. 2016
Property
Quarter Opened
Revenues
Operating Expenses
Equity in Earnings (Loss)
Operations
 
 
 
 
Office:
 
 
 
 
Properties recently stabilized:
 
 
 
 
300 Massachusetts Ave
Q1-16
$
—

$
—

$
3,669

Non-comparable property:
 
 
 
 
26 Landsdowne Street (1)
(996
)
(365
)
—

Total Office
$
(996
)
$
(365
)
$
3,669

 
 
 
 
 
Apartments:
 
 
 
 
Properties recently stabilized:
 
 
 
 
Aster Town Center North
Q4-15/Q1-16
$
1,835

$
594

$
—

Total Apartments
$
1,835

$
594

$
—

 
 
 
 
 
Retail:
 
 
 
 
Non-comparable property:
 
 
 
 
Boulevard Mall (2)
$
(1,070
)
$
(404
)
$
—

Total Retail
$
(1,070
)
$
(404
)
$
—

 
 
 
 
 
Development
 
 
 
 
Properties in lease-up:
 
 
 
 
1812 Ashland Ave
Q2-16
$
2,311

$
885

$
—

535 Carlton
Q1-17/Q2-17
—

—

(928
)
461 Dean Street
Q3-16/Q1-17
1,906

973

—

38 Sixth Ave
Q3-17/Q4-17
—

—

(362
)
Axis
Q3-17/Q2-18
21

818

—

Blossom Plaza
Q2-16
3,184

1,273

—

Eliot on 4th
Q1-17/Q3-17
594

1,497

—

Kapolei Lofts
Q3-15/Q3-16
3,250

259

—

NorthxNorthwest
Q4-16/Q1-17
596

896

—

The Bixby
Q3-16/Q2-17
—

—

(24
)
The Bridge at Cornell Tech
Q2-17
2,525

498

—

The Yards - Arris
Q1-16
4,865

(57
)
—

The Yards - District Winery
Q3-17
129

—

—

VYV
Q3-17
—

—

(381
)
Non-comparable property:
 
 
 
 
Ballston Quarter (3)
(1,950
)
(1,077
)
(3,457
)
Transfers from development (2016) to operations (2017):
 
 
 
 
300 Massachusetts Ave
Q1-16
—

—

(2,907
)
Aster Town Center North
Q4-15/Q1-16
(1,262
)
(673
)
—

Total Development
$
16,169

$
5,292

$
(8,059
)
(1)
26 Landsdowne Street, an office building in Cambridge, Massachusetts, is classified as a non-comparable property due to its planned redevelopment, which began in Q3 2017.
(2)
Boulevard Mall, a regional mall in Amherst, New York, is classified as a non-comparable property due to our intention to execute a deed-in-lieu transaction with the Special Servicer who currently holds the nonrecourse mortgage on the property.
(3)
Effective April 1, 2016, Ballston Quarter, a regional mall in Arlington, Virginia, changed from the full consolidation method of accounting to the equity method of accounting. Ballston Quarter is classified as a non-comparable property due to its current redevelopment.
Office
The decreases in revenues and operating expenses related to recent disposals are primarily due to the sale of Illinois Science & Technology Park, office buildings in Skokie, Illinois (Q1-2017), and Terminal Tower (Q3-2016) and Post Office Plaza (Q3-2017), office buildings in Cleveland, Ohio.

49

Apartments
The decreases in revenues and operating expenses related to recent disposals are primarily due to the sale of Grand Lowry Lofts, an apartment community in Denver, Colorado (Q4-2016), and 500 Sterling Place, an apartment community in Brooklyn, New York (Q3-2017). The decrease in operating expenses related to property and asset management is primarily due to reduced overhead costs as a result of our recent reorganization, as well as the centralization of certain functions now performed at Corporate and reported as Corporate expenses.
Retail
The decreases in revenues and operating expenses along with the increase in equity in earnings related to the change in consolidation method are due to the change from full consolidation to equity method accounting upon the formation of a joint venture with an outside partner for Westchester’s Ridge Hill, a regional mall in Yonkers, New York (Q1-2016), and Shops at Wiregrass, a regional mall in Tampa, Florida (Q4-2016). The decreases in revenues and operating expenses related to recent disposals are primarily due to the sale of Avenue at Tower City Center, a specialty retail center in Cleveland, Ohio, and related parking facility assets (Q1-2016), as a result of our ongoing strategy to sell operating assets in non-core markets.
Development
The decrease in other revenues relates to a $5,500,000 development fee related to the redevelopment project of Ballston Quarter, a regional mall in Arlington, Virginia, recognized in 2016 upon achievement of certain milestones on the project. The decrease in operating expenses related to the development management and service functions is primarily due to reduced overhead costs as a result of our recent reorganization, as well as the centralization of certain functions now performed at Corporate and reported as Corporate expenses.
Corporate
The decrease in other operating expenses is primarily due to general and administrative overhead reduction partially offset by an increase in costs as a result of certain functions being centralized as a result of the recent reorganization in the prior year and now reported as Corporate expenses that were previously recorded in the Office, Apartments, Retail and Development segments. The equity in earnings (loss) reported in the Corporate segment relates solely to interest expense on our equity method investments, as all interest expense is reported in the Corporate segment.
The decrease in organizational transformation and termination benefits is a result of the transactional nature of these project costs. The following table summarizes the components of organizational transformation and termination benefits:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
2016
 
2017
2016
 
(in thousands)
Termination benefits
$
1,764

$
2,710

 
$
10,501

$
10,273

Shareholder activism costs
869

—

 
3,520

—

Reorganization costs
—

5,382

 
—

11,357

REIT conversion costs
—

—

 
—

863

Total
$
2,633

$
8,092


$
14,021

$
22,493

For the periods presented, we experienced workplace reductions and recorded the associated termination benefits expenses (outplacement and severance payments based on years of service and other defined criteria) for each occurrence.
Shareholder activism costs are comprised of advisory, legal and other professional fees associated with activism matters. Reorganization costs consist primarily of consulting and other professional fees related to the 2016 restructuring of the organization by function (operations, development and corporate support). REIT conversion costs consist primarily of legal, accounting, consulting and other professional fees. We have segregated these costs along with termination benefits and reported these amounts as organizational transformation and termination benefits in the Consolidated Statements of Operations and reported in the Corporate segment.
REIT conversion costs and professional fees associated with the reorganization were complete as of December 31, 2016. Shareholder activism costs, if any, and termination benefits associated with the completion of the reorganization will continue to be reported on this line item.
Other
The fluctuations in revenues, operating expenses and equity in earnings related to recent disposals are due to the sale of our interests in entities that develop and manage military family housing (Q1-2016).


50

Depreciation and Amortization
Depreciation and amortization expense was $60,194,000 and $189,496,000 for the three and nine months ended September 30, 2017, respectively, and $62,892,000 and $188,521,000 for the three and nine months ended September 30, 2016, respectively. The decrease for the three months ended September 30, 2017 is primarily attributable to decreased amortization expense of the fair market value of in-place leases acquired in our June 2015 acquisition of our partner’s equity ownership interest in University Park at MIT, a mixed-use life science office campus in Cambridge, Massachusetts. The increase for the nine months ended September 30, 2017 is primarily attributable to new property openings in 2016 and 2017 offset by the sale of full or partial interest in rental properties in 2016 and 2017.
Impairment of Real Estate and Impairment of Unconsolidated Entities
See Note M – Impairment of Real Estate and Impairment of Unconsolidated Entities in the Notes to Consolidated Financial Statements in Item 1 of this Form 10‑Q for detailed information.
Interest and Other Income
Interest and other income was $20,361,000 and $40,529,000 for the three and nine months ended September 30, 2017, respectively, and $11,980,000 and $32,665,000 for the three and nine months ended September 30, 2016, respectively. The net increase for the three and nine months ended September 30, 2017 compared with the three and nine months ended September 30, 2016 is primarily related to the receipt of a New York State Empire Zone tax credit related to previously paid real estate taxes at Westchester’s Ridge Hill of $7,159,000 during the three months ended September 30, 2017 and an increase in available tax credits resulting in increased income recognition on the allocation of state and federal historic preservation, low income housing and new market tax credits.
Interest Expense
The following table presents interest expense for the three months ended September 30, 2017 compared with the three months ended September 30, 2016 and the nine months ended September 30, 2017 compared with the nine months ended September 30, 2016. All amounts are presented in thousands.
 
Three Months Ended
Nine Months Ended
 
September 30, 2016 and 2017
Interest expense for the three and nine months ended September 30, 2016
$
34,060

$
101,130

Increase (decrease) due to:
 
 
Comparable operating portfolio
(10,762
)
(30,207
)
Non-comparable operating portfolio
2,273

5,660

Change in consolidation method due to partial sale or acquisition
(1,024
)
(4,335
)
Recently disposed properties
(1,223
)
(2,407
)
Capitalized interest
5,579

17,179

Mark-to-market adjustments on non-designated swaps
445

(3,583
)
Corporate recourse debt
2,249

5,036

Interest expense for the three and nine months ended September 30, 2017
$
31,597

$
88,473

The decrease in interest expense for both periods for the comparable portfolio is primarily due to the paydown of the $640,000,000 nonrecourse mortgage note for the New York Times building (Q4-2016). The decrease in interest expense related to the change in consolidation method is due to the change from full consolidation to equity method accounting upon the formation of a joint venture with an outside partner in Westchester’s Ridge Hill (Q1-2016) and Shops at Wiregrass (Q4-2016). The increase in interest expense related to capitalized interest is due to the decrease in number of projects under construction and development as we completed those projects. The increase in interest expense from corporate recourse debt is due to the borrowing on our Term Loan (Q4-2016) in which those proceeds, along with additional cash on hand, were used to payoff the nonrecourse mortgage note for the New York Times building.
Amortization of Mortgage Procurement Costs
Amortization of mortgage procurement costs was $1,338,000 and $4,067,000 for the three and nine months ended September 30, 2017, respectively, and $1,314,000 and $4,395,000, for the three and nine months ended September 30, 2016, respectively. The decrease for the nine months ended September 30, 2017 as compared to the prior year period is primarily due to our ongoing deleveraging strategy.
Loss on Extinguishment of Debt
See Note N – Loss on Extinguishment of Debt and Note F – Convertible Senior Debt, Net in the Notes to Consolidated Financial Statements in Item 1 of this Form 10‑Q for detailed information.
Net Gain on Disposition of Interest in Unconsolidated Entities
See Note O – Net Gain on Disposition of Interest in Unconsolidated Entities in the Notes to Consolidated Financial Statements in Item 1 of this Form 10‑Q for detailed information.

51

Net Gain (Loss) on Disposition of Interest in Development Project
See Note Q – Net Gain (Loss) on Disposition of Interest in Development Project in the Notes to Consolidated Financial Statements in Item 1 of this Form 10‑Q for detailed information.
Net Gain on Disposition of Full or Partial Interest in Rental Properties, Net of Tax
See Note R – Net Gain on Disposition of Full or Partial Interest in Rental Properties, Net of Tax in the Notes to Consolidated Financial Statements in Item 1 of this Form 10‑Q for detailed information.
Discontinued Operations
See Note S – Discontinued Operations in the Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q for detailed information.

Net Earnings Attributable to Forest City Realty Trust, Inc.
Net earnings attributable to Forest City Realty Trust, Inc. for the three months ended September 30, 2017 was $5,454,000 versus net loss of $(430,861,000) for the three months ended September 30, 2016. The variance to the prior year period is primarily attributable to the following fluctuations, which are pre-tax, include unconsolidated investment activity and are net of noncontrolling interests:
Asset Dispositions - $6,944,000
•
$11,113,000 related to increased gains on disposition of full or partial interest in rental properties and unconsolidated investments in 2017 compared to 2016;
•
$(6,432,000) related to a combined fluctuation in revenues and operating expenses at properties in which we disposed of our full or partial interest during 2017 and 2016; and
•
$2,263,000 related to increased land sales in 2017 compared with 2016, primarily at our Stapleton project.
Financing Transactions - $3,572,000
•
$9,600,000 primarily related to a decrease in interest expense on nonrecourse mortgage debt due to the payoff of the $640,000,000 nonrecourse mortgage debt for the New York Times building in Q4 2016 partially offset by interest expense incurred on the Term Loan which we borrowed in full in November 2016 to payoff the mortgage debt on the New York Times building;
•
$(5,579,000) related to an increase in interest expense in 2017 compared with 2016 due to decreased capitalized interest on projects under construction and development as we decreased our construction pipeline; and
•
$(449,000) related to the change in fair market value of certain derivatives not qualifying for hedge accounting between the comparable periods, which was marked to market through interest expense.
Operations - $22,260,000
•
$9,774,000 related to increased interest and other income in 2017 compared to 2016 primarily attributable to the receipt of a New York State Empire Zone tax credit related to Westchester’s Ridge Hill of $7,159,000 in Q3 2017 and an increase in available tax credits resulting in increased income recognition on the allocation of state and federal historic preservation, low income housing and new market tax credits;
•
$5,459,000 related to lower organizational transformation and termination benefits in 2017 compared with 2016;
•
$4,095,000 related to a combined fluctuation in revenues and operating expenses for operations and development properties in lease-up or recently stabilized but not comparable and other non-comparable properties at September 30, 2017; and
•
$2,932,000 related to a combined fluctuation in revenues and operating expenses in our comparable portfolio in 2017 compared to 2016.
Non-Cash Transactions - $402,652,000
•
$393,773,000 related to decreased impairment of real estate in 2017 compared to 2016; and
•
$8,879,000 related to decrease write-offs of abandoned development projects and demolition costs in 2017 compared with 2016.
Income Taxes
•
$221,000 due to decreased income tax expense.

52

Net earnings attributable to Forest City Realty Trust, Inc. for the nine months ended September 30, 2017 was $103,124,000 versus net loss of $(160,227,000) for the nine months ended September 30, 2016. The variance to the prior year period is primarily attributable to the following fluctuations, which are pre-tax, include unconsolidated investment activity and are net of noncontrolling interests:
Asset Dispositions - $(320,937,000)
•
$(170,564,000) related to decreased gains on disposition of full or partial interest in rental properties and unconsolidated investments in 2017 compared to 2016;
•
$(136,687,000) related to the net gain on disposition of the development site 625 Fulton Avenue in 2016;
•
$(19,537,000) related to a combined fluctuation in revenues and operating expenses at properties in which we disposed of our full or partial interest during 2017 and 2016; and
•
$5,851,000 related to increased land sales in 2017 compared with 2016, primarily at our Stapleton project.
Financing Transactions - $47,902,000
•
$34,071,000 primarily related to decreases in interest expense on nonrecourse mortgage debt due to the payoff of the $640,000,000 nonrecourse mortgage debt for the New York Times building in Q4 2016 and on corporate debt due to separate, privately negotiated exchange transactions involving certain of our Senior Notes due 2016, 2018 and 2020 in 2016. The decreases were offset by interest expense incurred on the Term Loan which we borrowed in full in November 2016 to payoff the mortgage debt on the New York Times building;
•
$25,465,000 related to decreased losses on extinguishment of debt compared with 2016 primarily due to separate, privately negotiated exchange transactions involving a portion of our Senior Notes due 2016, 2018 and 2020 in 2016;
•
$(17,179,000) related to an increase in interest expense in 2017 compared with 2016 due to decreased capitalized interest on projects under construction and development as we decreased our construction pipeline;
•
$3,607,000 related to the change in fair market value of certain derivatives not qualifying for hedge accounting between the comparable periods, which was marked to market through interest expense; and
•
$1,128,000 related to a decrease in amortization of mortgage procurement costs primarily related to our ongoing deleveraging strategy.
Operations - $44,526,000
•
$10,275,000 related to increased interest and other income in 2017 compared to 2016 primarily attributable to the receipt of a New York State Empire Zone tax credit related to Westchester’s Ridge Hill of $7,159,000 in Q3 2017 and an increase in available tax credits resulting in increased income recognition on the allocation of state and federal historic preservation, low income housing and new market tax credits;
•
$9,663,000 related to a combined fluctuation in revenues and operating expenses in our comparable portfolio in 2017 compared to 2016;
•
$9,630,000 primarily related to lower corporate general and administrative expenses and decreased costs in our operations and development management and service entities;
•
$8,472,000 related to lower organizational transformation and termination benefits in 2017 compared with 2016; and
•
$6,486,000 related to a combined fluctuation in revenues and operating expenses for operations and development properties in lease-up or recently stabilized but not comparable and other non-comparable properties at September 30, 2017.
Non-Cash Transactions - $414,873,000
•
$408,337,000 related to decreased impairment of real estate in 2017 compared to 2016; and
•
$6,536,000 related to decreased write-offs of abandoned development projects and demolition costs in 2017 compared with 2016.
Income Taxes
•
$78,530,000 due to decreased income tax expense primarily due to gains on sale of assets owned by our TRS in 2016. The tax expense in 2016 is primarily non-cash as it largely relates to the utilization of the deferred tax asset to offset the taxable gain on the various sales.


53

Phased Openings and Projects Under Construction
September 30, 2017

In addition to the growth in our operating portfolio through improved NOI at our existing properties, we have used development as a primary source of growth in our real estate operations. The following tables summarize phased openings and projects currently under construction as of September 30, 2017 and properties we have opened during the nine months ended September 30, 2017.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Anticipated
 
 
 
 
 
 
 
 
 
 
 
 
Opening
Legal
Consolidated (C)
Cost at
Cost Incurred to Date (b)
No. of
 
 
 
Lease %
 
Location
Date
Ownership %
Unconsolidated (U)
Completion (a)
Consolidated
Unconsolidated
Units
 
GLA
 
(c)
 
 
 
 
 
(in millions)
 
 
 
 
 
2017 Phased Openings
 
 
 
 
 
 
 
 
 
 
 
 
Apartments
 
 
 
 
 
 
 
 
 
 
 
 
Arizona State Retirement System Joint Venture:
 
 
 
 
 
 
 
 
 
 
 
Axis
Los Angeles, CA
Q3-17/Q2-18
30
%
C
$
140.4

$
135.6

$
0.0

391

 
15,000

 
11
%
Greenland Joint Venture:
 
 
 
 
 
 
 
 
 
 
 
38 Sixth Ave
Brooklyn, NY
Q3-17/Q4-17
30
%
U
202.7

0.0

162.2

303

 
28,000

 
0
%
Pacific Park Parking (d)
Brooklyn, NY
Q1-17/Q1-18
30
%
U
46.2

0.0

39.2

—

 
—

 
 
 
 
 
 
 
$
248.9

$
0.0

$
201.4

303

 
28,000

 
 
 
 
 
 
 
$
389.3

$
135.6

$
201.4

694

 
43,000

 
 
Projects Under Construction
 
 
 
 
 
 
 
 
 
 
 
Apartments:
 
 
 
 
 
 
 
 
 
 
 
 
Arizona State Retirement System Joint Venture:
 
 
 
 
 
 
 
 
 
 
 
Ardan
Dallas, TX
Q1-18/Q2-18
30
%
C
$
122.1

$
75.3

$
0.0

389

 
4,250

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mint Town Center
Denver, CO
Q4-17/Q1-18
95
%
C
94.0

77.9

0.0

399

 
7,000

 
 
Ballston Quarter Residential
Arlington, VA
Q3-18/Q1-19
51
%
U
181.9

0.0

54.0

406

 
53,000

 
 
The Yards - The Guild (e)
Washington, D.C.
Q1-19
0
%
C
94.5

35.6

0.0

191

 
6,000

 
 
Capper 769
Washington, D.C.
Q1-19
25
%
U
71.8

0.0

18.2

179

 
—

 
 
 
 
 
 
 
$
564.3

$
188.8

$
72.2

1,564

 
70,250

 
 
Retail:
 
 
 
 
 
 
 
 
 
 
 
 
Ballston Quarter Redevelopment
Arlington, VA
Q3-18
51
%
U
86.7

0.0

48.4

—

 
307,000

 
42%
Total Projects Under Construction 
$
651.0

$
188.8

$
120.6

 
 
 
 
 
See footnotes on the following page.










54

Property Openings
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Location
Date
Opened
Legal Ownership %
Consolidated (C)
Unconsolidated (U)
Cost
at Completion (a)
No. of Units
 
GLA
Lease % (c)
 
 
 
 
 
(in millions)
 
 
 
 
 
2017 Property Openings
 
 
 
 
 
 
 
 
 
 
Office:
 
 
 
 
 
 
 
 
 
 
The Bridge at Cornell Tech
Roosevelt Island, NY
Q2-17
100
%
C
$
164.1

—

 
235,000

 
50
%
 
 
 
 
 
 
 
 
 
 
 
Apartments:
 
 
 
 
 
 
 
 
 
 
VYV
Jersey City, NJ
Q3-17
50
%
U
$
214.3

421

 
9,000

 
8
%
Greenland Joint Venture:
 
 
 
 
 
 
 
 
 
550 Vanderbilt (condominiums)
Brooklyn, NY
Q1-17/Q3-17
30
%
U
$
362.7

278

 
7,000

 
 
535 Carlton
Brooklyn, NY
Q1-17/Q2-17
30
%
U
168.1

298

 
—

 
51
%
 
 
 
 
 
$
530.8

576

 
7,000

 
 
 
 
 
 
 
 
 
 
 
 
 
461 Dean Street (f)
Brooklyn, NY
Q3-16/Q1-17
100
%
C
151.3

363

 
4,000

 
90
%
The Bixby.
Washington, D.C.
Q3-16/Q2-17
25
%
U
59.2

195

 
—

 
99
%
Arizona State Retirement System Joint Venture:
 
 
 
 
 
 
 
 
 
Eliot on 4th
Washington, D.C.
Q1-17/Q3-17
30
%
C
$
138.3

365

 
5,000

 
54
%
NorthxNorthwest
Philadelphia, PA
Q4-16/Q1-17
30
%
C
115.0

286

 
—

 
41
%
 
 
 
 
 
$
253.3

651

 
5,000

 
 
 
 
 
 
 
$
1,208.9

2,206

 
25,000

 
 
Retail:
 
 
 
 
 
 
 
 
 
 
The Yards - District Winery
Washington, D.C.
Q3-17
100
%
C
$
10.6

—

 
16,150

 
100
%
Total Property Openings
$
1,383.6

 
 
 
 
 

(a)
Represents estimated project costs to achieve stabilization. Amounts exclude capitalized interest not allocated to the underlying joint venture.
(b)
Represents total capitalized project costs incurred to date, including all capitalized interest related to the development project.
(c)
Lease commitments as of October 26, 2017.
(d)
Expected to include 370 parking spaces.
(e)
Represents an apartment community under construction in which the Company has a 0% legal ownership interest. However, the Company is the project developer, on a fee basis. In addition, the Company has issued a project completion guarantee to the first mortgagee and is funding a portion of the construction costs through a mezzanine loan to the owner. As a result, the Company determined it was the primary beneficiary of this variable interest entity and has consolidated the project.
(f)
During the three months ended September 30, 2017, the Company recorded an impairment related to 461 Dean Street of $44.3 million. Costs at completion has been adjusted by this impairment.

55

FINANCIAL CONDITION AND LIQUIDITY
Apartment performance has begun to moderate due to increased supply throughout many areas in the United States, especially in some gateway cities. The increased supply has put pressure on near-term occupancy levels and rental growth. Office and retail performance to varying degrees is dependent on product type and geographic market. Access to bank credit and capital remains open with banks and permanent lenders originating new loans for real estate projects. Lenders continue favoring high quality operating assets in strong markets. While banks continue to originate construction loans for apartment projects, construction loans for office or retail projects remain difficult to obtain, unless the project has substantial pre-leasing in place or higher than historical equity commitments from the developer.
Sources of Funds
Our principal sources of funds are cash provided by operations including land sales, our revolving credit facility, our term loan, nonrecourse mortgage debt and notes payable, dispositions of operating properties or development projects through sales or equity joint ventures, proceeds from the issuance of senior notes, common or preferred equity and other financing arrangements. We have consistently disposed of assets in an effort to recycle capital and reposition our portfolio. Over the last five years, we have generated cash proceeds from dispositions of full or partial interests in rental properties, development projects and other investments averaging well in excess of $400,000,000 per year. Given the diversity of our portfolio by market and product type, we believe the market for property dispositions will continue to be available. We believe the current market conditions will allow us to continue our historical strategy to recycle capital and reposition the portfolio through asset sales or equity joint ventures.
Our strategic plan drives our capital strategy and business focus on core products located in core markets. In order to achieve our strategic goals, we believe we can maximize cash provided by operations by concentrating our portfolio in the markets we believe are best positioned for long term growth. Additionally, we evaluate each individual asset in our operating and development portfolio to identify those having the best opportunity to provide capital through full or partial sale in conjunction with our strategy of focusing on core products located in core markets. This process may result in reductions to estimated holding periods and the total estimated undiscounted cash flows used for impairment calculations on our individual consolidated real estate assets. In some cases, this may result in estimated undiscounted cash flows being less than the carrying value of the consolidated asset and necessitating an impairment charge to write down the asset to its estimated fair value.
In addition, our capital strategy includes evaluating potential equity joint ventures to provide capital through the sales of partial interests of operating properties or to reduce our equity requirements and development risk on development opportunities. Entering into joint ventures could result in us granting joint control or losing control of the asset and, accordingly, the asset would no longer be consolidated. Upon deconsolidation, our investment balance in the joint venture would be compared to estimated fair value and recorded at the lesser of fair value or book value. Additionally, evaluation for other than temporary impairment on a quarterly basis would be required. This could result in future impairments, some of which could be significant, that would not otherwise be required if the real estate asset remained consolidated.
Strategic Alternatives for our Retail Portfolio
In August 2016, we announced that our Board of Directors authorized a process to review strategic alternatives for a portion of our retail portfolio. Negotiations with two of our existing partners have resulted in the execution of signed definitive agreements with both QIC and Madison International for the disposition of 10 of our regional mall assets and 12 of our specialty retail assets, respectively. We expect the specialty retail and the majority of the 6 regional mall asset transactions to close in the fourth quarter of 2017, with the remaining regional malls expected to close in the first quarter of 2018 pending lender and other third-party approvals. The remaining 4 regional mall assets are expected to close as we secure replacement assets. We expect to dispose of the majority of these retail assets in a tax-deferred manner and redeploy the equity from our retail portfolio into apartment and office assets that align with our focus on primarily core markets and urban, mixed-use placemaking projects, including amenity retail. If we successfully execute on the redeployment strategy, we would expect to generate larger than average proceeds from dispositions and more acquisition activity in the next 36 months than historical results.
In October 2017, we completed the sale of Shops at Northfield at Stapleton in Denver, Colorado, the first of the 10 regional mall assets to be sold to QIC. The disposition generated net cash proceeds of approximately $50,019,000 and a note receivable of $36,935,000 which matures in 2019.
Based on the executed transaction agreements, the economics of the potential transactions reflect an average cap rate of approximately five percent on 2016 net operating income of approximately $105,000,000 and total debt of approximately $920,000,000. The QIC regional mall definitive agreement includes seller financing of up to $150,000,000, which is expected to become due in 2019. The NOI and total debt discussed above excludes the 42nd Street specialty retail asset, which is expected to close after resolution of a ground rent issue with the City of New York. However, there can be no assurance that any transaction could be consummated on the terms described above or at all. In addition, there can be no assurance that any transaction, if consummated, could be executed in a tax deferred manner.

56

As discussions have proceeded since August 2016, we have continuously updated our impairment analysis on our retail assets, which resulted in the recording of a significant impairment charge during the year ended December 31, 2016 related to one of our consolidated assets, Shops at Northfield Stapleton, and in the three months ended September 30, 2017, related to our equity method investment in Westchester’s Ridge Hill. As we continue to finalize agreements related to the disposal of our retail portfolio, we may be required to further update our impairment analysis of fully consolidated assets and equity method investments, including probability weighted estimated holding periods and estimated sales prices. Changes in these estimates and assumptions may result in future impairments. Even when considering these impairments, we would expect to recognize a significant GAAP gain on the overall disposal of our retail portfolio, if we are able to execute on these agreements at the current pricing.
Use of Funds
Our principal uses of funds include the financing of our real estate operating and development projects, capital expenditures for our existing operating portfolio, principal and interest payments on our nonrecourse mortgage debt and notes payable, revolving credit facility, term loan and senior notes, our ongoing quarterly payments of common stock dividends and selective operating asset acquisitions, including joint venture partner acquisitions. As noted in the retail portfolio discussion, if we can execute on tax-deferred sales of our retail assets, we would expect to have an increased number of asset acquisitions compared to our historical activity.
Our capital strategy seeks to isolate the operating and financial risk at the property level to reduce risk on and of our equity capital. We typically do not cross-collateralize our mortgage debt and notes payable outside of a single identifiable project. As such, a majority of our operating and development properties are separately encumbered with nonrecourse mortgage debt or notes payable, which provides protection by allowing the lender to look only to the single asset securing the lender in the event of a default.
As discussed above, a majority of our assets are separately encumbered. Since 2011, our capital strategy has focused on reducing our overall leverage. During 2015, we began establishing an unencumbered asset pool. The New York Times office building in Manhattan, New York represents the most significant property in our unencumbered asset pool. The properties in our unencumbered asset pool generated NOI of $27,184,000 during the nine months ended September 30, 2017. We believe this change in financing strategy is consistent with our deleveraging efforts and provides us greater financial flexibility. We intend to add unencumbered assets to this pool during 2017 and beyond, as we continue to make progress on our deleveraging goals.
We use taxable and tax-exempt nonrecourse debt for our real estate projects. For real estate projects financed with tax-exempt debt, we generally utilize variable-rate debt. For construction loans, we generally pursue variable-rate financings with maturities ranging from two to five years. For those real estate projects financed with taxable debt, we generally seek long-term, fixed-rate financing for those operating projects whose loans mature or are projected to open and achieve stabilized operations.
Prior to operating as a REIT in 2016, we operated as a C corporation and retained substantially all of our internally generated cash. This cash, together with refinancing and property sale proceeds, has historically provided us with the necessary liquidity to take advantage of investment opportunities. The economic downturn and its impact on the lending and capital markets reduced our ability to finance development and acquisition opportunities and modified the required rates of return to make new investment opportunities appealing. As a result of these market changes, we have established self-imposed limitations on entering into new development activities.
We continue to make progress on certain other pre-development projects, primarily multifamily projects located in core markets. The cash required to fund our equity in projects under construction and development plus cash necessary to extend or pay down our near-term debt maturities is anticipated to exceed our cash from operations. As a result, we intend to extend maturing debt or repay it with net proceeds from property sales, equity joint ventures, borrowings on our revolving credit facility, term loan or future debt or equity financing.
The Nets and Barclays Center - Disposal
In January 2016, we sold our equity interest in the Nets and Barclays Center. Proceeds were received in a combination of cash and notes receivable. The sales price for our equity interest in Barclays Center was $162,600,000, generating net cash proceeds of $60,924,000 and a note receivable of $92,600,000, which bears interest at 4.50% per annum payable semi-annually and matures in 2019. In addition, the buyer assumed the gross debt that amounted to $457,745,000.
The sales price for our equity interest in the Nets was $125,100,000 payable entirely in the form of a note receivable, which bears interest at 4.50% per annum payable at maturity and matures in 2021.
461 Dean Street
461 Dean Street is an apartment building in Brooklyn, New York adjacent to the Barclays Center at the Pacific Park Brooklyn project. This modular construction project opened during the year ended December 31, 2016. We had a fixed price contract (the “CM Contract”) with Skanska USA to construct the apartment building. In 2014, Skanska USA ceased construction and we terminated the CM Contract for cause. Each party has filed lawsuits relating primarily to the project’s delays and associated additional completion costs. We continue to vigorously pursue legal action against Skanska USA for damages related to their default of the CM Contract. However, there is no assurance that we will be successful in recovering these damages or defending against Skanska USA’s claim.

57

During the three months ended September 30, 2017, we began the marketing process of 461 Dean Street. The initiation of the marketing process triggered management to update its undiscounted cash flow analysis including our probability weighted estimated holding period.  As a result, the estimate probability weighted undiscounted cash flows no longer exceeded the carrying value, requiring the recording of a $44,288,000 impairment charge to adjust the carrying value to our estimated fair value during the three months ended September 30, 2017.
Nonrecourse Mortgage Financings
As of September 30, 2017, we had $190,767,000 of nonrecourse mortgage financings with scheduled maturities during the year ending December 31, 2017, of which $7,983,000 represents regularly scheduled amortization payments. Subsequent to September 30, 2017, we addressed $61,000,000 of these maturities upon repayment of the maturing nonrecourse mortgage which encumbered Eleven Metrotech, an office building in Brooklyn, New York. The remaining 2017 maturities includes the nonrecourse mortgage encumbering Boulevard Mall discussed below. We are currently in negotiations to refinance and/or extend the remaining nonrecourse debt. We cannot give assurance as to the ultimate result of these negotiations. As with all nonrecourse mortgages, if we are unable to negotiate an extension or otherwise refinance the mortgage, we could go into default and the lender could commence foreclosure proceedings on the single collateralized asset, which would likely result in a loss of the asset or an impairment which could be significant.
During the nine months ended September 30, 2017, the $91,109,000 nonrecourse mortgage encumbering Boulevard Mall, a regional mall in Amherst, New York, matured and was transferred to a special servicer who subsequently delivered a default notice to us. We are in the process of working with the special servicer to execute a deed-in-lieu transaction. During the year ended December 31, 2016, we recorded an impairment of $52,510,000 on Boulevard Mall. At September 30, 2017, our basis in the property was $58,057,000. The loss of this asset would not have a significant impact to our financial condition, cash flows or liquidity.
As of September 30, 2017, our share of nonrecourse mortgage debt and notes payable, net recorded on our unconsolidated subsidiaries amounted to $2,364,887,000, of which $62,960,000 ($4,105,000 represents scheduled principal payments) is scheduled to mature during the year ending December 31, 2017. Subsequent to September 30, 2017, we addressed $16,804,000 of these maturities through closed transactions and loan commitments. Negotiations are ongoing to address the remaining 2017 maturities, but we cannot give assurance that we will obtain these financings on favorable terms or at all.
2017 Liquidity Transactions
We have recently completed the following transactions, which increased liquidity, reduced debt resulting in lower future fixed charges for interest, and strengthened our balance sheet.
•
We completed the sale of thirty of our federally assisted housing apartment communities, consisting of 5,459 units. The dispositions resulted in net cash proceeds of $57,013,000.
•
We completed the sale of Illinois Science & Technology Park, office buildings in Skokie, Illinois, generating net cash proceeds of $16,494,000 after paying off the nonrecourse mortgage debt of $51,274,000.
•
We completed the sale of Shops at Bruckner Boulevard, an unconsolidated specialty retail center in Bronx, New York, generating net cash proceeds of $8,863,000 at our ownership share.
•
We completed the sale of Post Office Plaza, an office building in Cleveland, Ohio, generating net cash proceeds of $1,224,000 after paying off the nonrecourse mortgage debt of $13,500,000.
•
We completed the sale of Shops at Northfield at Stapleton in Denver, Colorado, the first of 10 regional malls to be sold to QIC. The disposition generated net cash proceeds of approximately $50,019,000 and a note receivable of $36,935,000 which matures in 2019.
•
We paid off the maturing $61,000,000 nonrecourse mortgage which encumbered Eleven MetroTech Center, an office building in Brooklyn, New York, using cash on hand.
We continue to explore options to strengthen our balance sheet and enhance our liquidity, but can give no assurance that we can accomplish any of these other options on terms favorable to us or at all. If we cannot enhance our liquidity, it could adversely impact our growth and result in further curtailment of development activities.
Dividends
We have been operating as a REIT since January 1, 2016. As such, we intend to distribute at least 100% of our taxable income within the REIT to avoid paying federal tax. Our REIT taxable income typically will not include income earned by our TRSs except to the extent the TRSs pay dividends to us.

58

The following table summarizes cash dividends declared by the Board of Directors on our common stock (in thousands, except per share data):
Type
Date Declared
Record Date
Payment Date
Amount Per Share
Total Cash Payment
2017
 
 
 
 
 
Quarterly
August 22, 2017
September 5, 2017
September 18, 2017
$
0.14

$
37,343

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

$
23,482

Quarterly
March 1, 2017
March 13, 2017
March 27, 2017
$
0.09

$
23,441

 
 
 
Total
$
0.32

$
84,266

 
 
 
 
 
 
2016
 
 
 
 
 
Quarterly
November 30, 2016
December 12, 2016
December 23, 2016
$
0.06

$
15,620

Quarterly
August 18, 2016
September 2, 2016
September 16, 2016
$
0.06

$
15,621

Quarterly
May 17, 2016
June 10, 2016
June 24, 2016
$
0.06

$
15,623

Quarterly
February 18, 2016
March 4, 2016
March 18, 2016
$
0.06

$
15,596

E&P
February 18, 2016
March 4, 2016
March 18, 2016
$
0.10

$
25,992

 
 
 
Total
$
0.34

$
88,452

The amount, timing and frequency of future dividends is at the sole discretion of our Board of Directors and will be declared based upon various factors, many of which are beyond our control, including, our financial condition and operating cash flows, the amount required to maintain REIT status and reduce any income taxes that we otherwise would be required to pay, limitations on dividends in our existing and future debt instruments, our ability to utilize net operating losses to offset, in whole or in part, our dividend requirements, limitations on our ability to fund dividends using cash generated through our TRSs and other factors that our Board of Directors may deem relevant.
Financial Covenants
Our revolving credit facility and term loan contain certain identical restrictive financial covenants. A summary of the key financial covenants as defined in the agreements, all of which we are compliant with at September 30, 2017, follows:
 
Requirement
As of
Credit Facility Financial Covenants
Per Agreements
September 30, 2017
Maximum Total Leverage Ratio
≤65%
46.8
%
Maximum Secured Leverage Ratio
≤55%
43.2
%
Maximum Secured Recourse Leverage Ratio
≤15%
0.0
%
Maximum Unsecured Leverage Ratio
≤60%
17.9
%
Minimum Fixed Charge Coverage Ratio
≥1.50x
2.14
x
Minimum Unencumbered Interest Coverage Ratio
≥1.50x
6.93
x
Revolving Credit Facility
See Note D – Revolving Credit Facility in the Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q for detailed information.
Term Loan, Net
See Note E – Term Loan, Net in the Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q for detailed information.
Convertible Senior Debt, Net
See Note F – Convertible Senior Debt, Net in the Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q for detailed information.


59

Cash Flows
Operating Activities
Net cash provided by operating activities was $312,854,000 and $190,034,000 for the nine months ended September 30, 2017 and 2016, respectively. The net increase in cash provided by operating activities is the result of reduced interest payments as a result of our deleveraging strategy, cost reductions throughout the organization and other changes in operating assets and liabilities between the comparable periods.

60

Investing Activities
Net cash (used in) provided by investing activities was $(282,647,000) and $13,847,000 for the nine months ended September 30, 2017 and 2016, respectively, and consisted of the following:
 
Nine Months Ended September 30,
 
2017
2016
 
(in thousands)
Capital expenditures:
 
 
Construction and development costs:
 
 
Mint Town Center, an apartment community under construction in Denver, Colorado
(37,353
)
(17,227
)
The Bridge at Cornell Tech, an office building in Roosevelt Island, New York
(33,424
)
(49,391
)
Eliot on 4th, an apartment community in Washington, D.C.
(29,998
)
(26,293
)
Ardan, an apartment community under construction in Dallas, Texas
(29,982
)
(14,532
)
Axis, an apartment community under construction in Los Angeles, California
(29,357
)
(28,686
)
The Yards - The Guild, an apartment community under construction in Washington, D.C.
(18,573
)
(11,291
)
461 Dean Street, an apartment community in Brooklyn, New York
(11,184
)
(54,620
)
The Yards - Arris, an apartment community in Washington, D.C.
(2,139
)
(20,128
)
Kapolei Lofts, an apartment community in Kapolei, Hawaii
(1,673
)
(42,633
)
Blossom Plaza, an apartment community in Los Angeles, California
(1,105
)
(19,348
)
NorthxNorthwest, an apartment community in Philadelphia, Pennsylvania
—

(48,232
)
Other
(47,202
)
(63,862
)
Total construction and development costs (1)
(241,990
)
(396,243
)
Operating properties:
 
 
Office Segment
(15,246
)
(6,514
)
Apartment Segment
(19,370
)
(9,070
)
Retail Segment
(475
)
(4,156
)
 
(35,091
)
(19,740
)
Tenant improvements:
 
 
Office Segment
(24,886
)
(13,260
)
Retail Segment
(2,598
)
(4,317
)
 
(27,484
)
(17,577
)
Total operating properties
(62,575
)
(37,317
)
Corporate Segment
(2,372
)
(99
)
Total capital expenditures
$
(306,937
)
$
(433,659
)
Capital expenditures of assets included in discontinued operations:
 
 
Arena
—

(690
)
Payment of lease procurement costs (2) 
(9,297
)
(9,218
)
Increase in notes receivable
(31,047
)
(43,348
)
Payments on notes receivable
—

58,000

Decrease in restricted cash used for investing purposes:
 
 
Hamel Mill Lofts, an apartment community in Haverhill, Massachusetts 
$
13,658

$
—

Illinois Science & Technology Park
3,077

—

Chestnut Lake, an apartment community in Strongsville, Ohio
2,218

—

Axis
(2,481
)
—

The Uptown, an apartment community in Oakland, California
(2,379
)
—

Westchester’s Ridge Hill
—

4,936

Stapleton, a mixed-use community in Denver, Colorado
—

4,509

Nine Metrotech Center, an office building in Brooklyn, New York
—

4,485

The Yards - Twelve12, an apartment community in Washington, D.C.
—

3,847

Other
(2,483
)
(4,880
)
Total decrease in restricted cash used for investing purposes
$
11,610

$
12,897

Cash held at Arena upon disposition
—

(28,041
)
Proceeds from disposition of full or partial interest in rental properties or development project:
 
 
Illinois Science & Technology Park
$
16,494

$
—

Fairmont Cinema in San Jose, California
4,387

—

Post Office Plaza, an office building in Cleveland, Ohio
1,224

—

Disposition of entities that manage and develop military housing
—

208,305

625 Fulton Avenue, a development site in Brooklyn, New York
—

93,776

Disposition of partial interest in Westchester’s Ridge Hill
—

75,448

Barclays Center
—

60,924

Avenue at Tower City Center and Tower City Parking
—

55,015

Terminal Tower
—

38,027

Johns Hopkins Parking Garage
—

11,186

Aperture Center, an office building in Albuquerque, New Mexico
—

2,572

Other
10,567

36

Total proceeds from disposition of full or partial interest in rental properties or development project
$
32,672

$
545,289


61

Investing Activities (continued)
 
Nine Months Ended September 30,
 
2017
2016
 
(in thousands)
Change in investments in and advances to unconsolidated entities—(contributions to) or distributions from investment:
 
 
Dispositions:
 
 
Federally assisted housing apartment communities
$
56,969

$
—

Shops at Bruckner Boulevard
8,863

—

Renewable energy facilities
3,672

—

Steinway Street Theaters, Queens, New York
—

14,059

Apartment projects:
 
 
Pacific Park Brooklyn joint venture
(34,071
)
(66,979
)
VYV, an apartment community under construction in Jersey City, New Jersey
(4,640
)
(20,116
)
Cobblestone Court, an apartment community in Painesville, Ohio, refinancing proceeds
3,695

—

Retail projects:
 
 
Regional retail mall joint venture, primarily to fund rehabilitation and expansion projects
(17,879
)
(4,078
)
Westchester’s Ridge Hill, primarily to fund a restricted cash construction escrow account
—

(14,340
)
Atlantic Center, a specialty retail center in Brooklyn, New York
—

(4,383
)
Office project:
 
 
300 Massachusetts Ave, an office building in Cambridge, Massachusetts
—

12,697

The Nets, a National Basketball Association member
—

(3,883
)
Other
3,743

(360
)
Total change in investments in and advances to unconsolidated entities
$
20,352

$
(87,383
)
Net cash (used in) provided by investing activities
$
(282,647
)
$
13,847

(1)
We capitalized internal costs related to projects under construction and development of $27,356 and $23,677, including compensation related costs of $24,401 and $20,966, for the nine months ended September 30, 2017 and 2016, respectively. Total capitalized internal costs represent approximately 8.9% and 5.5% of total capital expenditures for the nine months ended September 30, 2017 and 2016, respectively.
(2)
We capitalized internal costs related to leasing activities of $1,698 and $2,602, including compensation related costs of $1,438 and $2,343, for the nine months ended September 30, 2017 and 2016, respectively.
Financing Activities
Net cash used in financing activities was $(11,151,000) and $(110,388,000) for the nine months ended September 30, 2017 and 2016, respectively. The Company is committed to continued deleveraging of the balance sheet. The significant debt reduction activity during the nine months ended September 30, 2017 related to the sales of Illinois Science & Technology Park and Post Office Plaza and the related extinguishments of their $51,274,000 and $13,500,000 nonrecourse mortgages, respectively. In addition, the $34,382,000 non-recourse mortgage on 500 Sterling Place was extinguished during the nine months ended September 30, 2017 in a related party transaction. However, these debt extinguishments occurred simultaneously at closing of the property dispositions, and therefore are reflected as non-cash cash flow transactions and not reflected in the Consolidated Statement of Cash Flows.
During the nine months ended September 30, 2016, we had increased deleveraging activity as we used cash to pay off a portion of our 2018 and 2020 Senior Notes and for the acquisitions of certain noncontrolling interests subsequent to the sale of Barclays Center and the Nets. In addition, since we operated as a REIT for the first time in 2016, we were required to pay our one-time estimated E&P distribution to our stockholders amounting to $25,992,000.

LEGAL PROCEEDINGS
We are involved in various claims and lawsuits incidental to our business, and management and legal counsel believe these claims and lawsuits will not have a material adverse effect on our consolidated financial statements.
NEW ACCOUNTING GUIDANCE
See the “New Accounting Guidance” section of Note A – Accounting Policies in the Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q for detailed information.

62

INFORMATION RELATED TO FORWARD-LOOKING STATEMENTS
This Form 10-Q, together with other statements and information publicly disseminated by us, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements reflect management’s current views with respect to financial results related to future events and are based on assumptions and expectations that may not be realized and are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial or otherwise, may differ, perhaps materially, from the results discussed in the forward-looking statements. Risk factors discussed in Item 1A of this Form 10-Q and our Form 10-K for the year ended December 31, 2016 and other factors that might cause differences, some of which could be material, include, but are not limited to, the uncertain outcome, impact, effects and results of our Board of Directors’ review of operating strategies, financial and structural alternatives, our ability to carry out future transactions and strategic investments, as well as the acquisition related costs, unanticipated difficulties realizing benefits expected when entering into a transaction, our ability to qualify or to remain qualified as a REIT, our ability to satisfy REIT distribution requirements, the impact of issuing equity, debt or both, and selling assets to satisfy our future distributions required as a REIT or to fund capital expenditures, future growth and expansion initiatives, the impact of the amount and timing of any future distributions, the impact from complying with REIT qualification requirements limiting our flexibility or causing us to forego otherwise attractive opportunities beyond rental real estate operations, the impact of complying with the REIT requirements related to hedging, our lack of experience operating as a REIT, legislative, administrative, regulatory or other actions affecting REITs, including positions taken by the Internal Revenue Service, the possibility that our Board of Directors will unilaterally revoke our REIT election, the possibility that the anticipated benefits of qualifying as a REIT will not be realized, or will not be realized within the expected time period, the impact of current lending and capital market conditions on our liquidity, our ability to finance or refinance projects or repay our debt, the impact of the slow economic recovery on the ownership, development and management of our commercial real estate portfolio, general real estate investment and development risks, litigation risks, vacancies in our properties, risks associated with developing and managing properties in partnership with others, competition, our ability to renew leases or re-lease spaces as leases expire, illiquidity of real estate investments, our ability to identify and transact on chosen strategic alternatives for a portion of our retail portfolio, bankruptcy or defaults of tenants, anchor store consolidations or closings, the impact of terrorist acts and other armed conflicts, our substantial debt leverage and the ability to obtain and service debt, the impact of restrictions imposed by our revolving credit facility, term loan and senior debt, exposure to hedging agreements, the level and volatility of interest rates, the continued availability of tax-exempt government financing, our ability to receive payment on the notes receivable issued by Onexim in connection with their purchase of our interests in the Barclays Center and the Nets, the impact of credit rating downgrades, effects of uninsured or underinsured losses, effects of a downgrade or failure of our insurance carriers, environmental liabilities, competing interests of our directors and executive officers, the ability to recruit and retain key personnel, risks associated with the sale of tax credits, downturns in the housing market, the ability to maintain effective internal controls, compliance with governmental regulations, increased legislative and regulatory scrutiny of the financial services industry, changes in federal, state or local tax laws and international trade agreements, volatility in the market price of our publicly traded securities, inflation risks, cybersecurity risks, cyber incidents, shareholder activism efforts, conflicts of interest, risks related to our organizational structure including operating through our Operating Partnership and our UPREIT structure, as well as other risks listed from time to time in our SEC filings, including but not limited to, our annual and quarterly reports. We have no obligation to revise or update any forward-looking statements, other than as imposed by law, as a result of future events or new information. Readers are cautioned not to place undue reliance on such forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our market risk includes the inability to obtain construction loans, refinance existing construction loans into long-term fixed-rate nonrecourse financing, refinance existing nonrecourse financing at maturity, obtain renewals or replacement of credit enhancement devices, such as letters of credit, or otherwise obtain funds by selling real estate assets or by raising equity. We also have interest-rate exposure on our current variable-rate debt portfolio. During the construction period, we have historically used variable-rate debt to finance developmental projects. At September 30, 2017, our outstanding variable-rate debt, including borrowings under our revolving credit facility and term loan, consisted of $1,020,715,000 of taxable debt and $611,396,000 of tax-exempt debt. Upon opening and achieving stabilized operations, we have historically procured long-term fixed-rate financing for our rental properties. If we are unable to procure long-term fixed-rate financing, we would pursue extending maturities with existing lenders. Additionally, we are exposed to interest rate risk upon maturity of our long-term fixed-rate financings. The total weighted average interest rate includes the impact of interest rate swaps, caps and long-term contracts in place as of September 30, 2017.

63

Interest Rate Exposure
The following table summarizes the composition of nonrecourse debt, net:
September 30, 2017
Operating
Properties
Development
Projects
Total
 
Total
Weighted
Average Rate
 
(dollars in thousands)
 
 
Fixed Rate
$
1,808,133

$
22,613

$
1,830,746

 
4.46
%
Variable Rate
 
 
 
 
 
Taxable
645,387

41,760

687,147

 
3.43
%
Tax-Exempt
609,337

2,059

611,396

 
1.90
%
 
$
3,062,857

$
66,432

$
3,129,289

 
3.73
%
Total gross commitment from lenders
$
201,234

 
 
 
To mitigate short-term variable interest rate risk, we have purchased interest rate hedges for our variable-rate debt as follows:
Taxable (Priced off of LIBOR Index)
 
Swaps
 
Notional
Average Base
Period Covered
Amount
Rate
 
(dollars in thousands)
10/01/17 - 12/31/17
$
97,839

1.87%
01/01/18 - 05/08/24
97,450

1.87%
Tax-Exempt (Priced off of Securities Industry and Financial Markets Association (“SIFMA”) Index)
 
Caps
 
Notional
Average Base
Period Covered
Amount
Rate
 
(dollars in thousands)
10/01/17 - 12/31/17
$
69,518

5.89%
01/01/18 - 12/31/18
69,518

5.89%
01/01/19 - 8/15/20
37,208

6.23%
The tax-exempt caps generally were purchased in conjunction with lender hedging requirements that require the borrower to protect against significant fluctuations in interest rates. Except for those requirements, we generally do not hedge tax-exempt debt due to its historically low interest rates.
Sensitivity Analysis to Changes in Interest Rates
Including the effect of the protection provided by the interest rate swaps, caps and long-term contracts in place as of September 30, 2017, a 100 basis point increase in taxable interest rates (including properties accounted for under the equity method, corporate debt and the effect of interest rate floors) would increase the annual pre-tax interest cost for the next 12 months of our variable-rate debt by approximately $9,229,000 at September 30, 2017. Although tax-exempt rates generally move in an amount smaller than corresponding changes in taxable interest rates, a 100 basis point increase in tax-exempt rates (including properties accounted for under the equity method) would increase the annual pre-tax interest cost for the next 12 months of our tax-exempt variable-rate debt by approximately $6,114,000 at September 30, 2017. This analysis includes a portion of our taxable and tax-exempt variable-rate debt related to construction loans for which the interest expense is capitalized.
We enter into total rate of return swaps (“TROR”) on various tax-exempt fixed-rate borrowings. The TROR convert borrowings from a fixed rate to a variable rate. The TROR requires the payment of a variable interest rate, generally equivalent to the SIFMA rate (0.94% at September 30, 2017) plus a spread. Additionally, we have guaranteed the fair value of the underlying borrowings. Fluctuation in the value of the TROR is offset by the fluctuation in the value of the underlying borrowings, resulting in minimal financial impact. At September 30, 2017, the aggregate notional amount of TROR designated as fair value hedging instruments is $555,936,000. The underlying TROR borrowings are subject to a fair value adjustment. In addition, we have TROR with notional amounts aggregating $137,517,000 that are not designated as fair value hedging instruments, but are subject to interest rate risk.

64

We estimate the fair value of our hedging instruments based on interest rate market and bond pricing models. At September 30, 2017 and December 31, 2016, we recorded interest rate caps, swaps and TROR with positive fair values of approximately $10,451,000 and $9,718,000, respectively, in other assets. At September 30, 2017 and December 31, 2016, we recorded interest rate swaps and TROR that had a negative fair value of approximately $15,864,000 and $26,202,000, respectively, in accounts payable, accrued expenses and other liabilities.
We estimate the fair value of our long-term debt instruments by market rates, if available, or by discounting future cash payments at interest rates that approximate the current market. Estimated fair value is based upon market prices of public debt, available industry financing data, current treasury rates and recent financing transactions. Based on these parameters, the table below contains the estimated fair value of our long-term debt, net (exclusive of the fair value of derivatives) at September 30, 2017.
 
Carrying Value
 
Fair Value
 
Fair Value
with 100 bp Decrease
in Market Rates
 
(in thousands)
Fixed
$
1,943,269

 
$
1,973,998

 
$
2,065,815

Variable
 
 
 
 
 
Taxable
1,020,715

 
1,019,760

 
1,021,330

Tax-Exempt
611,396

 
609,142

 
609,977

Total Variable
$
1,632,111

 
$
1,628,902

 
$
1,631,307

Total Long-Term Debt
$
3,575,380

 
$
3,602,900

 
$
3,697,122

The following table provides information about our long-term debt instruments that are sensitive to changes in interest rates.


65

Item 3. Quantitative and Qualitative Disclosures About Market Risk (continued)
September 30, 2017
 
Expected Maturity Date
 
 
 
 
 
Year Ending December 31,
 
 
 
 
Long-Term Debt
2017
 
2018
 
2019
 
2020
 
2021
 
Period
Thereafter
Net Unamortized Procurement Costs
Total
Outstanding
 
Fair Market
Value
 
(dollars in thousands)
 
 
Fixed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate debt
$
158,827

 
$
207,216

 
$
105,340

 
$
159,192

 
$
171,301

 
$
1,041,039

$
(12,169
)
$
1,830,746

 
$
1,839,934

Weighted average interest rate
6.14
%
 
4.53
%
 
4.09
%
 
5.04
%
 
4.64
%
 
4.10
%
 
4.46
%
 
 
Convertible senior debt (1) 
—

 
73,215

 
—

 
40,021

 
—

 
—

(713
)
112,523

 
134,064

Weighted average interest rate
—
%
 
4.25
%
 
—
%
 
3.63
%
 
—
%
 
—
%
 
4.03
%
 
 
Total Fixed-Rate Debt
158,827

 
280,431

 
105,340

 
199,213

 
171,301

 
1,041,039

(12,882
)
1,943,269

 
1,973,998

Variable:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Variable-rate debt
31,940

 
186,035

 
361,141

 
69,737

 
23,643

 
23,398

(8,747
)
687,147

 
686,074

Weighted average interest rate (2)
3.92
%
 
3.71
%
 
3.11
%
 
3.76
%
 
4.57
%
 
3.44
%
 
3.43
%
 
 
Tax-exempt
—

 
100,807

 
8,500

 
—

 
—

 
513,657

(11,568
)
611,396

 
609,142

Weighted average interest rate (2) 
—

 
1.88
%
 
3.96
%
 
—

 
—

 
1.87
%
 
1.90
%
 
 
Revolving credit facility (1) 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Weighted average interest rate (2)
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
 
Term loan (1) 
—

 
—

 
—

 
—

 
335,000

 
—

(1,432
)
333,568

 
333,686

Weighted average interest rate (2)
—
%
 
—
%
 
—
%
 
—
%
 
2.69
%
 
—
%
 
2.69
%
 
 
Total Variable-Rate Debt
31,940

 
286,842

 
369,641

 
69,737

 
358,643

 
537,055

(21,747
)
1,632,111

 
1,628,902

Total Long-Term Debt
$
190,767

 
$
567,273

 
$
474,981

 
$
268,950

 
$
529,944

 
$
1,578,094

$
(34,629
)
$
3,575,380

 
$
3,602,900

Weighted average interest rate
5.77
%
 
3.75
%
 
3.34
%
 
4.50
%
 
3.40
%
 
3.37
%
 
3.64
%
 
 
(1)
Represents recourse debt.
(2)
Weighted average interest rate is based on current market rates as of September 30, 2017.



66

Item 4. Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or furnishes under the Securities Exchange Act of 1934 (“Securities Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this quarterly report, an evaluation of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, was carried out under the supervision and with the participation of the Company’s management, which includes the CEO and CFO. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2017.
There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
In connection with the rules, the Company continues to review and document its disclosure controls and procedures, including the Company’s internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and ensuring that the Company’s systems evolve with the business.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings
The Company is involved in various claims and lawsuits incidental to its business, and management and legal counsel believe these claims and lawsuits will not have a material adverse effect on the Company’s consolidated financial statements.

Item 1A. Risk Factors

You should carefully consider the risks and uncertainties described below and under “Information Related to Forward-Looking Statements” in this Quarterly Report on Form 10-Q, as well as in Part I-Item 1A under the heading “Risk Factors” and the information contained under the heading “Information Related to Forward-Looking Statements” in our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Annual Report”), and the other information included or incorporated by reference in this Quarterly Report on Form 10-Q and in other documents that we file with the SEC from time to time. If any of the events or circumstances described in the following risks actually occur, our business, financial condition and/or results of operations could be materially adversely affected and the price of our common shares could decline.
The information presented below updates and should be read in connection with the risk factors and information disclosed in our 2016 Annual Report.
We are exploring and evaluating potential strategic alternatives and there can be no assurance that we will be successful in identifying or completing any strategic alternative, that any such strategic alternative will result in additional value for our stockholders or that the process will not have an adverse impact on our business.
On September 11, 2017, we announced that our Board of Directors, together with management and in consultation with financial and legal advisors, has commenced a process to review and consider a broad range of strategic alternatives to enhance stockholder value, which could result in, among other things, an accelerated and enhanced operating plan, a sale, a merger, consolidation or business combination, asset divestiture or acquisitions, partnering or other collaboration agreements, potential acquisitions, dispositions or recapitalizations, in one or more transactions, or continuing to operate with our current business plan and strategy. However, there can be no assurance that this process will result in the identification or consummation of any transaction. Any potential transaction would be dependent upon a number of factors that may be beyond our control, including, but not limited to, market conditions; industry trends; consent rights, rights of first offer, rights of first refusal or other rights granted to or held by our joint venture partners or other third parties, affiliates or agents; the interest of third parties in our business; and the availability of financing to potential buyers on reasonable terms.
There is no timetable for the completion of the process of exploring strategic alternatives and the process may be disruptive to our business operations and, if we are unable to effectively manage the process, our business, financial condition and results of operations could be adversely affected. In addition, the process, or any resulting transaction, could divert the attention of management and the Board of Directors from our business, could negatively impact our ability to attract, retain and motivate Board members, key employees or business partners, and could expose us to potential litigation. We expect to incur substantial expenses associated with identifying and evaluating potential strategic alternatives.

67

No decision has been made with respect to any transaction and we cannot assure you that any potential transaction or other strategic alternative, if identified, evaluated and consummated, will provide greater value to our stockholders than that reflected in the current price of our common stock. We do not intend to comment regarding the progress or status of the review process unless we determine that further disclosure is appropriate or required by law. As a consequence, perceived uncertainties related to our future may result in the loss of potential business opportunities and volatility in the market price of our common stock.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) and (b) – Not applicable.
(c) – Repurchase of equity securities during the quarter.
 
Issuer Purchases of Equity Securities
Period
Total
Number of
Shares
Purchased
 
Average
Price Paid
Per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
 
Maximum Dollar Amount of shares that May
Yet Be Purchased
Under the Plans
or Programs
Class A Common Stock
 
 
 
 
 
 
 
July 1 through July 31, 2017
 
 
 
 
 
 
 
Common Stock Repurchase Program (1) 
—

 
$
—

 
—

 
$
100,000,000

Employee Transactions (2) 
6,267

 
$
24.25

 
—

 
 
August 1 through August 31, 2017
 
 
 
 
 
 
 
Common Stock Repurchase Program (1) 
—

 
$
—

 
—

 
$
100,000,000

Employee Transactions (2) 
16,199

 
$
23.93

 
—

 
 
September 1 through September 30, 2017
 
 
 
 
 
 
 
Common Stock Repurchase Program (1) 
—

 
$
—

 
—

 
$
100,000,000

Employee Transactions (2) 
343

 
$
25.14

 
—

 
 
Total
 
 
 
 
 
 
 
Common Stock Repurchase Program (1) 
—

 
$
—

 
—

 
$
100,000,000

Employee Transactions (2) 
22,809

 
$
24.04

 
—

 
 
(1)
On November 18, 2015, our Board of Directors approved a $100,000,000 common stock repurchase program. The repurchase program authorizes us to repurchase shares of our Class A common stock and Class B common stock (prior to June 12, 2017, the effective date of the Reclassification) on the open market or otherwise in amounts and at such times and prices as our Chairman, Chief Executive Officer or Chief Financial Officer shall determine. The repurchase program has no set expiration date.
(2)
Class A common stock repurchased to satisfy the minimum tax withholding requirements relating to restricted stock vesting.

68

Item 6. Exhibits
Exhibit
Number
 
Description of Document
 
 
 
-
Principal Executive Officer’s Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
-
Principal Financial Officer’s Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
-
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
*101
-
The following financial information from Forest City Realty Trust, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited); (ii) Consolidated Statements of Operations (unaudited); (iii) Consolidated Statements of Comprehensive Income (Loss) (unaudited); (iv) Consolidated Statements of Equity (unaudited); (v) Consolidated Statements of Cash Flows (unaudited); and (vi) Notes to Consolidated Financial Statements (unaudited).

*
Filed herewith.
**
Furnished herewith.


69

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
FOREST CITY REALTY TRUST, INC.
(Registrant)
 
 
 
 
Date:
November 2, 2017
 
/s/ ROBERT G. O’BRIEN
 
 
 
Name: Robert G. O’Brien
 
 
 
Title: Executive Vice President and
         Chief Financial Officer
 
 
 
 
Date:
November 2, 2017
 
/s/ CHARLES D. OBERT
 
 
 
Name: Charles D. Obert
 
 
 
Title: Executive Vice President, Chief Accounting Officer and Corporate Controller

70

Forest City Realty Trust, Inc. Reports