Forest City Realty Trust, Inc. - FORM 10-Q - October 30, 2018

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EX-32.1 - EXHIBIT 32.1 - Forest City Realty Trust, Inc.fcrt-10qex3219302018.htm
EX-31.2 - EXHIBIT 31.2 - Forest City Realty Trust, Inc.fcrt-10qex3129302018.htm
EX-31.1 - EXHIBIT 31.1 - Forest City Realty Trust, Inc.fcrt-10qex3119302018.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, 2018
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to                 
Commission file number 1-37671 
_____________________________________________________________
FOREST CITY REALTY TRUST, INC.
(Exact name of registrant as specified in its charter) 
_____________________________________________________________
Maryland
(State or other jurisdiction of
incorporation or organization)
 
 
 
47-4113168
(I.R.S. Employer
Identification No.)
 
 
 
 
 
Key Tower
Suite 3100
 
127 Public Square
Cleveland, Ohio
 
44114
(Address of principal executive offices)
 
(Zip Code)
216-621-6060
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)
_____________________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨ 
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding, including unvested restricted stock, of the issuer’s class of common stock, as of the latest practicable date.
Class
Outstanding at October 25, 2018
Class A Common Stock, $.01 par value
271,162,772 shares


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


1

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

$
7,154,607

Projects under construction and development
435,892

568,552

Land inventory
72,885

57,296

Total Real Estate
7,922,227

7,780,455

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

6,296,292

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

204,260

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

146,131

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

225,022

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

398,785

Investments in and advances to unconsolidated entities
533,482

550,362

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

242,435

Assets held for sale
29,014

—

Total Assets
$
8,576,346

$
8,063,287

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

$
2,998,361

Revolving credit facility
—

—

Term loan, net
333,967

333,668

Convertible senior debt, net
31,802

112,637

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

650,022

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

123,882

Liabilities on assets held for sale
10,022

—

Total Liabilities
4,202,624

4,218,570

Commitments and Contingencies
—

—

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

—

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

2,653

Additional paid-in capital
2,626,442

2,537,538

Retained earnings
1,516,012

896,806

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

3,428,434

Noncontrolling interest
232,318

416,283

Total Equity
4,373,722

3,844,717

Total Liabilities and Equity
$
8,576,346

$
8,063,287


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

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

$
167,682

 
$
490,462

$
496,095

Tenant recoveries
30,026

26,671

 
85,245

80,735

Service and management fees
1,911

8,152

 
9,765

29,642

Parking and other
10,822

9,253

 
26,657

34,212

Land sales
7,920

21,786

 
23,359

45,308

Total revenues
218,230

233,544

 
635,488

685,992

Expenses
 
 
 
 
 
Property operating and management
66,337

71,961

 
200,112

228,912

Real estate taxes
25,105

21,748

 
66,147

64,305

Ground rent
4,235

3,837

 
12,013

11,491

Cost of land sales
2,723

13,301

 
7,943

22,996

Corporate general and administrative
9,736

16,480

 
35,331

46,081

Organizational transformation and termination benefits
8,289

2,633

 
29,188

14,021

 
116,425

129,960

 
350,734

387,806

Depreciation and amortization
60,925

60,194

 
170,652

189,496

Write-offs of abandoned development projects and demolition costs
—

—

 
—

1,596

Impairment of real estate
—

44,288

 
—

44,288

Total expenses
177,350

234,442

 
521,386

623,186

Operating income (loss)
40,880

(898
)
 
114,102

62,806

 
 
 
 
 
 
Interest and other income
13,296

20,361

 
34,773

40,529

Gain on change in control of interests
219,666

—

 
337,377

—

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

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

(13,472
)
 
391,442

7,952

Earnings from unconsolidated entities
 
 
 
 
 
Equity in earnings
7,369

8,295

 
12,038

23,834

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

28,828

 
265,510

81,782

Impairment
—

(10,600
)
 
—

(10,600
)
 
188,873

26,523

 
277,548

95,016

Earnings before income taxes
430,448

13,051

 
668,990

102,968

 
 
 
 
 
 
Current income tax expense
2,981

304

 
3,940

4,817

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

12,747

 
665,050

98,151

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

—

 
6,227

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

(256
)
 
84,038

13,573

Net earnings
488,398

12,491

 
755,315

111,611

Noncontrolling interests, gross of tax
 

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

$
5,454

 
$
715,432

$
103,124

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

$
0.02

 
$
2.66

$
0.39

Net earnings attributable to common stockholders - Diluted
$
1.63

$
0.02

 
$
2.62

$
0.39


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

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

12,491

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

1,240

Comprehensive income
489,444

13,731

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

$
6,690

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

$
111,611

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

3,790

Comprehensive income
760,019

115,401

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

$
106,903


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

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

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

Balances at December 31, 2016
239,938

$
2,399

18,788

$
188

$
2,483,275

$
812,386

$
(14,410
)
$
501,161

$
3,784,999

Net earnings
 
 
 
 
 
206,030

 
9,006

215,036

Other comprehensive income
 
 
 
 
 
 
5,847

14

5,861

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

246

(18,788
)
(188
)
(58
)
 
 
 
—

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

8

 
 
(8
)
 
 
 
—

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

1

 
 
1,497

 
 
 
1,498

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

—

 
 
309

 
 
 
309

Stock-based compensation
 
 
 
 
26,884

 
 
 
26,884

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

1

 
 
7,287

 
 
(7,288
)
—

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

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

—

 
 
1

 
 
 
1

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

 
 
(10,931
)
—

Contributions from noncontrolling interests
 
 
 
 
 
 
 
23,168

23,168

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

$
2,653

—

$
—

$
2,537,538

$
896,806

$
(8,563
)
$
416,283

$
3,844,717

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

 
—

Net earnings
 
 
 
 
 
715,432

 
39,883

755,315

Other comprehensive income
 
 
 
 
 
 
4,693

11

4,704

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

10

 
 
(10
)
 
 
 
—

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

 
 
 
13,256

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

39

 
 
81,076

 
 
 
81,115

Exercise of stock options
87

1

 
 
1,307

 
 
 
1,308

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

—

 
 
117

 
 
 
117

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

11,159

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

$
2,700

—

$
—

$
2,626,442

$
1,516,012

$
(3,750
)
$
232,318

$
4,373,722



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

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

$
111,611

Depreciation and amortization
170,652

189,496

Amortization of mortgage procurement costs
3,966

4,067

Impairment of real estate
—

44,288

Impairment of unconsolidated entities
—

10,600

Write-offs of abandoned development projects and demolition costs
—

1,596

Loss on extinguishment of debt
3,995

2,843

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

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

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

14,893

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

Operating distributions from unconsolidated entities
42,805

53,388

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

Decrease (increase) in accounts receivable
4,210

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

4,487

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

312,285

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

—

Proceeds from deconsolidation of a rental property
24,000

—

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

—

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

32,672

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

76,942

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

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

163,074

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

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

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

1,498

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

18,499

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

10,777

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

323,919

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

$
334,696

Beginning of Period
 
 
Cash and cash equivalents
204,260

174,619

Restricted cash
146,131

149,300

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

$
323,919

 
End of Period
 
 
Cash and cash equivalents
485,941

193,675

Restricted cash
211,572

141,021

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

$
334,696


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


A. Accounting Policies
General
Forest City Realty Trust, Inc., a Maryland corporation (with its subsidiaries, the “Company”) principally engages in the operation, development, management and acquisition of office, apartment and retail real estate and land throughout the United States. The Company had approximately $8.6 billion of consolidated assets in 16 states and the District of Columbia at September 30, 2018. The Company’s core markets include Boston, Chicago, Dallas, Denver, Los Angeles, Philadelphia, and the greater metropolitan areas of New York City, San Francisco and Washington, D.C. The Company has regional offices in Boston, Dallas, Denver, Los Angeles, New York City, San Francisco, Washington, D.C., and the Company’s corporate headquarters in Cleveland, Ohio.
On July 30, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Antlia Holdings LLC (“Parent”), and Antlia Merger Sub Inc., a wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which, upon the terms and subject to the conditions set forth therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub were formed by a Brookfield Asset Management Inc. (“Brookfield”) real estate investment fund.
Pursuant to the Merger Agreement, at the effective time of the Merger, each share of Class A common stock issued and outstanding immediately prior to the effective time of the Merger (other than Class A common stock owned by Parent, Merger Sub or any other wholly owned subsidiary of Parent, in each case not held on behalf of third parties, and shares granted in the form of equity awards) will be converted into the right to receive an amount in cash equal to $25.35 (as reduced by the per share amount of any dividends declared after May 15, 2018 and the distribution of one hundred percent (100%) of the Company’s REIT taxable income as reasonably estimated by the Company in cash prior to the completion of the Merger, the “Merger Consideration”).
Consummation of the Merger is subject to the satisfaction or waiver of specified closing conditions, including the approval of the Merger by the affirmative vote of the holders of a majority of the outstanding Class A common stock entitled to vote on such matter at a meeting of the Company’s stockholders scheduled to be held on November 15, 2018 (“the Special Meeting”), and other customary closing conditions for a transaction of this type.
Pursuant to the Merger Agreement, in no event will the consummation of the Merger be required to occur prior to the earliest to occur of (i) a date specified by Parent on no less than three business days’ notice to the Company, (ii) the third business day after receipt of an enumerated list of third party consents and (iii) December 10, 2018.
The Company expects to complete the Merger in the fourth quarter of 2018. Completion of the Merger is, however, subject to various conditions noted above, and it is possible that factors outside the Company’s control could result in the Merger being completed at a later time or not at all. There may be a substantial amount of time between the Special Meeting and the completion of the Merger. The Company hopes to complete the Merger as soon as reasonably practicable following the satisfaction of all applicable conditions. For additional information regarding the Merger or the Merger Agreement, see the Company’s other filings made with the Securities and Exchange Commission (“SEC”), which are available at the SEC’s public reference facilities or on the SEC’s website at www.sec.gov.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q, and should be read in conjunction with the consolidated financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2017. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In management’s opinion, all adjustments (consisting solely of normal recurring matters) necessary for a fair statement of financial position, results of operations and cash flows as of and for the periods presented have been included.
Company Operations
The Company is organized as a Real Estate Investment Trust (“REIT”) for federal income tax purposes. The Company holds substantially all of its assets, and conducts substantially all of its business, through Forest City Enterprises, L.P. (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership and, as of September 30, 2018, owns all of the limited partnership interests directly or indirectly in the Operating Partnership.

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

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

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

New Accounting Guidance
The following accounting pronouncements were adopted during the nine months ended September 30, 2018:
In May 2014, the FASB issued an amendment to the accounting guidance for revenue from contracts with customers. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance defines steps an entity should apply to achieve the core principle. The Company adopted this guidance as of January 1, 2018 using the modified retrospective method and therefore, the comparative information has not been adjusted. The guidance has been applied to contracts that were not completed as of the adoption date. Rental revenue and tenant recoveries from lease contracts represents a significant portion of the Company’s total revenues and is a specific scope exception provided by this guidance. The adoption of this guidance did not result in a material impact on the Company’s consolidated financial statements or disclosures.
In November 2016, the FASB issued an amendment to the accounting guidance on the classification and presentation of changes in restricted cash on the statement of cash flows. The guidance requires restricted cash to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the Consolidated Statement of Cash Flows. The Company adopted this guidance as of January 1, 2018 using the retrospective transition method. The adoption of this guidance significantly increased the combined beginning and ending period cash, cash equivalents and restricted cash balances as of each period presented and removed the effects of the change in restricted cash as previously presented in the Consolidated Statements of Cash Flows for the nine months ended September 30, 2017.
In February 2017, the FASB issued an amendment to the accounting guidance on the derecognition of nonfinancial assets. The guidance clarifies the definition of an in substance nonfinancial asset and the recognition of gains and losses from the transfer of nonfinancial assets and for partial sales of nonfinancial assets, which includes real estate. The Company elected the practical expedient to not apply the guidance on completed contracts. A completed contract is one in which “substantially all” of the revenue from the contract was recognized under the previous accounting guidance. The Company adopted this guidance using the modified retrospective method on January 1, 2018.
In August 2017, the FASB issued an amendment to the accounting guidance on derivatives and hedging activities to better align the financial reporting for hedging activities with their economic objectives. The Company early adopted this guidance on January 1, 2018, using the modified retrospective method requiring a cumulative effect adjustment of $120,000 to recognize the initial application as an adjustment to accumulated other comprehensive income and a corresponding adjustment to beginning retained earnings.
The following new accounting pronouncements will be adopted on their respective effective dates:
In February 2016, the FASB issued an amendment to the accounting guidance on leases. This guidance sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to the current guidance for operating leases. The new guidance requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The new guidance supersedes the previous leases accounting standard. The guidance is effective on January 1, 2019. The adoption of the new guidance is expected to have an impact on the consolidated financial statements as the Company has material ground lease arrangements, as well as other lease agreements. In addition, the Company believes it will be precluded from capitalizing its internal leasing costs, as the costs are not expected to be directly incremental to the successful execution of a lease, as required by the new guidance. The Company is the lessee under several ground leases, as well as leases for office space and some information technology equipment. The Company has continued to work towards the completion of its review and evaluation of the more complex rental adjustments within the ground leases and analyze the impact these adjustments may have when determining the right of use asset and lease liability. The Company has also continued to make progress on the evaluation of appropriate discount rates to be applied to each lease agreement. Therefore, the analysis of the impact the adoption will have on the consolidated financial statements is ongoing. The Company intends to use the practical expedients available to both lessees and lessors upon adoption. For leases in which the Company is the lessor, the Company is in the process of analyzing the various revenue streams from its lease agreements to determine the lease and non-lease components based on the applicable performance obligation associated with the consideration received and when considering the practical expedients available.




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

In July, 2018, the FASB approved targeted improvements to the Leases standard that provides lessors with a practical expedient by class of underlying assets to not separate non-lease components from the lease component. Such practical expedient is limited to circumstances in which (i) the timing and pattern of transfer for the non-lease component and the related lease component are the same and (ii) the stand-alone lease component would be classified as an operating lease if accounted for separately. The Company will elect the practical expedient which will allow the Company the ability to account for the combined component based on its predominant characteristic if the underlying asset meets the two criteria defined above.
In June 2016, the FASB issued an amendment on measurement of credit losses on financial assets held by a reporting entity at each reporting date. The guidance requires the use of a new current expected credit loss ("CECL") model in estimating allowances for doubtful accounts with respect to accounts receivable, straight-line rents receivable and notes receivable. The CECL model requires that the Company estimate its lifetime expected credit loss with respect to these receivables and record allowances that, when deducted from the balance of the receivables, represent the estimated net amounts expected to be collected. In August, 2018, the FASB issued a proposed amendment to clarify that operating lease receivables recorded by lessors (including straight-line rent) are explicitly excluded from the scope of this guidance. This guidance is effective for fiscal years, and for interim reporting periods within those fiscal years, beginning after December 15, 2019. The Company is in the process of evaluating the impact of this guidance.
Recognition of Revenues
The Company adopted new accounting guidance for revenue from contracts with customers on January 1, 2018. The adoption of this guidance did not result in a material impact on the Company’s consolidated financial statements at adoption and for the nine months ended September 30, 2018. The following is disclosure of the Company’s revenue recognition policies.
Rental – Lease terms in office buildings, retail centers and certain parking facilities generally range from 1 to 30 years, excluding leases with certain anchor tenants, which typically are longer. Minimum rents are recognized on a straight-line basis over the non-cancelable term of the lease, which include the effects of applicable rent steps and rent abatements. Overage rents are recognized after sales thresholds have been achieved. Apartment lease terms are generally one year.
Tenant Recoveries – Reimbursements from office, apartments and retail tenants for common area maintenance, taxes, insurance, utilities and other property operating expenses as defined in the lease agreements are recognized in the period the applicable costs are incurred.
Service and Management Fees – Management fee revenue in the Office, Apartment and Retail segments is a series of distinct services required to operate a property’s day to day activities with the same pattern of transfer to the customer satisfied over time. Management fee revenue is billed to the customer and recognized as revenue on a monthly basis as management services are rendered. Service fee revenue in the Office, Apartment and Retail segments primarily from leasing, financing, and other real estate services are distinct services billed and recognized in the period the Company’s performance obligation is satisfied. Development fee revenue on long-term fixed-price contracts or cost plus fee contracts are recognized as the Company’s performance obligation is satisfied. The Company applies the practical expedient and, as a result, does not disclose variable consideration attributable to wholly or partially unsatisfied performance obligations as of the end of the reporting period. 
Parking and Other – Revenues derived from monthly and transient tenant parking and other revenue relates primarily to the Office and Apartment segment and is recognized in the period the Company’s performance obligation is satisfied.
Land Sales – Sales of land to residential, commercial and industrial customers, primarily at the Company’s Stapleton project in the Development segment, and sales of commercial outlots adjacent to the Company’s operating property portfolio primarily in the Retail segment are recognized at closing or upon completion of all conditions precedent to the sales contract (whichever is later).
Historic, New Market and Low Income Housing Tax Credit Entities
The Company invests in properties that have received, or the Company believes are entitled to receive, historic preservation tax credits on qualifying expenditures under Internal Revenue Code (“IRC”) section 47, low income housing tax credits on new construction and rehabilitation of existing buildings as low income rental housing under IRC section 42, and new market tax credits on qualifying investments in designated community development entities (“CDEs”) under IRC section 45D, as well as various state credit programs, which entitles the members to tax credits based on qualified expenditures at the time those qualified expenditures are placed in service (collectively “Tax Credits”). The Company typically enters into these investments with sophisticated financial investors. In exchange for the financial investors’ initial contribution into the investment, the financial investor is entitled to substantially all of the benefits derived from the tax credit. Typically, these arrangements have put/call provisions whereby the Company may be obligated (or entitled) to repurchase the financial investors’ interest. The Company has consolidated each of these entities in its consolidated financial statements and has included these investor contributions in accounts payable, accrued expenses and other liabilities.

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

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

$
50,790

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

5,852

Ending balance
$
54,497

$
47,377

Related Party Transactions
The Company and certain of its affiliates entered into a Master Contribution and Sale Agreement (the “Master Contribution Agreement”) with Bruce C. Ratner (“Mr. Ratner”), Executive Vice President at the time of the transaction and currently Chairman of Forest City Ratner Companies, and certain entities and individuals affiliated with Mr. Ratner (the “BCR Entities”) in August 2006 to purchase their interests in a total of 30 retail, office and apartment operating properties and service companies in the Greater New York City metropolitan area. The Company issued Class A Common Units (“2006 Units”) in a jointly-owned, limited liability company in exchange for their interests. The 2006 Units may be exchanged for one of the following forms of consideration at the Company’s sole discretion: (i) an equal number of shares of the Company’s Class A common stock or, (ii) cash based on a formula using the average closing price of the Class A common stock at the time of conversion or, (iii) a combination of cash and shares of the Company’s Class A common stock. If the Company elects to pay cash as full or partial consideration in exchange for 2006 Units, the exchanging unit holder(s) may elect to redeem such 2006 Units for an in-kind distribution of one or more properties in lieu of cash, provided certain conditions set forth under the Exchange Rights Agreement adopted pursuant to the Master Contribution Agreement are met. The Company may, in its sole discretion, elect not to proceed with an in-kind redemption if the Company determines in good faith that the Company will suffer any adverse effects from proceeding with the in-kind redemption. The Company has no rights to redeem or repurchase the 2006 Units. Pursuant to the Master Contribution Agreement, certain projects under development would remain owned jointly until each project was completed and achieved “stabilization.” Upon stabilization, each project would be valued and the Company, in its discretion, would choose among various ownership options for the project. As of September 30, 2018, air rights for any future residential vertical development at East River Plaza, a specialty retail center in Manhattan, New York, remains the only development asset subject to this agreement.
In connection with the Master Contribution Agreement, the parties entered into the Tax Protection Agreement (the “Tax Protection Agreement”). The Tax Protection Agreement indemnified the BCR Entities included in the initial closing against taxes payable by reason of any subsequent sale of certain operating properties and expires in November 2018.
Pursuant to the Master Contribution Agreement, 2006 Units not exchanged are entitled to a distribution preference payment equal to the dividends paid on an equivalent number of shares of the Company’s common stock. The Company recorded $0 and $400,000 during the three and nine months ended September 30, 2018, respectively, and $219,000 and $553,000 during the three and nine months ended September 30, 2017, respectively, which is classified as noncontrolling interest expense on the Consolidated Statement of Operations.
In March 2017, certain BCR Entities exchanged 142,879 of the 2006 Units. The Company issued 142,879 shares of its Class A common stock for the exchanged 2006 Units. The Company accounted for the exchange as a purchase of noncontrolling interests, resulting in a reduction of noncontrolling interests of $7,288,000, an increase to Class A common stock of $1,000 and a combined increase to additional paid-in capital of $7,287,000, accounting for the fair value of common stock issued and the difference between the fair value of consideration exchanged and the historical cost basis of the noncontrolling interest balance. At September 30, 2018 and December 31, 2017, 1,111,044 of the 2006 Units were outstanding.

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

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

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

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

$
1,764

 
$
12,320

$
10,501

Strategic alternative costs
4,194

—

 
16,868

—

Shareholder activism costs
—

869

 
—

3,520

Total
$
8,289

$
2,633

 
$
29,188

$
14,021

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

Accrued severance benefits, beginning balance
$
12,188

$
11,710

 
$
13,974

$
9,969

Termination benefits expense
4,095

1,764

 
12,320

10,501

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

$
8,859

 
$
13,295

$
8,859


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

Supplemental Non-Cash Disclosures
The following table summarizes the impact to the applicable balance sheet line items as a result of various non-cash transactions. Non-cash transactions primarily include dispositions of operating properties whereby the nonrecourse mortgage debt is assumed by the buyer or otherwise extinguished at closing, acquisition of properties from the exchange of ownership interests and the related assumption of the non-recourse mortgage debt, exchanges of 2006 Units or senior notes for Class A common stock, changes in consolidation methods of fully consolidated properties due to the occurrence of triggering events including, but not limited to, disposition of a partial interest in rental properties or change in control transactions, change in construction payables and other capital expenditures, notes receivable from the sale of rental properties and capitalization of stock-based compensation granted to employees directly involved with the development and construction of real estate.
 
Nine Months Ended September 30,
 
2018
2017
 
(in thousands)
Non-cash changes to balance sheet - Investing Activities
 
 
Projects under construction and development
$
(3,698
)
$
(51,996
)
Completed rental properties
164,102

(126,810
)
Notes receivable
113,065

2,500

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

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

(218
)
Total
$
171,577

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

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

59

Additional paid-in capital
84,249

49,335

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

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

$
128,676

Various
8.52%
The Nets sale
—

125,100

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

92,600

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

36,935

April 2019
4.25%
Other
15,942

15,474

Various
4.97%
Total
$
423,737

$
398,785

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


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

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

2019
325,594

2020
222,275

2021
195,369

2022
208,678

Thereafter
2,153,782

 
3,203,522

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


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

$
600,000

Less:
 
 
Outstanding borrowings
—

—

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

$
563,561

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


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

E. Term Loan, Net
The Company’s Term Loan Credit Agreement provides a $335,000,000 senior unsecured term loan credit facility (“Term Loan”).
The Term Loan matures in May 2021 and bears interest at the Company’s option at either LIBOR (based on the date of the initial borrowings and adjusted monthly thereafter) plus a margin of 1.30% - 2.20% (1.35% at September 30, 2018) or the Prime Rate plus a margin of 0.30% - 1.20% (0.35% at September 30, 2018). The applicable margins are based on the Company’s total leverage ratio. Upon the Company obtaining an investment grade credit rating, established by certain debt rating agencies for the Company’s long term, senior, unsecured non-credit enhanced debt (the “Debt Ratings”), the applicable margin will, at the Company’s election, be based on the Company’s then-current Debt Ratings.
The Term Loan contains identical financial covenants as the Revolving Credit Facility as described in Note 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, 2018
December 31, 2017
 
(in thousands)
Total outstanding borrowings
$
335,000

$
335,000

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

$
333,668


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

$
73,215

3.625% Notes due 2020
32,037

40,021

 
32,037

113,236

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

$
112,637

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

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

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

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

$
23.63

December 20, 2017
42.8079

$
23.36

June 8, 2018
43.5629

$
22.96


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

On October 12, 2018, the Company gave notice of its intention to redeem the remaining $32,037,000 aggregate principal amount of 2020 Senior Notes for cash plus accrued and unpaid interest, if any, up to but not including November 21, 2018. Holders have the right to convert their 2020 Senior Notes up to the close of business on November 20, 2018. Through October 26, 2018, holders have converted $7,763,000 aggregate principal amount of the remaining 2020 Senior Notes and received 338,376 shares of Class A common stock in the aggregate.
All of the senior debt are unsecured senior obligations and rank equally with all existing and future unsecured indebtedness; however, they are effectively subordinated to all existing and future secured indebtedness and other liabilities of the Company’s subsidiaries to the extent of the value of the collateral securing that other debt.

G. Derivative Instruments and Hedging Activities
Risk Management Objective of Using Derivatives
The Company maintains an overall interest rate risk management strategy using derivative instruments to minimize significant unplanned impact on earnings and cash flows caused by interest rate volatility. The strategy uses interest rate swaps and caps having indices related to the pricing of specific liabilities. The Company enters into interest rate swaps to convert floating-rate debt to fixed-rate long-term debt, and vice-versa, depending on market conditions. Interest rate swaps are generally for periods of one to ten years. Interest rate caps are generally for periods of one to three years. The use of interest rate caps is consistent with the Company’s risk management objective to reduce or eliminate exposure to variability in future cash flows primarily attributable to increases in interest rates on its floating-rate debt.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. The Company primarily uses interest rate caps and swaps as part of its interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an upfront premium. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
Changes in the fair value of derivatives designated and qualifying as cash flow hedges are recorded in accumulated OCI and subsequently reclassified into earnings during the period the hedged forecasted transaction affects earnings. As of September 30, 2018, the Company expects it will reclassify $1,282,000 of accumulated other comprehensive loss into interest expense and equity in earnings within the next twelve months. However, the actual amount reclassified could vary due to future changes in the fair value of these derivatives.

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

Fair Value Hedges of Interest Rate Risk
The Company enters into total rate of return swaps (“TROR”) on various tax-exempt fixed-rate borrowings. The TROR convert borrowings from a fixed rate to a variable rate. The TROR requires the payment of a variable interest rate, generally equivalent to the Securities Industry and Financial Markets Association (“SIFMA”) rate (1.56% at September 30, 2018) plus a spread. Additionally, the Company has guaranteed the fair value of the underlying borrowings. Fluctuation in the value of the TROR is offset by the fluctuation in the value of the underlying borrowings, resulting in minimal financial impact. At September 30, 2018, the aggregate notional amount of TROR designated as fair value hedging instruments is $676,466,000. The underlying TROR borrowings are subject to a fair value adjustment.
The following amounts were recorded on the Consolidated Balance Sheets in nonrecourse mortgage debt and notes payable, net related to the hedged borrowings in fair value hedges:
 
September 30, 2018
December 31, 2017
 
(in thousands)
Carrying amount of underlying borrowings
$
676,466

$
605,036

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

Fair value of underlying borrowings
$
673,744

$
608,246

Nondesignated Hedges of Interest Rate Risk
The Company uses derivative contracts to hedge certain interest rate risk, even though the contracts do not qualify for, or the Company has elected not to apply, hedge accounting. In these situations, the derivative is recorded at its fair value with changes reflected in earnings.
The Company has certain undesignated TROR where the associated debt is held by an unconsolidated affiliate or unrelated third parties. The change in fair value of these TROR is recognized in earnings. At September 30, 2018, the aggregate notional amount of these TROR is $180,321,000.
The following table summarizes the fair values and location in the Consolidated Balance Sheets of all derivative instruments:
 
Fair Value of Derivative Instruments
 
Asset Derivatives
(included in Other Assets)
 
Liability Derivatives
(included in Accounts Payable,
Accrued Expenses and Other Liabilities)
 
Current
Notional
Fair Value
 
Current
Notional
Fair Value
 
(in thousands)
 
September 30, 2018
Derivatives Designated as Hedging Instruments
 
 
 
 
 
Interest rate swaps
$
96,271

$
2,046

 
$
—

$
—

TROR
409,151

679

 
267,315

3,401

Total
$
505,422

$
2,725

 
$
267,315

$
3,401

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

$
—

 
$
—

$
—

TROR
89,124

2,509

 
91,197

8,619

Total
$
158,642

$
2,509

 
$
91,197

$
8,619

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

$
1,129

 
$
34,078

$
863

TROR
369,021

3,862

 
236,015

652

Total
$
432,393

$
4,991

 
$
270,093

$
1,515

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

$
—

 
$
—

$
—

TROR
100,466

4,107

 
36,280

11,330

Total
$
169,984

$
4,107

 
$
36,280

$
11,330


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

The following table summarizes the impact of gains and losses related to derivative instruments designated as cash flow hedges on accumulated other comprehensive income:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
2017
 
2018
2017
 
(in thousands)
Gain (loss) on interest rate contracts recognized in Accumulated OCI
$
264

$
(49
)
 
$
1,942

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


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

$
2,869

 
$
(5,932
)
$
9,367

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

(9,367
)
Total Fair Value Hedging Relationships
 
$
—

$
—

 
$
—

$
—

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

$
(45
)
 
$
—

$
(45
)
TROR
Interest expense
$
921

$
(432
)
 
$
2,230

$
1,366

Credit-risk-related Contingent Features
The principal credit risk of the Company’s interest rate risk management strategy is the potential inability of a counterparty to cover its obligations. If a counterparty fails to fulfill its obligation, the risk of loss approximates the fair value of the derivative. To mitigate this exposure, the Company generally purchases derivative financial instruments from the financial institution that issues the related debt, from financial institutions with which the Company has other lending relationships, or from financial institutions with a minimum credit rating of BBB+, at the time of the transaction.
Agreements with derivative counterparties contain provisions under which the counterparty could terminate the derivative obligations if the Company defaults on its obligations under the Revolving Credit Agreement and designated conditions are fulfilled. In instances where the Company’s subsidiaries have derivative obligations secured by a mortgage, the derivative obligations could be terminated if the indebtedness between the two parties is terminated, either by loan payoff or default of the indebtedness. In addition, certain subsidiaries have agreements containing provisions whereby the subsidiaries must maintain certain minimum financial ratios. As of September 30, 2018, the Company does not have any derivative contracts containing credit-risk related contingent features, such as a credit rating downgrade, that may trigger collateral to be posted with a counterparty.

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


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

$
2,046

$
—

$
2,046

TROR (assets)
—

—

3,188

3,188

TROR (liabilities)
—

—

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

—

2,722

2,722

Total
$
—

$
2,046

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

$
1,129

$
—

$
1,129

Interest rate swaps (liabilities)
—

(863
)
—

(863
)
TROR (assets)
—

—

7,969

7,969

TROR (liabilities)
—

—

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

—

(3,210
)
(3,210
)
Total
$
—

$
266

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

2,230

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

—

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

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

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

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

(9,367
)
1,366

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

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

The following table presents quantitative information about the significant unobservable inputs used to estimate the fair value of financial instruments measured on a recurring basis as of September 30, 2018:
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value September 30, 2018
Valuation
Technique
Unobservable
Input
Input Values
 
(in thousands)
 
 
 
TROR
$
(8,832
)
Third party bond pricing
Bond valuation
95.43 - 107.97
Fair value adjustment to the borrowings subject to TROR
$
2,722

Third party bond pricing
Bond valuation
95.43 - 101.22
Third party service providers involved in fair value measurements are evaluated for competency and qualifications. Fair value measurements, including unobservable inputs, are evaluated based on current transactions and experience in the real estate and capital markets.
The impact of changes in unobservable inputs used to determine the fair market value of the credit valuation adjustment, TROR and fair value adjustment to the borrowings subject to TROR are not deemed to be significant.
Fair Value of Other Financial Instruments
The carrying amount of accounts receivable and accounts payable, accrued expenses and other liabilities approximates fair value based upon the short-term nature of the instruments. The carrying amount of notes receivable approximates fair value since the interest rates on these notes approximates current market rates for similar instruments when considering the risk profile and quality of the collateral, if applicable. The Company estimates the fair value of its debt instruments by discounting future cash payments at interest rates the Company believes approximate the current market. Estimated fair value is based upon market prices of public debt, available industry financing data, current treasury rates, recent financing transactions, conversion features on convertible senior debt and loan to value ratios. The fair value of the Company’s debt instruments is classified as Level 3 in the fair value hierarchy.
The following table summarizes the fair value of nonrecourse mortgage debt and notes payable, net (exclusive of the fair value of derivatives), term loan, net and convertible senior debt, net:
 
September 30, 2018
 
December 31, 2017
 
Carrying Value
Fair Value
 
Carrying Value
Fair Value
 
(in thousands)
Nonrecourse mortgage debt and notes payable, net
$
3,174,009

$
3,108,343

 
$
2,998,361

$
2,995,559

Term loan, net
333,967

333,977

 
333,668

333,726

Convertible senior debt, net
31,802

34,976

 
112,637

130,942

Total
$
3,539,778

$
3,477,296

 
$
3,444,666

$
3,460,227


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

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

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

$
48,094

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

48,012

 
 
Total
$
0.36

$
96,106

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

$
37,344

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

37,343

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

23,482

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

23,441

 
 
Total
$
0.46

$
121,610

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

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

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

$
126

 
$
84

$
463

Restricted stock costs
3,245

4,494

 
9,909

13,440

Performance share costs
1,116

2,633

 
3,263

7,391

Total stock-based compensation costs
4,361

7,253

 
13,256

21,294

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

5,152

 
10,200

14,893

Depreciation expense on capitalized stock-based compensation
637

216

 
1,220

665

Total stock-based compensation expense
$
3,994

$
5,368

 
$
11,420

$
15,558

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

L. Write-Offs of Abandoned Development Projects and Demolition Costs
The Company reviews each project under development to determine whether it is probable the project will be developed. If management determines the project will not be developed, its project costs and other related project exit costs are written off as an abandoned development project cost. The Company abandons projects under development for a number of reasons, including, but not limited to, changes in local market conditions, increases in construction or financing costs or third party challenges related to entitlements or public financing. The Company recorded no write-offs of abandoned development projects and demolition costs during the three and nine months ended September 30, 2018. The Company incurred no write-offs of abandoned development projects and demolition costs during the three months ended September 30, 2017 and $1,596,000 during the nine months ended September 30, 2017.
The Company incurred $0 and $6,282,000 as write-offs of abandoned development projects and demolition costs of unconsolidated entities during the three and nine months ended September 30, 2018, respectively, and $1,179,000 and $1,926,000 during the three and nine months ended September 30, 2017, respectively, which is included in equity in earnings and primarily represents non-capitalizable demolition costs at a redevelopment project.

M. Impairment of Real Estate and Impairment of Unconsolidated Entities
Impairment of Real Estate
The Company reviews its real estate for impairment whenever events or changes indicate its carrying value may not be recoverable. In determining whether the carrying costs are recoverable from estimated future undiscounted cash flows, the Company uses various assumptions including future estimated net operating income, estimated holding periods, risk of foreclosure and estimated cash proceeds upon the disposition of the asset. If the carrying costs are not recoverable, the Company records an impairment charge to reduce the carrying value to estimated fair value. The assumptions used to estimate fair value, which are based on current information, are Level 2 or 3 inputs. If the conditions deteriorate or if plans regarding the assets change, additional impairment charges may occur in future periods. There were no impairments of real estate recorded during the three and nine months ended September 30, 2018.
During the three months ended September 30, 2017, the Company began the marketing process of 461 Dean Street, an apartment community in Brooklyn, New York. The initiation of the marketing process triggered management to update its undiscounted cash flow analysis, including its probability weighted estimated holding period. As a result, the estimated probability weighted undiscounted cash flows no longer exceeded the carrying value, requiring the Company to adjust the carrying value to its estimated fair value during the three months ended September 30, 2017, resulting in an impairment charge of $44,288,000. The Company closed on the sale of 461 Dean Street in March 2018.

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

Impairment of Unconsolidated Entities
The Company reviews its portfolio of unconsolidated entities for other-than-temporary impairments whenever events or changes indicate its carrying value in the investments may be in excess of fair value. An equity method investment’s value is impaired if management’s estimate of its fair value is less than the carrying value and the difference is deemed to be other-than-temporary. In estimating fair value, assumptions that may be used include comparable sale prices, market discount rates, market capitalization rates and estimated future discounted cash flows specific to the geographic region and property type, all of which are considered Level 3 inputs. For recently opened properties, assumptions also include the timing of initial property lease up. In the event initial property lease up assumptions differ from actual results, estimated future discounted cash flows may vary, resulting in impairment charges in future periods. There were no impairments of unconsolidated entities recorded during the three and nine months ended September 30, 2018.
During the three months ended September 30, 2017, the Company signed a definitive agreement for the sale of Westchester’s Ridge Hill, a regional mall in Yonkers, New York, to its partner. This triggered management to update its impairment analysis, including its estimated selling price. As a result, the estimated fair value no longer exceeded the carrying value, requiring the Company to adjust the carrying value to its estimated fair value during the three months ended September 30, 2017, resulting in an impairment charge of $10,600,000. The Company closed on the sale of Westchester’s Ridge Hill in April 2018.
Impairment - Fair Value Information
The following table presents quantitative information about the significant unobservable inputs used to determine the fair value of the impaired real estate for the nine months ended September 30, 2017:
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value
Valuation Technique
Unobservable Input
Range of Input Values
 
(in thousands)
 
 
 
September 30, 2017
 
 
 
 
Impairment of real estate
$
152,575

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

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

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

$
—

 
$
193,674

$
—

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

—

 
25,992

—

Bayside Village
San Francisco, California
—

—

 
117,711

—

 
 
$
219,666

$
—

 
$
337,377

$
—

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

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

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

$
188,006

$
726,893

Cash and restricted cash
13,646

5,378

19,024

Other assets (1)
84,315

4,396

88,711

 
636,848

197,780

834,628

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

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

$
91,386

$
436,167

Gains on change in control of interests
$
193,674

$
25,992

$
219,666

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

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

47,075

205,524

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

44,311

230,643

Total consideration
$
344,781

$
91,386

$
436,167

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

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

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

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

$
—

 
$
181,504

$
—

Regional Malls - QIC
Various
—

—

 
75,107

—

Federally assisted housing apartments
Various
—

28,828

 
8,899

73,130

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

—

 
—

8,183

Other
—

—

 
—

469

 
$
181,504

$
28,828

 
$
265,510

$
81,782

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

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

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

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

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

$
—

 
$
25,736

$
—

Fairmont Cinema
San Jose, California
—

—

 
—

4,128

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

—

 
—

500

Apartments:
 
 
 
 
 
 
Kapolei Lofts
Kapolei, Hawaii
60,931

—

 
60,931

—

461 Dean Street
Brooklyn, New York
—

—

 
(3,713
)
—

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

—

 
—

3,771

Post Office Plaza
Cleveland, Ohio
—

(1,244
)
 
—

(1,244
)
Federally assisted housing apartment
—

375

 
464

375

Other
—

613

 
750

6,235

 
 
60,931

(256
)
 
84,168

13,765

Income tax effect
—

—

 
(130
)
(192
)
 
 
$
60,931

$
(256
)
 
$
84,038

$
13,573

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

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

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

$
5,454

 
$
715,432

$
103,124

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

$
5,249

 
$
709,492

$
102,404

Undistributed earnings allocated to participating securities
—

—

 
—

125

Interest on convertible debt
710

—

 
2,991

—

Preferred distribution on Class A Common Units
—

—

 
—

553

Net earnings attributable to common stockholders ‑ Diluted
$
444,011

$
5,249

 
$
712,483

$
103,082

Denominators
 
 
 
 
 
Weighted average shares outstanding ‑ Basic
267,978,704

265,260,403

 
266,468,193

261,566,151

Effect of stock options and performance shares
1,109,855

1,001,792

 
679,356

718,584

Effect of convertible debt
3,326,824

—

 
4,637,923

—

Effect of convertible Class A Common Units
—

—

 
—

1,757,072

Weighted average shares outstanding ‑ Diluted (1) (2) 
272,415,383

266,262,195

 
271,785,472

264,041,807

Earnings Per Share
 
 
 
 
 
Net earnings attributable to common stockholders ‑ Basic
$
1.65

$
0.02

 
$
2.66

$
0.39

Net earnings attributable to common stockholders ‑ Diluted
$
1.63

$
0.02

 
$
2.62

$
0.39

(1)
Incremental shares from restricted stock, convertible securities and Class A Common Units of 1,626,009 and 1,638,320 for the three and nine months ended September 30, 2018, respectively, and 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.
(2)
Weighted-average options, restricted stock and performance shares of 14,120 and 494,590 for the three and nine months ended September 30, 2018, respectively, and 698,333 and 1,375,366 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 under the treasury stock method.


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

T. Segment Information
The following tables summarize financial data for the Company’s reportable operating segments. All amounts are presented in thousands.
 
September 30, 2018
December 31, 2017
 
 
 
 
 
 
 
 
Identifiable Assets
 
 
 
 
 
 
Office
$
3,691,382

$
3,025,810

 
 
 
 
 
 
 
Apartments
2,297,394

2,246,479

 
 
 
 
 
 
 
Retail
360,005

368,353

 
 
 
 
 
 
 
Total Operations
6,348,781

5,640,642

 
 
 
 
 
 
 
Development
1,706,763

2,020,273

 
 
 
 
 
 
 
Corporate
520,802

402,372

 
 
 
 
 
 
 
 
$
8,576,346

$
8,063,287

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2018
2017
2018
2017
 
2018
2017
2018
2017
 
Revenues
 
Operating Expenses
Office
$
122,443

$
108,165

$
344,775

$
339,087

 
$
45,017

$
41,104

$
129,614

$
128,618

Apartments
69,424

72,086

215,449

216,498

 
35,059

30,874

103,533

96,968

Retail
4,978

14,009

15,035

43,803

 
5,026

9,532

12,664

30,882

Total Operations
196,845

194,260

575,259

599,388

 
85,102

81,510

245,811

256,468

Development
21,385

39,284

60,229

86,604

 
13,298

29,337

40,404

71,236

Corporate
—

—

—

—

 
18,025

19,113

64,519

60,102

 
$
218,230

$
233,544

$
635,488

$
685,992

 
$
116,425

$
129,960

$
350,734

$
387,806

 
 
 
 
 
 
 
 
 
 
 
Depreciation and Amortization
 
Capital Expenditures
Office
$
32,901

$
28,471

$
88,694

$
97,382

 
$
22,792

$
12,831

$
41,407

$
40,132

Apartments
20,288

19,442

61,106

57,452

 
7,706

9,264

17,243

19,370

Retail
626

2,889

2,065

8,404

 
975

912

2,012

3,073

Total Operations
53,815

50,802

151,865

163,238

 
31,473

23,007

60,662

62,575

Development
6,147

8,764

16,220

24,299

 
63,768

80,368

180,282

241,990

Corporate
963

628

2,567

1,959

 
162

2,008

922

2,372

 
$
60,925

$
60,194

$
170,652

$
189,496

 
$
95,403

$
105,383

$
241,866

$
306,937

The Company uses Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") to manage its business and 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; and ix) other transactional items, including organizational transformation and termination benefits.
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.



29
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, 2018
Office
Apartments
Retail
Total Operations
Development
Corporate
Total
Net earnings (loss) attributable to Forest City Realty Trust, Inc.
$
237,920

$
67,436

$
194,047

$
499,403

$
1,889

$
(54,119
)
$
447,173

Depreciation and amortization
32,514

23,285

9,062

64,861

6,008

963

71,832

Interest expense
—

—

—

—

—

43,236

43,236

Amortization of mortgage procurement costs
—

—

—

—

—

1,520

1,520

Income tax expense
—

—

—

—

—

3,347

3,347

Loss on extinguishment of debt
—

—

—

—

—

19

19

Gain on disposition of rental properties
—

(17,820
)
—

(17,820
)
—

—

(17,820
)
Gain on disposition of unconsolidated entities
—

—

(181,504
)
(181,504
)
—

—

(181,504
)
Gain on change in control of interests
(193,674
)
(25,992
)
—

(219,666
)
—

—

(219,666
)
Organizational transformation and termination benefits
—

—

—

—

—

8,289

8,289

Adjusted EBITDA attributable to Forest City Realty Trust, Inc.
$
76,760

$
46,909

$
21,605

$
145,274

$
7,897

$
3,255

$
156,426

 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
Office
Apartments
Retail
Total Operations
Development
Corporate
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 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



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

Nine Months Ended September 30, 2018
Office
Apartments
Retail
Total Operations
Development
Corporate
Total
Net earnings (loss) attributable to Forest City Realty Trust, Inc.
$
321,854

$
243,229

$
328,601

$
893,684

$
(4,823
)
$
(173,429
)
$
715,432

Depreciation and amortization
89,730

69,527

30,306

189,563

17,721

2,567

209,851

Interest expense
—

—

—

—

—

129,734

129,734

Amortization of mortgage procurement costs
—

—

—

—

—

4,563

4,563

Income tax expense
—

—

—

—

—

4,721

4,721

Loss on extinguishment of debt
—

—

—

—

—

3,495

3,495

Net (gain) loss on disposition of rental properties
—

(19,034
)
(25,735
)
(44,769
)
3,712

—

(41,057
)
Gain on disposition of unconsolidated entities
—

(8,899
)
(256,259
)
(265,158
)
—

—

(265,158
)
Gain on change in control of interests
(193,674
)
(143,703
)
—

(337,377
)
—

—

(337,377
)
Organizational transformation and termination benefits
—

—

—

—

—

29,188

29,188

Adjusted EBITDA attributable to Forest City Realty Trust, Inc.
$
217,910

$
141,120

$
76,913

$
435,943

$
16,610

$
839

$
453,392

 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
Office
Apartments
Retail
Total Operations
Development
Corporate
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 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



U. Subsequent Event
On October 4, 2018, the Company completed the sale of the Fidelity Investments office building in Albuquerque, New Mexico. Real estate, net of $29,014,000 and nonrecourse mortgage debt, net of $10,022,000 related to the Fidelity Investments building were classified in assets held for sale and liabilities of assets held for sale, respectively, at September 30, 2018. The sale generated net cash proceeds of approximately $33,588,000, which are expected to be redeployed in a Section 1031 exchange.

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


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The 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, 2017.
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 $8.6 billion of consolidated assets in 16 states and the District of Columbia at September 30, 2018. 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.
Review of Strategic Alternatives and Reconstituted Board
On March 22, 2018, we announced that our Board of Directors (the “Board”) concluded its previously announced review of strategic alternatives. After extensive evaluation and deliberation, including review and analysis of multiple offers, the Board determined that stockholder value would be better enhanced on a standalone basis than by pursuing a transaction on the terms and pricing indicated by the offers received.
In addition, on March 22, 2018, we announced our entry into agreements with Starboard Value LP ("Starboard") and Scopia Capital Management LP ("Scopia"), which, as of March 22, 2018, owned approximately 3.0% and 8.3% of our outstanding shares, respectively, and RMS, Limited Partnership ("RMS"), which, prior to the elimination of our dual-class stock structure in 2017, was our controlling stockholder, pursuant to which:
•
Nine directors agreed to resign from the Board;
•
Michelle Felman, Adam S. Metz, Marran H. Ogilvie, Mark S. Ordan, William R. Roberts, and Robert A. Schriesheim were appointed on April 16, 2018, as new independent directors to the Company's Board;
•
James A. Ratner became Interim Chairman of the Board. The reconstituted Nominating and Governance Committee initiated a process to identify and recommend a new Chairman or Executive Chairman of the Board. Candidates will include both new Board members as well as external candidates that are seasoned real estate industry executives or professionals;
•
The reconstituted Nominating and Governance Committee initiated a process to identify an additional independent director to join the Board;
•
Each of Starboard and Scopia had the right to appoint one additional director to the Board. Gavin T. Molinelli is the Starboard appointee and Jerome J. Lande is the Scopia appointee;
•
RMS agreed to alter its director nomination rights from four members of the Ratner family to two designees, one director who must be independent under NYSE listing standards and one director who may be either a family member or independent under NYSE listing standards. William R. Roberts serves as the independent RMS designee. RMS also gave up its right for James Ratner to be elected Chairman of the Board, and he will resign from the Chairmanship upon appointment of the new Chairman identified by the process referred to above; and
•
David J. LaRue, Kenneth J. Bacon, Z. Jamie Behar and James A. Ratner continued their service on the Board.
Merger Agreement
On July 30, 2018, after careful consideration the Board voted seven to five to enter into an Agreement and Plan of Merger (the “Merger Agreement”) with Antlia Holdings LLC (“Parent”) and Antlia Merger Sub Inc. (“Merger Sub”), pursuant to which, upon the terms and subject to the conditions set forth therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Consummation of the Merger is subject to the satisfaction or waiver of specified closing conditions, including the approval of the Merger by the affirmative vote of the holders of a majority of the Company’s outstanding shares Class A common stock entitled to vote on such matter at a meeting of the Company’s stockholders scheduled to be held November 15, 2018 (“the Special Meeting”) and other customary closing conditions for a transaction of this type.

32

We expect to complete the Merger in the fourth quarter of 2018. Completion of the Merger is, however, subject to various conditions noted above, and it is possible that factors outside our control could result in the Merger being completed at a later time or not at all. There may be a substantial amount of time between the Special Meeting and the completion of the Merger. We hope to complete the Merger as soon as reasonably practicable following the satisfaction of all applicable conditions. For additional information regarding the Merger or the Merger Agreement, see Note A to the Consolidated Financial Statements and our other filings made with the Securities and Exchange Commission (“SEC”), which are available at the SEC’s public reference facilities or on the SEC’s website at www.sec.gov. Please also see Part II, Item 1A, “Risk Factors” in this Form 10-Q for a discussion of the risk’s related to the Merger and the Merger Agreement.
Milestones
Significant milestones achieved in the third quarter of 2018 include:
•
Entered into a Merger Agreement whereby, subject to the conditions set forth in the Merger Agreement, affiliates of Brookfield Asset Management, Inc. will acquire all of our outstanding Class A common stock. The Merger is expected to close in the fourth quarter of 2018;
•
Exchanged our preferred ownership interests in nine specialty retail assets owned by the retail joint venture with Madison International for the retail joint venture’s ownership interest in 300 Massachusetts Ave, 350 Massachusetts Ave, and 38 Sidney Street, three life science office properties at University Park at MIT, in a non-cash transaction;
•
Exchanged our preferred ownership interests in one specialty retail asset owned by the retail joint venture with Madison International for the retail joint venture’s ownership interests in DKLB BKLN, an apartment community in Brooklyn, New York, in a non-cash transaction;
•
Through our jointly owned specialty retail joint venture with Madison International, we acquired our partner’s 75% interest in 3700M, an apartment community in Dallas, Texas, for a purchase price of $78,375,000;
•
Completed the sale of Kapolei Lofts, an apartment community in Kapolei, Hawaii. The sale generated net cash proceeds of approximately $26,935,000;
•
Paid off the maturing $59,189,000 nonrecourse mortgage which encumbered Glen Forest Office Park, an eleven building consolidated office park in Richmond, Virginia, using cash on hand;
•
Settled conversions of $73,188,000 in aggregate principal amount of our 4.25% Convertible Senior Notes due 2018 for 3,560,990 shares of Class A common stock; and
•
Settled conversions of $7,980,000 in aggregate principal amount of our 3.625% Convertible Senior Notes due 2020 (“our 2020 Senior Notes”) for 347,631 shares of Class A common stock.
In addition, subsequent to September 30, 2018, we achieved the following significant milestones:
•
Completed the sale of the Fidelity Investments office building in Albuquerque, New Mexico. The sale generated net cash proceeds of approximately $33,588,000, which are expected to be redeployed in a Section 1031 exchange;
•
On October 12, 2018, we provided notice of our intention to redeem the remaining $32,037,000 aggregate principal amount of our 2020 Senior Notes for cash plus accrued and unpaid interest, if any, up to, but not including, November 21, 2018. Holders have the right to convert their 2020 Senior Notes up to the close of business on November 20, 2018. Through October 26, 2018, holders have converted $7,763,000 aggregate principal amount of the remaining 2020 Senior Notes and received 338,376 shares of Class A common stock in the aggregate; and
•
On October 12, 2018, we filed a definitive proxy with the SEC, which includes notice that the Special Meeting to vote on the Merger Agreement has been scheduled for November 15, 2018.



33

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 activity of our Corporate segment does not involve the operations of our rental property portfolio and therefore is excluded from our NOI.
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.

34

Reconciliation of Earnings Before Income Taxes (GAAP) to Net Operating Income (non-GAAP) (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
2017
 
2018
2017
Earnings before income taxes (GAAP)
$
430,448

$
13,051

 
$
668,990

$
102,968

Earnings from unconsolidated entities
(188,873
)
(26,523
)
 
(277,548
)
(95,016
)
Earnings before income taxes and earnings from unconsolidated entities
241,575

(13,472
)
 
391,442

7,952

Land sales
(7,920
)
(21,786
)
 
(23,359
)
(45,308
)
Cost of land sales
2,723

13,301

 
7,943

22,996

Other land development revenues
(3,574
)
(1,781
)
 
(9,612
)
(4,748
)
Other land development expenses
2,338

2,977

 
7,132

7,575

Corporate general and administrative expenses
9,736

16,480

 
35,331

46,081

Organizational transformation and termination benefits
8,289

2,633

 
29,188

14,021

Depreciation and amortization
60,925

60,194

 
170,652

189,496

Write-offs of abandoned development projects and demolition costs
—

—

 
—

1,596

Impairment of real estate
—

44,288

 
—

44,288

Interest and other income
(13,296
)
(20,361
)
 
(34,773
)
(40,529
)
Gains on change in control of interests
(219,666
)
—

 
(337,377
)
—

Interest expense
30,882

31,597

 
86,849

88,473

Amortization of mortgage procurement costs
1,366

1,338

 
3,966

4,067

Loss on extinguishment of debt
19

—

 
3,995

2,843

NOI related to noncontrolling interest (1)
(8,658
)
(10,583
)
 
(29,985
)
(30,737
)
NOI related to unconsolidated entities (2)
41,378

51,738

 
132,565

160,467

Net Operating Income (Non-GAAP)
$
146,117

$
156,563

 
$
433,957

$
468,533

 
 
 
 
 
 
(1) NOI related to noncontrolling interest:
 
 
 
 
 
Earnings from continuing operations attributable to noncontrolling interests (GAAP)
$
(41,225
)
$
(7,037
)
 
$
(39,883
)
$
(8,487
)
Exclude non-NOI activity from noncontrolling interests:
 
 
 
 
 
Land and non-rental activity, net
652

3,565

 
1,753

4,943

Interest and other income
499

514

 
1,254

1,486

Depreciation and amortization
(6,462
)
(6,079
)
 
(19,393
)
(19,628
)
Amortization of mortgage procurement costs
(239
)
(353
)
 
(900
)
(981
)
Interest expense and extinguishment of debt
(4,994
)
(4,585
)
 
(16,279
)
(12,119
)
Gain on disposition of rental properties and interest in unconsolidated entities
43,111

3,392

 
43,463

4,049

NOI related to noncontrolling interest
$
(8,658
)
$
(10,583
)
 
$
(29,985
)
$
(30,737
)
 
 
 
 
 
 
(2) NOI related to unconsolidated entities:
 
 
 
 
 
Equity in earnings (GAAP)
$
7,369

$
8,295

 
$
12,038

$
23,834

Exclude non-NOI activity from unconsolidated entities:
 
 
 
 
 
Land and non-rental activity, net
(907
)
(4,001
)
 
(1,857
)
(5,580
)
Interest and other income
(194
)
(2,117
)
 
(2,651
)
(4,093
)
Write offs of abandoned development projects and demolition costs
—

1,179

 
6,282

1,926

Depreciation and amortization
17,369

23,736

 
58,592

69,123

Amortization of mortgage procurement costs
393

822

 
1,497

2,462

Interest expense and extinguishment of debt
17,348

23,824

 
58,664

72,795

NOI related to unconsolidated entities
$
41,378

$
51,738

 
$
132,565

$
160,467



35

Comparable NOI
We use comparable NOI, a non-GAAP measure, as a metric to evaluate the performance of our office and apartment properties. Comparable NOI is an operating statistic defined as NOI from stabilized properties operated in all periods presented. This operating statistic provides a same-store comparison of operating results of all stabilized properties that are open and operating in each period 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. Due to the planned/ongoing disposition of substantially all of our regional mall and specialty retail portfolios, we are no longer disclosing comparable NOI for our retail properties. Other properties and activities such as federally assisted 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.
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, 2018
 
Three Months Ended September 30, 2017
Comparable
 
Comparable
Non-Comparable
Total
 
Comparable
Non-Comparable
Total
NOI % Change
Office
$
67,918

$
3,427

$
71,345

 
$
66,515

$
367

$
66,882

2.1
%
Apartments
47,764

741

48,505

 
47,250

(26
)
47,224

1.1
%
Retail
—

22,794

22,794

 
—

39,698

39,698



Product Type NOI
$
115,682

$
26,962

$
142,644

 
$
113,765

$
40,039

$
153,804

 
Federally Assisted Housing
—

—

—

 
—

1,532

1,532

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

3,985

3,985

 
—

2,133

2,133

 
Participation payments
—

(26
)
(26
)
 
—

—

—

 
Other Operations
—

(1,329
)
(1,329
)
 
—

(165
)
(165
)
 
 
115,682

29,592

145,274

 
113,765

43,539

157,304



Recently-Opened Properties/Redevelopment
—

2,646

2,646

 
—

2,542

2,542

 
Development Segment (2)
—

(1,803
)
(1,803
)
 
—

(3,283
)
(3,283
)
 
Grand Total
$
115,682

$
30,435

$
146,117

 
$
113,765

$
42,798

$
156,563

1.7
%
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
Nine Months Ended September 30, 2017
Comparable
 
Comparable
Non-Comparable
Total
 
Comparable
Non-Comparable
Total
NOI % Change
Office
$
203,390

$
4,668

$
208,058

 
$
200,620

$
8,787

$
209,407

1.4
%
Apartments
143,424

2,198

145,622

 
140,205

(79
)
140,126

2.3
%
Retail
—

77,436

77,436

 
—

118,659

118,659



Product Type NOI
$
346,814

$
84,302

$
431,116

 
$
340,825

$
127,367

$
468,192

 
Federally Assisted Housing
—

124

124

 
—

9,813

9,813

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

10,919

10,919

 
—

8,776

8,776

 
Participation payments
—

(1,160
)
(1,160
)
 
—

—

—

 
Other Operations
—

(5,056
)
(5,056
)
 
—

(3,140
)
(3,140
)
 
 
346,814

89,129

435,943

 
340,825

142,816

483,641



Recently-Opened Properties/Redevelopment
—

7,392

7,392

 
—

1,188

1,188

 
Development Segment (2)
—

(9,378
)
(9,378
)
 
—

(16,296
)
(16,296
)
 
Grand Total
$
346,814

$
87,143

$
433,957

 
$
340,825

$
127,708

$
468,533

1.8
%
(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.

36


Percentage of NOI by Product Type (dollars in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
2017
 
2018
2017
 
NOI
% of Total
NOI
% of Total
 
NOI
% of Total
NOI
% of Total
Office Segment
$
71,345

50.0
%
$
66,882

43.5
%
 
$
208,058

48.2
%
$
209,407

44.7
%
Apartment Segment
48,505

34.0
%
47,224

30.7
%
 
145,622

33.8
%
140,126

29.9
%
Retail Segment
22,794

16.0
%
39,698

25.8
%
 
77,436

18.0
%
118,659

25.4
%
Total Product Type NOI
$
142,644

 
$
153,804

 
 
$
431,116

 
$
468,192

 




37

Core Market NOI
(dollars in thousands)
Nine Months Ended September 30, 2018
 
Nine Months Ended September 30, 2017
coremarketgrapha12.jpg
Product Type NOI
$
431,116

 
Product Type NOI
$
468,192

Federally Assisted Housing
124

 
Federally Assisted Housing
9,813

Other NOI (3):
 
 
Other NOI (3):
 
Straight-line rent adjustments
10,919

 
Straight-line rent adjustments
8,776

Participation payments
(1,160
)
 
Participation payments
—

Other Operations
(5,056
)
 
Other Operations
(3,140
)
 
4,703

 
 
5,636

Recently-Opened Properties/Redevelopment
7,392

 
Recently-Opened Properties/Redevelopment
1,188

Development Segment (4)
(9,378
)
 
Development Segment (4)
(16,296
)
Grand Total NOI
$
433,957

 
Grand Total NOI
$
468,533

(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.

38

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 of gains and losses from the sale of operating real estate assets from FFO 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 peers 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 the National Association of Real Estate Investment Trusts (“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) gains or losses on change in control of interests; iii) non-cash charges for real estate depreciation and amortization; iv) impairment of depreciable real estate (net of tax); and v) cumulative or retrospective effect of change in accounting principle (net of tax).

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) the adjustment to recognize rental revenues and rental expense using the straight-line method; vii) participation payments to ground lessors on refinancing of our properties; viii) other transactional items; and ix) income taxes on FFO.


39

The table below reconciles net earnings, the most comparable GAAP measure, to FFO and Operating FFO, non-GAAP measures.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
2017
 
2018
2017
 
(in thousands)
Net earnings attributable to Forest City Realty Trust, Inc. (GAAP)
$
447,173

$
5,454

 
$
715,432

$
103,124

Depreciation and Amortization—real estate (1)
70,847

77,164

 
207,198

236,913

Gain on change in control of interests
(219,666
)
—

 
(337,377
)
—

Gain on disposition of rental properties
(199,324
)
(25,180
)
 
(306,215
)
(91,498
)
Impairment of depreciable rental properties
—

54,888

 
—

54,888

Income tax expense (benefit) adjustment:
 
 
 
 
 
Gain on disposition of rental properties
(234
)
232

 
738

4,874

FFO attributable to Forest City Realty Trust, Inc. (Non-GAAP)
$
98,796

$
112,558

 
$
279,776

$
308,301

Write-offs of abandoned development projects and demolition costs
—

1,179

 
6,282

3,522

Tax credit income
(3,430
)
(3,916
)
 
(10,854
)
(9,128
)
Loss on extinguishment of debt
19

—

 
3,495

4,468

Change in fair market value of nondesignated hedges
(613
)
416

 
(3,162
)
(1,387
)
Straight-line rent adjustments
(4,569
)
(2,797
)
 
(12,752
)
(9,732
)
Participation payments
26

—

 
1,160

—

Organizational transformation and termination benefits
8,289

2,633

 
29,188

14,021

Income tax expense on FFO
3,581

72

 
3,983

135

Operating FFO attributable to Forest City Realty Trust, Inc. (Non-GAAP)
$
102,099

$
110,145

 
$
297,116

$
310,200

 
 
 
 
 
 
Numerator Adjustments (in thousands):
 
 
 
 
 
If-Converted Method (adjustments for interest):
 
 
 
 
 
4.250% Notes due 2018
380

778

 
1,936

2,334

3.625% Notes due 2020
330

363

 
1,055

1,088

Total Adjustments
$
710

$
1,141

 
$
2,991

$
3,422

FFO attributable to Forest City Realty Trust, Inc. (If-Converted)
$
99,506

$
113,699

 
$
282,767

$
311,723

Operating FFO attributable to Forest City Realty Trust, Inc. (If-Converted)
$
102,809

$
111,286

 
$
300,107

$
313,622

Denominator:
 
 
 
 
 
Weighted average shares outstanding—Basic
267,978,704

265,260,403

 
266,468,193

261,566,151

Effect of stock options, restricted stock and performance shares
1,624,820

1,735,881

 
1,206,632

1,458,634

Effect of convertible debt
3,326,824

5,153,214

 
4,637,923

5,153,242

Effect of convertible 2006 Class A Common Units
1,111,044

1,566,465

 
1,111,044

1,757,072

Weighted average shares outstanding - Diluted
274,041,392

273,715,963

 
273,423,792

269,935,099

FFO Per Share - Diluted
$
0.36

$
0.42

 
$
1.03

$
1.15

Operating FFO Per Share - Diluted
$
0.38

$
0.41

 
$
1.10

$
1.16

(1)
The following table provides detail of depreciation and amortization:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
2017
 
2018
2017
 
(in thousands)
Full Consolidation
$
60,925

$
60,194

 
$
170,652

$
189,496

Noncontrolling interest
(6,462
)
(6,079
)
 
(19,393
)
(19,628
)
Unconsolidated
17,369

23,736

 
58,592

69,123

Company Share
71,832

77,851

 
209,851

238,991

Non-Real Estate
(985
)
(687
)
 
(2,653
)
(2,078
)
Real Estate at Company share
$
70,847

$
77,164

 
$
207,198

$
236,913



40

Operations

Office
Comparable leased occupancy for Office is 94.5% and 97.0% as of September 30, 2018 and 2017, respectively. 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”) and represents leased occupancy at the end of the quarter. Office occupancy data includes leases with original terms of one year or less. Comparable leased occupancy relates to stabilized properties opened and operated in both the three months ended September 30, 2018 and 2017.
We monitor office leases expiring in the short to mid-term. Management’s plan to obtain lease renewals for expiring 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 2017
14

340,532

$
46.92

$
39.39

19.1
%
 
3

1,186

$
57.26

 
341,718

Q1 2018
13

183,331

$
73.09

$
63.36

15.4
%
 
3

7,172

$
31.61

 
190,503

Q2 2018
12

208,502

$
61.53

$
49.23

25.0
%
 
3

39,530

$
25.61

 
248,032

Q3 2018
8

103,667

$
50.26

$
46.23

8.7
%
 
4

10,103

$
90.71

 
113,770

Total
47

836,032

$
56.72

$
47.95

18.3
%
 
13

57,991

$
38.34

 
894,023

 
 
 
 
 
 
 
 
 
 
 
 

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

41

Apartments
Comparable economic occupancy was 94.7% and 94.1% for the nine months ended September 30, 2018 and 2017, 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 opened and operated in both the nine months ended September 30, 2018 and 2017.
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)
 
2018
2017
% Change
 
2018
2017
% Change
Core Markets
8,857

 
$
2,043

$
2,027

0.8
%
 
95.8
%
94.3
%
1.5
%
Non-Core Markets
7,953

 
$
1,029

$
1,013

1.6
%
 
94.5
%
93.5
%
1.0
%
Total Comparable Apartments
16,810

 
$
1,563

$
1,547

1.0
%
 
95.4
%
94.0
%
1.4
%
 
 
 
 
 
 
 
 
 
 

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)
 
2018
2017
% Change
 
2018
2017
% Change
Core Markets
8,857

 
$
2,031

$
2,011

1.0
%
 
95.1
%
94.6
%
0.5
%
Non-Core Markets
7,953

 
$
1,020

$
1,002

1.8
%
 
93.8
%
92.9
%
0.9
%
Total Comparable Apartments
16,810

 
$
1,553

$
1,533

1.3
%
 
94.7
%
94.1
%
0.6
%
 
 
 
 
 
 
 
 
 
 

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)
 
2018
2018
% Change
 
2018
2018
% Change
Core Markets
8,857

 
$
2,043

$
2,031

0.6
%
 
95.8
%
95.0
%
0.8
%
Non-Core Markets
7,953

 
$
1,029

$
1,016

1.3
%
 
94.5
%
94.1
%
0.4
%
Total Comparable Apartments
16,810

 
$
1,563

$
1,551

0.8
%
 
95.4
%
94.7
%
0.7
%
 
 
 
 
 
 
 
 
 
 
(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, 2018, 14.4% of leasable units in core markets and 4.9% of leasable units in non-core markets were affordable housing units.
(2)
Represents gross potential rent less concessions.
(3)
Leasable units represent our share of comparable leasable units at the apartment community.


42

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, 2018 compared with the three months ended September 30, 2017. 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, 2017
$
108,165

$
72,086

$
14,009

$
194,260

$
39,284

$
233,544

Increase (decrease) due to:
 
 
 
 
 
 
Comparable portfolio
4,692

3,298

42

8,032

—

8,032

Non-comparable properties (1) 
1,449

5,512

360

7,321

(3,569
)
3,752

Change in consolidation method due to change in control
8,445

(8,165
)
—

280

—

280

Recently disposed properties
(617
)
(1,850
)
(5,860
)
(8,327
)
—

(8,327
)
Land sales
—

—

—

—

(13,866
)
(13,866
)
Other
309

(1,457
)
(3,573
)
(4,721
)
(464
)
(5,185
)
Revenues for the three months ended September 30, 2018
$
122,443

$
69,424

$
4,978

$
196,845

$
21,385

$
218,230

 
Office
Apartments
Retail
Total Operations
Development
Corporate
Total
Operating expenses for the three months ended September 30, 2017
$
41,104

$
30,874

$
9,532

$
81,510

$
29,337

$
19,113

$
129,960

Increase (decrease) due to:
 
 
 
 
 
 
 
Comparable portfolio
1,720

4,197

269

6,186

—

—

6,186

Non-comparable properties (1) 
685

2,741

183

3,609

(576
)
—

3,033

Change in consolidation method due to change in control
2,663

(2,147
)
—

516

—

—

516

Recently disposed properties
(712
)
(1,261
)
(3,388
)
(5,361
)
—

—

(5,361
)
Land cost of sales
—

—

—

—

(10,578
)
—

(10,578
)
Organizational transformation and termination benefits
—

—

—

—

—

5,656

5,656

Development, management, corporate and other
(443
)
655

(1,570
)
(1,358
)
(4,885
)
(6,744
)
(12,987
)
Operating expenses for the three months ended September 30, 2018
$
45,017

$
35,059

$
5,026

$
85,102

$
13,298

$
18,025

$
116,425

 
Office
Apartments
Retail
Total Operations
Development
Corporate
Total
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

Increase (decrease) due to:
 
 
 
 
 
 
 
Comparable portfolio
(76
)
1,018

(710
)
232

—

—

232

Non-comparable properties (1)
—

110

—

110

1,344

—

1,454

Recently disposed equity method properties
(1,753
)
(2,027
)
(6,514
)
(10,294
)
—

—

(10,294
)
Change in consolidation method due to change in control
(1,787
)
2,607

—

820

—

—

820

Land
—

—

—

—

350

—

350

Other
—

333

(433
)
(100
)
46

6,566

6,512

Equity in earnings (loss) for the three months ended September 30, 2018
$
1,523

$
11,831

$
12,854

$
26,208

$
(1,292
)
$
(17,547
)
$
7,369



43

(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, 2018 vs. 2017
Property
Quarter Opened
Revenues
Operating Expenses
Equity in Earnings (Loss)
Operations
 
 
 
 
Office:
 
 
 
 
Property recently stabilized:
 
 
 
 
1812 Ashland Ave
Q2-16
$
1,167

$
439

$
—

Non-comparable property:
 
 
 
 
26 Landsdowne Street (i)
282

246

—

Total Office
$
1,449

$
685

$
—

 
 
 
 
 
Apartments:
 
 
 
 
Properties recently stabilized:
 
 
 
 
Blossom Plaza
Q2-16
$
1,477

$
932

$
—

Kapolei Lofts (ii)
Q3-15/Q3-16
1,254

657

—

The Bixby
Q3-16/Q2-17
—

—

110

The Yards - Arris
Q1-16
2,781

1,152

—

Total Apartments
$
5,512

$
2,741

$
110

 
 
 
 
 
Retail:
 
 
 
 
Property recently stabilized:
 
 
 
 
The Yards - District Winery
Q3-17
$
360

$
183

$
—

Total Retail
$
360

$
183

$
—

 
 
 
 
 
Development
 
 
 
 
Properties in lease-up:
 
 
 
 
535 Carlton
Q1-17/Q2-17
$
—

$
—

$
255

461 Dean Street (iii)
Q3-16/Q1-17
(1,176
)
(941
)
—

38 Sixth Ave
Q3-17/Q4-17
—

—

27

Ardan
Q2-18/Q3-18
(15
)
514

—

Axis
Q3-17/Q2-18
1,100

1,438

—

Eliot on 4th
Q1-17/Q3-17
2,107

240

—

Mint Town Center
Q4-17/Q2-18
529

614

—

NorthxNorthwest
Q4-16/Q1-17
1,063

71

—

The Bridge at Cornell Tech
Q2-17
477

251

—

VYV
Q3-17
—

—

253

Non-comparable property:
 
 
 
 
Ballston Quarter
—

—

865

Transfers from development (2017) to operations (2018):
 
 
 
 
1812 Ashland Ave
Q2-16
(1,364
)
(405
)
—

Blossom Plaza
Q2-16
(1,329
)
(829
)
—

Kapolei Lofts (ii)
Q3-15/Q3-16
(2,472
)
(712
)
—

The Bixby
Q3-16/Q2-17
—

—

(56
)
The Yards - Arris
Q1-16
(2,360
)
(815
)
—

The Yards - District Winery
Q3-17
(129
)
(2
)
—

Total Development
$
(3,569
)
$
(576
)
$
1,344

(i)
26 Landsdowne Street, an office building in Cambridge, Massachusetts, is classified as a non-comparable property due to its redevelopment, which began in Q3 2017. The redevelopment is complete with occupancy starting in Q3-2018.
(ii)
Kapolei Lofts, an apartment community in Kapolei, Hawaii, was sold in Q3-2018.
(iii)
461 Dean Street, an apartment community in Brooklyn, New York, was sold in Q1-2018.

44

Office
The increases in revenues and operating expenses along with the decrease in equity in earnings related to the change in consolidation method are due to the change from equity method to full consolidation method of accounting for the three life science office properties at University Park at MIT (Q3-2018) upon the acquisition of our partner’s equity interests in those properties. The decreases in revenues and operating expenses related to recent disposals are primarily due to the sale of Post Office Plaza, an office building in Cleveland, Ohio (Q3-2017). The decrease in equity in earnings related to recent disposals is primarily due to a non-recurring land sale adjacent to our suburban Cleveland, Ohio office properties (Q3-2017).
Apartments
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 deconsolidation of Bayside Village, an apartment community in San Francisco, California (Q1-2018). The decreases in revenues and operating expenses along with the decrease in equity in earnings related to recent disposals are primarily due to the sale of 500 Sterling Place, an apartment community in Brooklyn, New York (Q3-2017), and our FAH apartment communities and related service and management companies during 2017 and 2018.
Retail
The decreases in revenues and operating expenses related to recent disposals are primarily due to the deed in lieu transaction on Boulevard Mall, a regional mall in Amherst, New York (Q4-2017), and the sales of The Shops at Northfield Stapleton (Q4-2017), a regional mall in Denver, Colorado (Q4-2017), and Brooklyn Commons, a specialty retail center in Brooklyn, New York (Q2-2018). The decreases in equity in earnings related to recent disposals are primarily due to the various assets sold under the signed definitive agreements with QIC and Madison International to dispose of 10 regional malls and 11 specialty retail assets, respectively. The decreases in revenues and operating expenses reported in Other are primarily due to the transfer of service and management functions to QIC and Madison International relating to the properties sold under the signed definitive agreements.
Development
The decrease in revenue and operating expenses related to other is primarily due to a reduction of development fees and reduced overhead.
Corporate
The decrease in operating expenses is primarily due to reduced overhead. The equity in earnings (loss) reported in the Corporate segment relates to interest expense, partially offset by interest income, on our equity method investments, as all interest expense and interest income is reported in the Corporate segment. The increase in equity in earnings (loss) reported in Other primarily relates to reduced interest expense as a result of the recent disposals of the various assets sold under the signed definitive agreements with QIC and Madison International to dispose of 10 regional malls and 11 specialty retail assets, respectively.

45

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, 2018 compared with the nine months ended September 30, 2017. 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 nine months ended September 30, 2017
$
339,087

$
216,498

$
43,803

$
599,388

$
86,604

$
685,992

Increase (decrease) due to:
 
 
 
 
 
 
Comparable portfolio
456

8,776

(284
)
8,948

—

8,948

Non-comparable properties (1) 
(449
)
19,982

776

20,309

(2,151
)
18,158

Change in consolidation method due to change in control
8,445

(20,939
)
—

(12,494
)
—

(12,494
)
Recently disposed properties
(4,035
)
(7,008
)
(19,529
)
(30,572
)
—

(30,572
)
Land sales
—

—

—

—

(21,949
)
(21,949
)
Other
1,271

(1,860
)
(9,731
)
(10,320
)
(2,275
)
(12,595
)
Revenues for the nine months ended September 30, 2018
$
344,775

$
215,449

$
15,035

$
575,259

$
60,229

$
635,488

 
Office
Apartments
Retail
Total Operations
Development
Corporate
Total
Operating expenses for the nine months ended September 30, 2017
$
128,618

$
96,968

$
30,882

$
256,468

$
71,236

$
60,102

$
387,806

Increase (decrease) due to:
 
 
 
 
 
 
 
Comparable portfolio
11

6,469

339

6,819

—

—

6,819

Non-comparable properties (1) 
799

8,092

219

9,110

(4,001
)
—

5,109

Change in consolidation method due to change in control
2,663

(5,670
)
—

(3,007
)
—

—

(3,007
)
Recently disposed properties
(3,540
)
(3,949
)
(9,765
)
(17,254
)
—

—

(17,254
)
Land cost of sales
—

—

—

—

(15,053
)
—

(15,053
)
Organizational transformation and termination benefits
—

—

—

—

—

15,167

15,167

Development, management, corporate and other
1,063

1,623

(9,011
)
(6,325
)
(11,778
)
(10,750
)
(28,853
)
Operating expenses for the nine months ended September 30, 2018
$
129,614

$
103,533

$
12,664

$
245,811

$
40,404

$
64,519

$
350,734

 
Office
Apartments
Retail
Total Operations
Development
Corporate
Total
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

Increase (decrease) due to:
 
 
 
 
 
 
 
Comparable portfolio
(1,517
)
707

(18
)
(828
)
—

—

(828
)
Non-comparable properties (1)
—

341

—

341

493

—

834

Recently disposed equity method properties
(2,035
)
(6,952
)
(15,863
)
(24,850
)
29

—

(24,821
)
Change in consolidation method due to change in control
(1,787
)
4,456

—

2,669

—

—

2,669

Land
—

—

—

—

869

—

869

Other
4

867

(1,350
)
(479
)
(5,278
)
15,238

9,481

Equity in earnings (loss) for the nine months ended September 30, 2018
$
7,102

$
30,172

$
45,934

$
83,208

$
(13,660
)
$
(57,510
)
$
12,038



46

(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, 2018 vs. 2017
Property
Quarter Opened
Revenues
Operating Expenses
Equity in Earnings (Loss)
Operations
 
 
 
 
Office:
 
 
 
 
Property recently stabilized:
 
 
 
 
1812 Ashland Ave
Q2-16
$
3,507

$
1,250

$
—

Non-comparable property:
 
 
 
 
26 Landsdowne Street (i)
(3,956
)
(451
)
—

Total Office
$
(449
)
$
799

$
—

 
 
 
 
 
Apartments:
 
 
 
 
Properties recently stabilized:
 
 
 
 
Blossom Plaza
Q2-16
$
4,445

$
2,533

$
—

Kapolei Lofts (ii)
Q3-15/Q3-16
7,784

2,527

—

The Bixby
Q3-16/Q2-17
—

—

341

The Yards - Arris
Q1-16
7,753

3,032

—

Total Apartments
$
19,982

$
8,092

$
341

 
 
 
 
 
Retail:
 
 
 
 
Property recently stabilized:
 
 
 
 
The Yards - District Winery
Q3-17
$
776

$
219

$
—

Total Retail
$
776

$
219

$
—

 
 
 
 
 
Development
 
 
 
 
Properties in lease-up:
 
 
 
 
535 Carlton
Q1-17/Q2-17
$
—

$
—

$
663

461 Dean Street (iii)
Q3-16/Q1-17
4

(2,979
)
—

38 Sixth Ave
Q3-17/Q4-17
—

—

(463
)
Ardan
Q2-18/Q3-18
(14
)
929

—

Axis
Q3-17/Q2-18
1,924

2,440

—

Eliot on 4th
Q1-17/Q3-17
5,954

1,144

—

Mint Town Center
Q4-17/Q2-18
942

1,366

—

NorthxNorthwest
Q4-16/Q1-17
3,013

143

—

The Bridge at Cornell Tech
Q2-17
6,065

1,461

—

VYV
Q3-17
—

—

(1,303
)
Non-comparable property:
 
 
 
 
Ballston Quarter
—

—

1,428

Transfers from development (2017) to operations (2018):
 
 
 
 
1812 Ashland Ave
Q2-16
(3,665
)
(1,163
)
—

Blossom Plaza
Q2-16
(3,439
)
(2,447
)
—

Kapolei Lofts (ii)
Q3-15/Q3-16
(6,564
)
(2,002
)
—

The Bixby
Q3-16/Q2-17
—

—

168

The Yards - Arris
Q1-16
(6,242
)
(2,891
)
—

The Yards - District Winery
Q3-17
(129
)
(2
)
—

Total Development
$
(2,151
)
$
(4,001
)
$
493

(i)
26 Landsdowne Street, an office building in Cambridge, Massachusetts, is classified as a non-comparable property due to its redevelopment, which began in Q3 2017. The redevelopment is complete with occupancy starting in Q3-2018.
(ii)
Kapolei Lofts, an apartment community in Kapolei, Hawaii, was sold in Q3-2018.
(iii) 461 Dean Street, an apartment community in Brooklyn, New York, was sold in Q1-2018.

47

Office
The increases in revenues and operating expenses along with the decrease in equity in earnings related to the change in consolidation method are due to the change from equity method to full consolidation method of accounting for the three life science office properties at University Park at MIT (Q3-2018) upon the acquisition of our partner’s equity interests in those properties. 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 Post Office Plaza, an office building in Cleveland, Ohio (Q3-2017). The decrease in equity in earnings related to recent disposals is primarily due to a non-recurring land sale adjacent to our suburban Cleveland, Ohio office properties (Q3-2017).
Apartments
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 deconsolidation of Bayside Village, an apartment community in San Francisco, California (Q1-2018). The decreases in revenues and operating expenses along with the decrease in equity in earnings related to recent disposals are primarily due to the sale of 500 Sterling Place, an apartment community in Brooklyn, New York (Q3-2017), and our FAH apartment communities and related service and management companies during 2017 and 2018.
Retail
The decreases in revenues and operating expenses related to recent disposals are primarily due to the deed in lieu transaction on Boulevard Mall, a regional mall in Amherst, New York (Q4-2017), and the sales of The Shops at Northfield Stapleton, a regional mall in Denver, Colorado (Q4-2017), and Brooklyn Commons, a specialty retail center in Brooklyn, New York (Q2-2018). The decreases in equity in earnings related to recent disposals are primarily due to the various assets sold under the signed definitive agreements with QIC and Madison International to dispose of 10 regional malls and 11 specialty retail assets, respectively. The decreases in revenues and operating expenses reported in Other are primarily due to the transfer of service and management functions to QIC and Madison International relating to the properties sold under the signed definitive agreements.
Development
The decrease in equity in earnings for other is primarily related to the $6,218,000 write-off of abandoned development projects of unconsolidated entities in the first quarter of 2018. The decrease in revenue and operating expenses related to other is primarily due to a reduction of development fees and reduced overhead.
Corporate
The decrease in operating expenses is primarily due to the ongoing Corporate overhead reductions and the recognition of the remaining deferred gain related to the Terminal Tower sale (our previous Corporate headquarters). At the time of the Terminal Tower sale, we maintained continuing involvement through a lease and were required to defer a portion of the gain on sale. The deferred gain was being amortized over the 36 month lease term (with extensions). Upon vacating the premises early, the remaining deferred gain was recorded as contra rent expense in accordance with GAAP.
The fluctuation 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,
 
2018
2017
 
2018
2017
 
(in thousands)
Termination benefits
$
4,095

$
1,764

 
$
12,320

$
10,501

Strategic alternative costs
4,194

—

 
16,868

—

Shareholder activism costs
—

869

 
—

3,520

Total
$
8,289

$
2,633

 
$
29,188

$
14,021

For the periods presented, 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. We record a severance liability during the period in which costs are estimable and notification has been communicated to affected employees.
Strategic alternative costs consist primarily of professional fees (legal and investment banking advisors) incurred related to the Board of Directors’ process to consider a broad range of alternatives to enhance stockholder value, including, but not limited to, an accelerated and enhanced operating plan, structural alternatives for our assets, and potential merger, acquisition or sale transactions. If the Merger is consummated, we expect to incur additional third party strategic alternative costs, some of which may be material.
Shareholder activism costs are comprised of advisory, legal and other professional fees associated with activism matters.

48

The equity in earnings (loss) reported in the Corporate segment relates to interest expense on our equity method investments, partially offset by interest income, as all interest expense and interest income is reported in the Corporate segment. The increase in equity in earnings (loss) in other primarily relates to reduced interest expense as a result of the recent disposals of the various assets sold under the signed definitive agreements with QIC and Madison International to dispose of 10 regional malls and 11 specialty retail assets, respectively.

Depreciation and Amortization
Depreciation and amortization expense was $60,925,000 and $170,652,000 for the three and nine months ended September 30, 2018, respectively, and $60,194,000 and $189,496,000 for the three and nine months ended September 30, 2017, respectively. The net increase for the three months ended September 30, 2018 is primarily attributable to the acquisition of our partner’s 50% interest in 300 Massachusetts Ave, 350 Massachusetts Ave, and 38 Sidney Street, three life science office properties at University Park at MIT, and 49% of our partner's equity interest in DKLB BKLN, an apartment community in Brooklyn, New York, as well as new property openings in 2017 and 2018. These increases were partially offset by the 2018 change from full consolidation to the equity method of accounting for Bayside Village, an apartment community in San Francisco, California, the 2017 deed-in-lieu transaction at Boulevard Mall in Amherst, New York, accelerated depreciation in 2017 at 26 Landsdowne Street, an office building in Cambridge, Massachusetts, which is undergoing redevelopment, and the disposition of our full or partial interest in rental properties in 2017 and 2018. The net decrease for the nine months ended September 30, 2018 is primarily attributable to the reasons described above with particular emphasis on the Bayside Village deconsolidation as it occurred during the first quarter of 2018 as well as 2017 write-offs of tenant improvements upon tenants vacating space early at MIT 45/75 Sidney Street, an office building in Cambridge, Massachusetts, and New York Times, an office building in Manhattan, New York.
Interest and Other Income
Interest and other income was $13,296,000 and $34,773,000 for the three and nine months ended September 30, 2018, respectively, and $20,361,000 and $40,529,000 for the three and nine months ended September 30, 2017, respectively. The net decrease for the three and nine months ended September 30, 2018 compared with the three and nine months ended September 30, 2017 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 partially offset by increased interest income recognition on notes receivable related to QIC (Regional Mall dispositions).
Gain on Change in Control of Interests
See Note N – Gain on Change in Control of Interests in the Notes to Consolidated Financial Statements in Item 1 of this Form 10‑Q for detailed information.
Interest Expense
The following table presents interest expense for the three months ended September 30, 2018 compared with the three months ended September 30, 2017 and nine months ended September 30, 2018 compared with the nine months ended September 30, 2017. All amounts are presented in thousands.
 
Three Months Ended
Nine Months Ended
Interest expense for the three and nine months ended September 30, 2017
$
31,597

$
88,473

Increase (decrease) due to:
 
 
Comparable operating portfolio
(1,538
)
(4,024
)
Non-comparable operating portfolio
2,404

8,121

Change in consolidation method due to change in control
1,306

339

Recently disposed properties
(1,595
)
(5,625
)
Capitalized interest
(220
)
(11
)
Mark-to-market adjustments on non-designated swaps
(1,140
)
(1,922
)
Corporate recourse debt
56

1,190

Other
12

308

Interest expense for the three and nine months ended September 30, 2018
$
30,882

$
86,849


49

The decrease in interest expense for the comparable portfolio is primarily due to the paydown of nonrecourse mortgage notes for Eleven MetroTech Center, an office building in Brooklyn, New York (Q4-2017), American Cigar Lofts, Consolidated-Carolina Lofts and Lucky Strike Lofts, consolidated apartment communities in Richmond, Virginia (Q2-2018), and Glen Forest Office Park, an office building in Richmond, Virginia (Q3-2018). The increase in interest expense related to the change in consolidation method is due to the change from equity method to full consolidation method of accounting for the three life science office properties at University Park at MIT (Q3-2018) upon the acquisition of our partner’s equity interests in those properties partially offset by the change from full consolidation to equity method accounting at Bayside Village, an apartment community in San Francisco, California (Q1-2018). The decrease in interest expense related to recently disposed properties is primarily due to the deed in lieu transaction at Boulevard Mall, a regional mall in Amherst, New York (Q4-2017), and the sales of Post Office Plaza, an office building in Cleveland, Ohio (Q3-2017), 500 Sterling Place, an apartment community in Brooklyn, New York (Q3-2017), and Brooklyn Commons, a specialty retail center in Brooklyn, New York (Q2-2018).
Amortization of Mortgage Procurement Costs
Amortization of mortgage procurement costs was $1,366,000 and $3,966,000 for the three and nine months ended September 30, 2018, respectively, and $1,338,000 and $4,067,000 for the three and nine months ended September 30, 2017, respectively.
Loss on Extinguishment of Debt
See Note O – Loss on Extinguishment of Debt 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 P – 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.
Net Gain on Disposition of Rental Properties, Net of Tax
See Note R – Net Gain (Loss) on Disposition of Rental Properties, Net of Tax in the Notes to Consolidated Financial Statements in Item 1 of this Form 10‑Q for detailed information.
Subsequent Event
See Note U - Subsequent Event 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, 2018 was $447,173,000 versus $5,454,000 for the three months ended September 30, 2017. 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 and Acquisitions - $374,357,000
•
$219,666,000 related to the 2018 gains on change in control of interest from the acquisition of our partner’s 50% interest in three life science office properties at University Park at MIT and 49% of our partner's equity interest in DKLB BKLN, an apartment community in Brooklyn, New York;
•
$174,144,000 related to increased gains on disposition of rental properties and unconsolidated investments in 2018 compared to 2017;
•
$(16,782,000) related to a combined fluctuation in revenues and operating expenses at properties in which we disposed of our interests during 2018 and 2017; and
•
$(2,671,000) related to decreased land sales in 2018 compared to 2017, primarily at our Stapleton project.
Financing Transactions - $7,600,000
•
$9,659,000 primarily related to decreases in interest expense on nonrecourse mortgage debt due to the property sales in 2017 and 2018 and our ongoing deleveraging strategy, partially offset by increases at properties opened in 2017 and 2018 and the acquisition of our partner’s 50% ownership in three life science office buildings at University Park at MIT;
•
$(3,192,000) related to an increase in interest expense in 2018 compared with 2017 due to decreased capitalized interest on projects under construction and development as we decreased our construction pipeline; and

50

•
$1,133,000 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 - $451,000
•
($8,973,000) 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 decreased interest income recognition on the Nets note receivable which was paid in full in April 2018, partially offset by increased interest income recognition on notes receivable related to QIC (Regional Mall dispositions);
•
$7,595,000 related to decreased development, management, corporate and other expenses due primarily to the transfer of service and management functions to QIC and Madison International relating to the properties sold under the signed definitive agreements and reduced overhead as a result of our recent reorganization;
•
($5,656,000) related to increased organizational transformation and termination benefits in 2018 compared to 2017;
•
$3,595,000 related to a combined fluctuation in revenues and operating expenses for properties in our comparable operating portfolio;
•
$2,941,000 related to a combined fluctuation in revenues and operating expenses at properties in which we recently acquired our partners’ interest; and
•
$949,000 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, 2018.
Non-Cash Transactions - $62,086,000
•
$54,888,000 related to impairments of real estate in 2017;
•
$6,019,000 related to a decrease in depreciation and amortization expense in 2018 compared with 2017 primarily due to properties sold in 2017 and 2018, the 2017 deed-in-lieu transaction at Boulevard Mall, and accelerated depreciation in 2017 at 26 Landsdowne Street, an office building in Cambridge, Massachusetts, which is undergoing redevelopment, partially offset by increases from properties in which we recently acquired our partners’ interest; and
•
$1,179,000 related to decreased write-offs of abandoned development projects and demolition costs included in equity in earnings in 2018 compared to 2017.
Income Taxes
•
($3,043,000) due to increased income tax expense.
Net earnings attributable to Forest City Realty Trust, Inc. for the nine months ended September 30, 2018 was $715,432,000 versus $103,124,000 for the nine months ended September 30, 2017. 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 and Acquisitions - $499,756,000
•
$337,377,000 related to the 2018 gains on change of control in interest related to the deconsolidation of Bayside Village, an apartment community in San Francisco, California, and the acquisition of our partner’s 50% interest in three life science office properties at University Park at MIT and 49% of our partner's equity interest in DKLB BKLN;
•
$214,717,000 related to increased gains on disposition of rental properties and unconsolidated investments in 2018 compared to 2017;
•
$(52,520,000) related to a combined fluctuation in revenues and operating expenses at properties in which we disposed of our interests during 2018 and 2017;
•
$6,625,000 related to an increased net gain on disposition of development project in 2018 compared to 2017; and
•
$(6,443,000) related to decreased land sales in 2018 compared to 2017, primarily at our Stapleton project.
Financing Transactions - $18,763,000
•
$21,118,000 primarily related to decreases in interest expense on nonrecourse mortgage debt due to property sales in 2017 and 2018 and our ongoing deleveraging strategy, partially offset by increases at properties opened in 2017 and 2018;
•
$(5,267,000) related to an increase in interest expense in 2018 compared with 2017 due to decreased capitalized interest on projects under construction and development as we decreased our construction pipeline;
•
$1,939,000 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

51

•
$973,000 related primarily to a loss on extinguishment of debt primarily at Illinois Science and Technology Park, office buildings in Skokie, Illinois that were sold during the first quarter of 2017, offset by loss on extinguishment of debt recorded related to several refinancings in 2018.
Operations - $11,248,000
•
$17,176,000 related to decreased development, management, corporate and other expenses primarily due to reduced overhead as a result of our recent reorganization and the recognition of the remaining deferred gain related to the Terminal Tower sale (our previous Corporate headquarters) upon our early vacating of the premises and the transfer of service and management functions to QIC and Madison International relating to the properties sold under the signed definitive agreements;
•
$(15,167,000) related to increased organizational transformation and termination benefits in 2018 compared to 2017;
•
$8,870,000 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, 2018;
•
($6,966,000) related to decreased interest and other income 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 decreased interest income recognition on the Nets note receivable, which was paid in full in April 2018, partially offset by increased interest income recognition on notes receivable related to QIC (Regional Mall dispositions);
•
$4,372,000 related to a combined fluctuation in revenues and operating expenses for properties in our comparable operating portfolio; and
•
$2,963,000 related to a combined fluctuation in revenues and operating expenses at properties in which we recently acquired our partners’ interest.
Non-Cash Transactions - $82,253,000
•
$54,888,000 related to impairments of real estate in 2017;
•
$29,140,000 related to a decrease in depreciation and amortization expense in 2018 compared with 2017 primarily due to the write-off of tenant improvements in 2017 at two office buildings, accelerated depreciation in 2017 at two properties undergoing redevelopment, the 2017 deed-in-lieu transaction at Boulevard Mall, and the disposition of rental properties in 2018 and 2017, partially offset by recently opened properties and properties in which we recently acquired our partners’ interests;
•
$(2,760,000) related to increased write-offs of abandoned development projects and demolition costs in 2018 compared to 2017; and
•
$985,000 related to decreased amortization of mortgage procurement costs due to property sales in 2017 and 2018, partially offset by increases at properties opened in 2017 and 2018.
Income Taxes
•
$288,000 due to decreased income tax expense.


52

Projects Under Construction
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
 
 
 
 
 
Projects Under Construction
 
 
 
 
 
 
 
 
 
 
 
Apartments:
 
 
 
 
 
 
 
 
 
 
 
 
Ballston Quarter Residential (d)
Arlington, VA
Q4-18/Q1-19
51
%
U
$
173.6

$
0.0

$
129.2

406

 
53,000

 
 
Aster Conservatory Green North (e)
Denver, CO
Q1-19
0
%
C
60.7

27.1

0.0

256

 
—

 
 
The Yards - The Guild (e)
Washington, D.C.
Q1-19
0
%
C
94.9

72.7

0.0

191

 
6,000

 
 
Capper 769
Washington, D.C.
Q1-19
25
%
U
72.2

0.0

46.8

179

 
—

 
 
The Yards - L2 (e)
Washington, D.C.
Q1-20
0
%
C
134.5

52.0

0.0

264

 
14,000

 
 
VYV East Tower
Jersey City, NJ
Q4-20
50
%
U
228.8

0.0

43.8

432

 
19,000

 
 
 
 
 
 
 
$
764.7

$
151.8

$
219.8

1,728

 
92,000

 
 
Retail:
 
 
 
 
 
 
 
 
 
 
 
 
Ballston Quarter Redevelopment
Arlington, VA
Q4-18
51
%
U
$
115.6

$
0.0

$
103.5

—

 
307,000

 
72
%
Total Projects Under Construction 
$
880.3

$
151.8

$
323.3

1,728

 
399,000

 
 

Property Openings
September 30, 2018
 
 
Opening
Legal
Consolidated (C)
Cost at
No. of
 
 
 
Lease %
 
Location
Date
Ownership %
Unconsolidated (U)
Completion (a)
Units
 
GLA
 
(c)
 
 
 
 
 
(in millions)
 
 
 
 
 
2018 Property Openings
 
 
 
 
 
 
 
 
 
 
Apartments
 
 
 
 
 
 
 
 
 
 
Mint Town Center
Denver, CO
Q4-17/Q3-18
88
%
C
$
94.8

399

 
7,000

 
36
%
Arizona State Retirement System Joint Venture:
 
 
 
 
 
 
 
 
 
Ardan
Dallas, TX
Q2-18/Q4-18 (f)
30
%
C
121.8

389

 
4,250

 
16
%
Axis
Los Angeles, CA
Q3-17/Q2-18
30
%
C
141.7

391

 
15,000

 
56
%
Total Property Openings
$
358.3

1,179

 
26,250

 
 

(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 25, 2018.
(d)
The amenity retail component is expected to open Q4-18. As of October 25, 2018, the lease commitment related to this was 30%.
(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, which gets eliminated in consolidation, to the owner. As a result, the Company determined it was the primary beneficiary of this variable interest entity and has consolidated the project. The Company has an exclusive option to purchase the constructed asset for an amount approximating cost at completion.
(f)
Opened October 2018.

53

FINANCIAL CONDITION AND LIQUIDITY
Market Conditions
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 multifamily 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.
Source of Funds
Our principal sources of funds are cash provided by operations including land sales, our revolving credit facility, our term loan facility, 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.
Retail Portfolio Disposition
During 2017, we 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. Due to an anticipated deed-in-lieu transaction, Shops at Northern Boulevard in Queens, New York, was removed from the specialty retail asset agreement with Madison during the three months ended March 31, 2018, resulting in the disposition of 11 specialty retail assets to Madison International.
We have begun and expect to redeploy the remaining equity from the Madison specialty retail assets and the four remaining regional malls into apartment and office assets that align with our focus on core markets and urban, mixed-use place-making projects. We plan to give strong consideration to buying out our partner’s share of core assets as a method of equity redeployment as we understand the operations of the underlying asset and the reduction of joint venture partners will help simplify the business.

54

The following table summarizes completed sales of regional mall assets to QIC:
Quarter
Property
Cash Proceeds
Note Receivable
Nonrecourse Mortgage Debt Assumed by Buyer
2018
 
(in thousands)
Q1
Antelope Valley Mall
$
6,943

$
28,310

$
42,682

Q1
Mall at Robinson
9,656

23,619

35,320

Q1
Shops at Wiregrass
28,271

—

41,006

Q1
Victoria Gardens - Bass Pro Shops
29,333

—

14,706

 
Total Q1
$
74,203

$
51,929

$
133,714

Q2
Westchester’s Ridge Hill
10,468

61,136

155,040

 
Total 2018
$
84,671

$
113,065

$
288,754

 
 

 
 
 
 
 
 
 
2017
 
 
 
 
Q4
Shops at Northfield Stapleton
$
50,019

$
36,935

$
—

Q4
South Bay Galleria
58,530

—

45,670

 
Total 2017
$
108,549

$
36,935

$
45,670

Total regional mall sales to QIC
$
193,220

$
150,000

$
334,424

The remaining four regional mall assets (Short Pump Town Center, Galleria at Sunset, Promenade at Temecula and Victoria Gardens) are expected to close in a tax deferred manner as we secure replacement assets.
For the Madison International transaction, we have closed on the conversion of substantially all of our common ownership interest to preferred ownership interest in the 11 specialty retail assets.
On April 25, 2018, our jointly owned specialty retail joint venture with Madison International, acquired a 50% ownership interest in three life science office buildings (“acquired assets”) located at University Park at MIT in Cambridge, Massachusetts, for a purchase price of approximately $302,000,000. Prior to this acquisition, we owned the remaining 50% ownership interest in the acquired assets and accounted for this investment on the equity method of accounting. Subsequent to the acquisition, we continue to own the remaining 50% ownership interests in the acquired assets and continue to account for this investment on the equity method of accounting as the Madison International joint venture retains the same rights as the previous partner was entitled to. The acquisition was funded primarily through a capital contribution into the joint venture from Madison International. On July 24, 2018, we exchanged our preferred ownership interests in nine of the specialty retail assets owned by the joint venture for the acquired assets in a non-cash transaction. Following this exchange, we own approximately 100% of the acquired assets and fully consolidate the properties.
On June 27, 2018, our jointly owned specialty retail joint venture with Madison International, acquired our partner’s 49% ownership interest in DKLB BKLN, a 365-unit apartment community located in Brooklyn, New York, for a purchase price of approximately $93,500,000. Prior to this acquisition, we owned the remaining 51% ownership interest in the acquired asset and accounted for this investment on the equity method of accounting. Subsequent to the acquisition, we continue to own the remaining 51% ownership interest in the acquired asset and continue to account for this investment on the equity method of accounting as the Madison International joint venture retains the same rights as the previous partner was entitled to. The acquisition was funded primarily through capital contributions into the joint venture by us and Madison International. On September 25, 2018, we exchanged our preferred ownership interests in certain of the specialty retail assets owned by the joint venture for the acquired asset in a non-cash transaction. Following this exchange, we own 100% of the acquired asset and fully consolidate the property.
On September 24, 2018, our jointly owned specialty retail joint venture with Madison International, acquired our partner’s 75% ownership interest in 3700M, a 381-unit apartment community located in Dallas, Texas, for a purchase price of approximately $78,375,000. Prior to this acquisition, we owned the remaining 25% ownership interest in the acquired asset and accounted for this investment on the equity method of accounting. Subsequent to the acquisition, we continue to own the remaining 25% ownership interest in the acquired asset and continue to account for this investment on the equity method of accounting as the Madison International joint venture retains the same rights of which the previous partner was entitled. The acquisition was funded primarily through a capital contribution into the joint venture by Madison International. We expect to exchange our preferred ownership interest in the last remaining specialty retail asset owned by the joint venture for the acquired asset in a non-cash transaction during the three months ended December 31, 2018. Following this anticipated exchange, we will own 100% of the acquired asset and expect to fully consolidate the property. In accordance with accounting guidance, we will record the asset received at its fair value (based upon the income approach using current rents and market cap rates and discount rates) and expect to record a gain on change in control, to the extent such fair value exceeds the carrying value of its prior equity interest, during the three months ended December 31, 2018.

55

Based on the executed transaction agreements, the economics of the potential retail transactions reflect an average cap rate of approximately five percent on 2016 net operating income of approximately $103,000,000 and total debt of approximately $902,000,000. 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, and the Shops at Northern Boulevard specialty retail asset in anticipation of a deed-in-lieu transaction with the lender. However, there can be no assurance that the remaining transactions will be consummated on the terms described above, or at all. In addition, there can be no assurance that the remaining transactions, if consummated, could be executed in a tax deferred manner.
In connection with our sale of Short Pump Town Center, a regional mall in Richmond Virginia, to QIC, we have an agreement with a third partner, which currently owns 33% of the regional mall. In accordance with this agreement, the partner may put its entire ownership interest to us, requiring us to purchase its 33% ownership interest for approximately $192,517,000 based upon pricing agreed to in connection with the QIC definitive sales agreement. The partner exercised this put right on October 15, 2018, requiring us to close on the purchase by December 31, 2018, with an available extension to March 31, 2019.
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 facility and senior notes, our ongoing quarterly payments of common stock dividends, repurchases of common stock 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. Our unencumbered asset pool generated NOI of $31,168,000 during the three months ended September 30, 2018. We believe this change in financing strategy is consistent with our deleveraging efforts and provides us greater financial flexibility.
Cash generated by operating activities, 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 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 cash on hand or net proceeds from property sales, equity joint ventures, borrowings on our revolving credit facility or term loan facility or future debt or equity financing.
Pacific Park Brooklyn
On June 30, 2014, we entered into a joint venture with Greenland Atlantic Yards, LLC (“Greenland”), a subsidiary of Shanghai-based Greenland Holding Group Company Limited, to develop Pacific Park Brooklyn, a 22 acre mixed-use project in Brooklyn, New York. Under the joint venture, Greenland acquired 70% of the project and will co-develop the project with us, along with sharing in the entire project costs going forward in proportion to ownership interests. During 2014, we received $208,275,000 of cash, net of transaction costs, related to the transaction. The joint venture will execute on the remaining development rights, including the infrastructure and vertical construction of the apartment units, but excludes Barclays Center and 461 Dean Street apartment community. Consistent with the approved master plan, the joint venture will develop the remaining portion of Phase I and all of Phase II of the project, including the permanent rail yard. The remaining portion of Phase I that will be developed by the joint venture is comprised of seven buildings totaling approximately 3.1 million square feet. Phase II consists of seven buildings totaling approximately 3.3 million square feet.
On June 27, 2014, the City of New York and State of New York entities revised certain project requirements of Pacific Park Brooklyn with the goal of accelerating the construction of affordable housing. Among the requirements, affordable units are required to constitute 35% of all units for which construction has commenced until 1,050 affordable units have been started, after which the percentage drops to 25%. Failure to meet this requirement will prevent the joint venture from seeking new building permits, as well as give the State of New York the right to seek injunctive relief. Also, temporary certificates of occupancy (“TCOs”) for a total of 2,250 affordable housing units are required to be issued by May 31, 2025 or a $2,000 per unit per month penalty will be imposed for those affordable units which have not received TCOs by such date, until issued. As of September 30, 2018, 782 affordable units have been completed.

56

In order to construct the seven buildings in Phase II, substantial additional costs for rail yard and infrastructure improvements, including a platform over the new permanent rail yard, will be required. The joint venture is accounted for on the equity method of accounting. The closing of this joint venture allows us to accelerate the delivery of needed affordable housing while significantly reducing our future equity requirements for the full build-out of this project, thereby reducing our development risk and improving our future liquidity.
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 Ave, 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 increases in the 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 our formal strategic plan update, a decision was made to revise the overall project schedule for Pacific Park Brooklyn. Accordingly, we 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, requiring the recording of a $299,300,000 impairment charge to adjust the carrying value to its estimated fair value during the year ended December 31, 2016.
During June 2018, we closed on an agreement with Greenland on the restructuring of the Pacific Park Brooklyn joint venture. The transaction increases Greenland’s ownership interest in the joint venture from 70% to 95% on future construction activity, effective January 15, 2018, and significantly decreases our development risk at the project by reducing our ownership interest and future obligations to fund future construction costs, excluding the permanent rail yard, from 30% to 5%.  Completed or partially completed projects of the joint venture, including 38 Sixth Ave, 550 Vanderbilt, 535 Carlton and the related parking garages, will remain owned by Greenland and us on a 70%/30% basis, respectively.
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 three months ended September 30, 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. As a result, significant cost overruns were incurred to complete the project. Each party has filed lawsuits relating primarily to the project’s delays and associated additional completion costs.
During the three months ended March 31, 2018, we completed the sale of 461 Dean Street. The disposition generated net cash proceeds of $147,193,000.
We intend to continue to vigorously pursue legal action against Skanska USA for damages related to its default of the CM Contract. However, there is no assurance we will be successful in recovering these damages or defending against Skanska USA’s claims.
Nonrecourse Mortgage Financings
As of September 30, 2018, we had $97,824,000 of nonrecourse mortgage financings with scheduled maturities during the year ending December 31, 2018, of which $8,760,000 represents regularly scheduled amortization payments. Subsequent to September 30, 2018, we addressed $10,022,000 of these maturities through closed transactions. 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 year ended December 31, 2017, the $93,096,000 nonrecourse mortgage encumbering Charleston Town Center, an unconsolidated regional mall in Charleston, West Virginia, matured and was transferred to a Special Servicer. We are in the process of working with the Special Servicer to execute a deed-in-lieu transaction. We account for our 50% ownership interest in this investment using the equity method of accounting. At September 30, 2018, we have a negative investment basis of $15,924,000.
As of September 30, 2018, our share of nonrecourse mortgage debt and notes payable, net recorded on our unconsolidated subsidiaries amounted to $1,652,159,000, of which $82,856,000 ($3,395,000 represents scheduled principal payments) is scheduled to mature during the year ending December 31, 2018. Negotiations are ongoing to address the remaining 2018 maturities, but we cannot give assurance that we will obtain these financings on favorable terms or at all.

57

2018 Liquidity Transactions
During the three months ended September 30, 2018, we completed the following transactions, which increased liquidity, reduced debt resulting in lower future fixed charges for interest and strengthened our balance sheet.
•
Completed the sale of Kapolei Lofts, an apartment community in Kapolei, Hawaii. The sale generated net cash proceeds of approximately $26,935,000. In addition, nonrecourse mortgage debt of $93,133,000 was extinguished in connection with the sale;
•
Paid off the maturing $59,189,000 nonrecourse mortgage which encumbered Glen Forest Office Park, an eleven building consolidated office park in Richmond, Virginia, using cash on hand;
•
Settled conversions of $73,188,000 in aggregate principal amount of our 4.25% Convertible Senior Notes due 2018 for 3,560,990 shares of Class A common stock; and
•
Settled conversions of $7,980,000 in aggregate principal amount of our 3.625% Convertible Senior Notes due 2020 (“our 2020 Senior Notes”) for 347,631 shares of Class A common stock.
Subsequent to September 30, 2018, we completed the following liquidity transactions:
•
Completed the sale of the Fidelity Investments office building in Albuquerque, New Mexico. The sale generated net cash proceeds of approximately $33,588,000, which are expected to be redeployed in a Section 1031 exchange. In addition, nonrecourse mortgage debt of $10,022,000 was extinguished in connection with the sale; and
•
Provided notice of our intention to redeem the remaining $32,037,000 aggregate principal amount of our 2020 Senior Notes for cash plus accrued interest up to, but not including, November 21, 2018. Holders have the right to convert their 2020 Senior Notes up to the close of business on November 20, 2018. Through October 26, 2018, holders have converted $7,763,000 aggregate principal amount of the remaining 2020 Senior Notes and received 338,376 shares of Class A common stock in the aggregate.
We continue to explore various options to strengthen our balance sheet and enhance our liquidity, but can give no assurance 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.
Share Repurchase Program
On March 22, 2018, the Board approved an increase in our share repurchase program to an aggregate total of $400,000,000. The shares may be repurchased, in light of prevailing market and economic conditions, to take advantage of investment opportunities at times when the Board and management believe the market price of the common stock does not accurately reflect the underlying value of the Company; to indicate to investors our confidence in our business; to enhance stockholder value; and to reduce dilution. We had not repurchased any shares under this program through July 30, 2018 and pursuant to the Merger Agreement, we are not permitted to repurchase shares of our Class A common stock prior to the completion of the proposed Merger.
Dividends
We operate as a REIT. 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 the quarterly cash dividends declared by the Board of Directors on our common stock (in thousands, except per share data):
Date Declared
Record Date
Payment Date
Amount Per Share
Total Cash Payment
2018
 
 
 
 
May 15, 2018
June 8, 2018
June 22, 2018
$
0.18

$
48,094

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

48,012

 
 
Total
$
0.36

$
96,106

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

$
37,344

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

37,343

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

23,482

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

23,441

 
 
Total
$
0.46

$
121,610

The amount, timing and frequency of future distributions will be 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 distributions in our existing and future debt instruments, our ability to utilize net operating losses to offset, in whole or in part, our distribution requirements, limitations on our ability to fund distributions using cash generated through our TRSs and other factors that our Board of Directors may deem relevant.
Pursuant to the Merger Agreement, we have agreed that we will not pay regular, quarterly distributions to the holders of the Class A common stock prior to the completion of the Merger, except to the extent that dividends and other distributions are necessary for us to maintain our status as a REIT. Any payment of dividends prior to the completion of the Merger will result in a corresponding reduction in the Merger Consideration. There were no dividends declared during the three months ended September 30, 2018.
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, 2018, follows:
 
Requirement
As of
Credit Facility Financial Covenants
Per Agreements
September 30, 2018
Maximum Total Leverage Ratio
≤65%
42.1
%
Maximum Secured Leverage Ratio
≤55%
40.9
%
Maximum Secured Recourse Leverage Ratio
≤15%
0.0
%
Maximum Unsecured Leverage Ratio
≤60%
0.0
%
Minimum Fixed Charge Coverage Ratio
≥1.50x
2.13
x
Minimum Unencumbered Interest Coverage Ratio
≥1.50x
5.50
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
Forest City Realty Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

Cash Flows
Operating Activities
Net cash provided by operating activities was $216,053,000 and $312,285,000 for the nine months ended September 30, 2018 and 2017, respectively. The net decrease in cash provided by operating activities is primarily the result of cash used to purchase land inventory and extinguish accounts payable, accrued expenses and other liabilities, partially offset by changes in operating assets.
Investing Activities
Net cash provided by (used in) investing activities was $206,666,000 and $(294,257,000) for the nine months ended September 30, 2018 and 2017, respectively, and consisted of the following:

 
Nine Months Ended September 30,
 
2018
2017
 
(in thousands)
Capital expenditures:
 
 
Construction and development costs:
 
 
The Yards - L2, an apartment community under construction in Washington, D.C.
(30,432
)
(3,934
)
Ardan, an apartment community in Dallas, Texas
(29,731
)
(29,982
)
The Yards - The Guild, an apartment community under construction in Washington, D.C.
(28,306
)
(18,573
)
Pier 70, a 28-acre waterfront neighborhood in San Francisco, California
(18,909
)
(8,801
)
5M, an apartment community under development in San Francisco, California
(14,606
)
(2,068
)
The Bridge at Cornell Tech, an office building in Roosevelt Island, New York
(13,879
)
(33,424
)
Aster Conservatory Green North, an apartment community under construction in Denver, Colorado
(13,422
)
—

Mint Town Center, an apartment community under construction in Denver, Colorado
(9,333
)
(37,353
)
Axis, an apartment community in Los Angeles, California
(8,684
)
(29,357
)
Eliot on 4th, an apartment community in Washington D.C.
(7,351
)
(29,998
)
461 Dean Street, an apartment community in Brooklyn, New York
—

(11,184
)
Other
(5,629
)
(37,316
)
Total construction and development costs (1)
(180,282
)
(241,990
)
Operating properties:
 
 
Office Segment
(21,816
)
(15,246
)
Apartment Segment
(17,243
)
(19,370
)
Retail Segment
(1,054
)
(475
)
 
(40,113
)
(35,091
)
Tenant improvements:
 
 
Office Segment
(19,591
)
(24,886
)
Retail Segment
(958
)
(2,598
)
 
(20,549
)
(27,484
)
Corporate Segment
(922
)
(2,372
)
Total capital expenditures
$
(241,866
)
$
(306,937
)
Payment of lease procurement costs
(9,509
)
(9,297
)
Increase in notes receivable
(39,140
)
(31,047
)
Payment on note receivable
125,100

—

Proceeds from deconsolidation of a rental property
24,000

—

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

—

Proceeds from disposition of rental properties or interest in development project:
 
 
461 Dean Street
$
147,193

$
—

Brooklyn Commons, proceeds expected to be redeployed in a Section 1031 exchange
31,523

—

Kapolei Lofts
26,935

—

Sale of development opportunity
10,449

—

Illinois Science & Technology Park
—

16,494

Fairmont Cinema in San Jose, California
—

4,387

Other
853

9,302

Total proceeds from disposition of rental properties or interest in development project
$
216,953

$
30,183


60
Forest City Realty Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

Investing Activities (continued)

 
Nine Months Ended September 30,
 
2018
2017
 
(in thousands)
Change in investments in and advances to unconsolidated entities—(contributions to) or distributions from investment:
 
 
Acquisition of partner’s interest:
 
 
300 Massachusetts Ave, 350 Massachusetts Ave and 38 Sidney, life science office buildings located in Cambridge, Massachusetts
$
(40,713
)
$
—

DKLB BKLN, an apartment building in Brooklyn, New York
(23,060
)
—

Dispositions:
 
 
Regional Malls - QIC
84,671

—

Nassau Coliseum
5,934

—

Federally Assisted Housing apartment communities
3,013

56,969

Closing costs related to the disposition of 10 specialty retail assets
(11,061
)
—

Shops at Bruckner Boulevard
—

8,863

Renewable energy facilities
—

3,672

Apartment projects:
 
 
Bayside Village, an apartment community in San Francisco, California, refinancing proceeds
80,896

—

Pacific Park Brooklyn joint venture, primarily release of escrowed funds
17,258

—

VYV, an apartment community under construction in Jersey City, New Jersey, low income housing tax credit proceeds
3,347

—

Pacific Park Brooklyn joint venture, funding of project equity requirements
(23,002
)
(34,071
)
VYV 
(6,687
)
(4,640
)
Cobblestone Court, an apartment community in Painesville, Ohio, refinancing proceeds
—

3,695

Office projects:
 
 
350 Massachusetts Ave, refinancing proceeds
33,096

—

Retail projects:
 
 
Queens Place, a specialty retail center in Queens, New York, refinancing proceeds
13,096

—

Regional retail mall joint venture, primarily reimbursements (funding) for rehabilitation and expansion projects
11,085

(17,879
)
Galleria at Sunset, a regional mall in Henderson, Nevada, to fund partial mortgage paydown
(14,350
)
—

Other
(21,419
)
3,743

Total change in investments in and advances to unconsolidated entities
$
112,104

$
20,352

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

$
(294,257
)

(1)
We capitalized internal costs related to projects under construction and development of $22,058 and $27,356, including compensation related costs of $17,536 and $24,401, for the nine months ended September 30, 2018 and 2017, respectively. Total capitalized internal costs represent approximately 9.12% and 8.91% of total capital expenditures for the nine months ended September 30, 2018 and 2017, respectively.

Financing Activities
Net cash used in financing activities was $(75,597,000) and $(7,251,000) for the nine months ended September 30, 2018 and 2017, respectively. The Company is committed to continued deleveraging of the balance sheet. The significant mortgage activity during the nine months ended September 30, 2018 relates to the payoff of mortgages at Glen Forest Office Park, American Cigar Lofts, Consolidated-Carolina Lofts, Lucky Strike Lofts, Aster Town Center North and Edgeworth Building, offset by increases in mortgages, primarily related to under construction projects. In addition, the non-recourse mortgage debt at Brooklyn Commons of $17,361,000 was extinguished simultaneously at closing of the property disposition, and therefore, is reflected as a non-cash cash flow transaction and not reflected in the Consolidated Statement of Cash Flows. The significant mortgage activity during the nine months ended September 30, 2017 related to the sale of Illinois Science & Technology Park and Post Office Plaza and the related extinguishment 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 a non-cash cash flow transactions and not reflected in the Consolidated Statement of Cash Flows.

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.

61

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 our Form 10-K for the year ended December 31, 2017 and this Form 10-Q and other factors that might cause differences, some of which could be material, include, but are not limited to, the conditions to the completion of the proposed merger transaction may not be satisfied, the parties’ to the proposed merger transaction ability to meet expectations regarding the anticipated timing of the transaction, the occurrence of any event, change or other circumstance that could give rise to the termination of the transaction agreement between the parties to the proposed merger transaction, the effect of the pendency of the proposed merger transaction on business relationships, operating results, stock price and business generally, risks that the proposed merger transaction disrupts current plans and operations and potential difficulties in employee retention as a result of the proposed merger transaction, risks related to diverting management’s attention from ongoing business operations as a result of the proposed merger transaction, the outcome of any legal proceedings that may be instituted related to the proposed merger transaction or the transaction agreement between the parties to the proposed merger transaction, the amount of the costs, fees, expenses and other charges related to the proposed merger transaction, 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 note receivable issued by Onexim in connection with their purchase of our interests in the Barclays Center, 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.

62


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. 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 and caps for applicable fixed rate and variable rate debt in place as of September 30, 2018.
Interest Rate Exposure
The following table summarizes the composition of long-term debt, net:
September 30, 2018
Corporate
Operating
Properties
Development
Projects
Total
 
Total
Weighted
Average Rate
 
 
(dollars in thousands)
 
 
Fixed Rate
$
31,802

$
2,001,105

$
8,574

$
2,041,481

 
4.26
%
Variable Rate
 
 
 
 
 
 
Taxable
333,967

415,655

—

749,622

 
3.95
%
Tax-Exempt
—

647,479

101,196

748,675

 
2.50
%
 
$
365,769

$
3,064,239

$
109,770

$
3,539,778

 
3.82
%
Total gross commitment from lenders
$
151,619

 
 
 
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)
10/01/18 - 12/31/18
$
96,271

1.87%
01/01/19 - 05/08/24
95,874

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)
10/01/18 - 12/31/18
$
69,518

5.89%
01/01/19 - 12/31/19
37,208

6.23%
01/01/20 - 8/15/20
28,400

6.00%
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.

63

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, 2018, a 100 basis point increase in taxable interest rates (including 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 $6,534,000 at September 30, 2018. 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 would increase the annual pre-tax interest cost for the next 12 months of our tax-exempt variable-rate debt by approximately $7,487,000 at September 30, 2018. 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 (1.56% at September 30, 2018) 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, 2018, the aggregate notional amount of TROR designated as fair value hedging instruments is $676,466,000. The underlying TROR borrowings are subject to a fair value adjustment. In addition, we have TROR with notional amounts aggregating $180,321,000 that are not designated as fair value hedging instruments, but are subject to interest rate risk.
We estimate the fair value of our hedging instruments based on interest rate market and bond pricing models. At September 30, 2018 and December 31, 2017, we recorded interest rate caps, swaps and TROR with positive fair values of approximately $5,234,000 and $9,098,000, respectively, in other assets. At September 30, 2018 and December 31, 2017, we recorded interest rate swaps and TROR that had a negative fair value of approximately $12,020,000 and $12,845,000, 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, 2018.
 
Carrying Value
 
Fair Value
 
Fair Value
with 100 bp Increase
in Market Rates
 
(in thousands)
Fixed
$
2,041,481

 
$
1,979,643

 
$
1,875,746

Variable
 
 
 
 
 
Taxable
749,622

 
750,687

 
750,001

Tax-Exempt
748,675

 
746,966

 
747,549

Total Variable
$
1,498,297

 
$
1,497,653

 
$
1,497,550

Total Long-Term Debt
$
3,539,778

 
$
3,477,296

 
$
3,373,296

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


64

Item 3. Quantitative and Qualitative Disclosures About Market Risk (continued)
September 30, 2018
 
Expected Maturity Date
 
 
 
 
 
Year Ending December 31,
 
 
 
 
Long-Term Debt
2018
 
2019
 
2020
 
2021
 
2022
 
Period
Thereafter
Net Unamortized Procurement Costs
Total
Outstanding
 
Fair Market
Value
 
(dollars in thousands)
 
 
Fixed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate debt
$
7,513

 
$
124,239

 
$
132,265

 
$
170,940

 
$
208,477

 
$
1,377,611

$
(11,366
)
$
2,009,679

 
$
1,944,667

Weighted average interest rate
4.78
%
 
4.15
%
 
5.18
%
 
4.68
%
 
4.82
%
 
4.06
%
 
4.27
%
 
 
Convertible senior debt (1) 
—

 
—

 
32,037

 
—

 
—

 
—

(235
)
31,802

 
34,976

Weighted average interest rate
—
%
 
—
%
 
3.63
%
 
—
%
 
—
%
 
—
%
 
3.63
%
 
 
Total Fixed-Rate Debt
7,513

 
124,239

 
164,302

 
170,940

 
208,477

 
1,377,611

(11,601
)
2,041,481

 
1,979,643

Variable:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Variable-rate debt
90,311

 
192,855

 
90,010

 
24,429

 
201

 
23,197

(5,348
)
415,655

 
416,710

Weighted average interest rate (2)
4.74
%
 
4.04
%
 
4.60
%
 
4.65
%
 
4.37
%
 
4.08
%
 
4.35
%
 
 
Tax-exempt
—

 
8,500

 
—

 
—

 
—

 
752,974

(12,799
)
748,675

 
746,966

Weighted average interest rate (2) 
—

 
4.63
%
 
—

 
—

 
—

 
2.47
%
 
2.50
%
 
 
Revolving credit facility (1) 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

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

 
—

 
—

 
335,000

 
—

 
—

(1,033
)
333,967

 
333,977

Weighted average interest rate (2)
—
%
 
—
%
 
—
%
 
3.45
%
 
—
%
 
—
%
 
3.45
%
 
 
Total Variable-Rate Debt
90,311

 
201,355

 
90,010

 
359,429

 
201

 
776,171

(19,180
)
1,498,297

 
1,497,653

Total Long-Term Debt
$
97,824

 
$
325,594

 
$
254,312

 
$
530,369

 
$
208,678

 
$
2,153,782

$
(30,781
)
$
3,539,778

 
$
3,477,296

Weighted average interest rate
4.74
%
 
4.10
%
 
4.78
%
 
3.91
%
 
4.82
%
 
3.51
%
 
3.82
%
 
 
(1)
Represents recourse debt.
(2)
Weighted average interest rate is based on current market rates as of September 30, 2018.



65

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, 2018.
There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2018 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, 2017 (the “2017 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 2017 Annual Report.
The pending Merger may not be completed on the terms or timeline currently contemplated or at all.
The completion of the pending Merger is subject to certain conditions, including (i) approval by our stockholders; (ii) receipt by the Company of an opinion that we will qualify as a REIT under the Code; and (iii) other closing conditions set forth in the Merger Agreement. While it is currently anticipated that the Merger will be completed in the fourth quarter of 2018, there can be no assurance that such conditions will be satisfied in a timely manner or at all, or that an effect, event, development or change will not transpire that could delay or prevent these conditions from being satisfied.
If the pending Merger is completed, our stockholders will forgo the opportunity to benefit from potential future appreciation in the value of the Company.
If the pending Merger is consummated, stockholders will no longer hold interests in the Company and, therefore, will not be entitled to benefit from any potential future appreciation in the value of the Company. In addition, in the absence of the Merger, the Company could have various opportunities to enhance its value, including, but not limited to, entering into a transaction that values the shares of common stock higher than the value provided for in the Merger Agreement. Therefore, if the Merger is completed, stockholders will forgo future appreciation, if any, in the value of the Company and the opportunity to participate in any other potential transactions that may have resulted in a higher price per share than the price to be paid in the Merger.

66

If the pending Merger is not consummated by January 30, 2019 (unless extended by mutual written consent of the parties), either of us or Parent may terminate the Merger Agreement.
We or Parent may terminate the Merger Agreement if the pending Merger has not been consummated by January 30, 2019 (unless extended by mutual written consent of the parties). We or Parent also may terminate the Merger Agreement for certain other reasons, including, among others, (i) if with respect to us, in order to enter into a superior proposal or (ii) with respect to Parent, if our Board of Directors changes its recommendation to our stockholders to approve the Merger.
The pending Merger may not be completed, which may adversely affect our business.
If the pending Merger is not completed for any reason, the trading price of our Class A common stock may decline to the extent that the market price of our Class A common stock reflects positive market assumptions that the Merger will be completed and the related benefits will be realized. We may also be subject to additional risks if the Merger is not completed, including:
•
the requirement in the Merger Agreement that, under certain circumstances, we pay Parent a termination fee of $261 million or an expense reimbursement amount of up to $70 million;
•
incurring substantial costs related to the Merger, such as legal, accounting, financial advisory and integration costs that have already been incurred or will continue to be incurred until completion of the Merger;
•
reputational harm due to the adverse perception of any failure to successfully complete the Merger; and
•
potential disruption to our business and distraction of our workforce and management team to pursue other opportunities that could be beneficial to the Company, in each case without realizing any of the benefits of having the Merger completed.
The pendency of the Merger could adversely affect our business and operations and may result in the departure of key personnel.
The pendency of the Merger could adversely affect our business and operations and may result in the departure of key personnel. In connection with the pending Merger, some of our customers may delay or defer decisions or may end their relationships with us, which could negatively affect our revenues, earnings and cash flows, regardless of whether the Merger is completed. In addition, due to operating restrictions in the Merger Agreement, the Company may be unable, during the pendency of the Merger to pursue strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial. Similarly, our current and prospective employees may experience uncertainty about their future roles with us following the Merger, which may materially adversely affect our ability to attract and retain key personnel during the pendency of the Merger.
The Merger Agreement contains provisions that could discourage a potential competing acquiror of the Company or could result in any competing acquisition proposal being at a lower price than it might otherwise be.
The Merger Agreement contains provisions that, subject to limited exceptions, restrict our ability to solicit, initiate, knowingly encourage or facilitate any acquisition proposal. With respect to any written, bona fide acquisition proposal that we receive, Parent generally has an opportunity to offer to modify the terms of the Merger Agreement in response to such proposal before our Board of Directors may withdraw or modify its recommendation to stockholders in response to such acquisition proposal or terminate the Merger Agreement to enter into a definitive agreement with respect to such acquisition proposal. Upon termination of the Merger Agreement under circumstances relating to an acquisition proposal, we may be required to pay a termination fee of $261 million to Parent.
These provisions could discourage a potential competing acquiror that might have an interest in acquiring all or a significant part of our business from considering or making a competing acquisition proposal, even if the potential competing acquiror was prepared to pay consideration with a higher per share cash value than that market value proposed to be received or realized in the Merger, or might cause a potential competing acquiror to propose to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee and expense reimbursement that may become payable in certain circumstances under the Merger Agreement.
An adverse judgment in a lawsuit challenging the Merger may prevent the Merger from becoming effective or from becoming effective within the expected timeframe.
Our stockholders may file lawsuits challenging the Merger or the other transactions contemplated by the Merger Agreement, which may name us and/or our Board of Directors as defendants. We cannot assure you as to the outcome of such lawsuits, including the amount of costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation of these claims. If plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the Merger on the agreed-upon terms, such an injunction may delay the completion of the Merger in the expected timeframe, or may prevent the Merger from being completed altogether. Whether or not any plaintiff’s claim is successful, this type of litigation may result in significant costs and diverts management’s attention and resources, which could adversely affect the operation of our business.

67

Counterparties to certain of our agreements may have consent rights in connection with the Merger.
We are party to certain agreements that give the counterparties to such agreements certain rights, including consent rights, in connection with “change in control” transactions or otherwise. Under certain of these agreements, the Merger may constitute a “change in control” or otherwise give rise to consent rights and, therefore, the counterparties may assert their rights in connection with the Merger, including in the case of indebtedness, acceleration of amounts due. Any such counterparty may request modifications of its agreements as a condition to granting a waiver or consent under those agreements, and there can be no assurance that such counterparties will not exercise their rights under the agreements, including termination rights where available. In addition, the failure to obtain consent under one agreement may be a default under other agreements and, thereby, trigger rights of the counterparties to such other agreements, including termination rights where available.
Our Board of Directors and executive officers have interests in seeing the pending Merger completed that are different from, or in addition to, those of our other stockholders.
Our Board of Directors and executive officers have interests in the pending Merger that are different from, or in addition to, our other stockholders. Some of these interests include:
•
Effective as of five business days prior to, and conditional upon the occurrence of, the completion of the merger, each holder of an outstanding incentive stock option under our 1994 Stock Plan (the “Stock Plan”), whether vested or unvested, will be entitled to exercise such incentive stock option in full by providing us with a notice of exercise and full payment of the applicable exercise price in accordance with the terms of the Stock Plan and applicable related award agreement;
•
At the completion of the Merger, each outstanding option to purchase shares of our Class A common stock under the Stock Plan that is not exercised as described above, whether vested or unvested, will automatically be cancelled and will entitle the holder of such option to receive (without interest) an amount in cash equal to the product of the number of shares subject to such option immediately prior to the completion of the Merger multiplied by the excess, if any, of the Merger Consideration (as defined in the Merger Agreement) over the exercise price per share of such option, less any applicable taxes. Each option with an exercise price per share that is greater than or equal to the Merger Consideration will be cancelled at the completion of the Merger for no consideration;
•
At the completion of the Merger, any vesting conditions applicable to each outstanding restricted stock award under the Stock Plan (each, a “Restricted Share”) will automatically accelerate in full and be cancelled and will entitle the holder of such Restricted Share to receive (without interest and less any applicable taxes) an amount in cash equal to the number of Restricted Shares multiplied by the Merger Consideration;
•
At the completion of the Merger, each outstanding performance-based stock award under the Stock Plan (each, a “Performance Share”), whether vested or unvested, will automatically vest on a prorated basis (as described in the following sentence) and be cancelled, and each such vested Performance Share will entitle the holder thereof to receive (without interest and less any applicable taxes) an amount in cash equal to the total number of shares subject to such Performance Share based on the higher of target performance and the actual level of performance through the completion of the Merger, as reasonably determined in good faith by the Compensation Committee of the Board of Directors, multiplied by the Merger Consideration. The Performance Shares will vest on a prorated basis as follows: one-third of Performance Shares granted in 2018 will vest, two-thirds of Performance Shares granted in 2017 will vest and 100% of Performance Shares granted in 2016 will vest, and in each case, any portion of the award that does not vest will be forfeited without consideration; and
•
At the completion of the Merger, each long-term incentive cash award, whether vested or unvested, will automatically vest on a prorated basis (as described in the following sentence) and be cancelled, and each such vested long-term incentive cash award will entitle the holder thereof to receive (without interest and less any applicable taxes) an amount in cash equal to the higher of target performance and the actual level of performance for such long-term incentive cash award through the completion of the Merger, as reasonably determined in good faith by the Compensation Committee of our Board. The long-term incentive cash awards will vest on a prorated basis as follows: one-third of the long-term incentive cash awards granted in 2018 will vest, two-thirds of the long-term incentive cash awards granted in 2017 will vest and 100% of the long-term incentive cash awards granted in 2016 will vest, and in each case, any portion of the award that does not vest will be forfeited without consideration.



68

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, 2018
 
 
 
 
 
 
 
Common Stock Repurchase Program (1) 
—

 
$
—

 
—

 
$
400,000,000

Employee Transactions (2) 
9,595

 
$
23.25

 
—

 
 
August 1 through August 31, 2018
 
 
 
 
 
 
 
Common Stock Repurchase Program (1) 
—

 
$
—

 
—

 
$
400,000,000

Employee Transactions (2) 
147

 
$
25.05

 
—

 
 
September 1 through September 30, 2018
 
 
 
 
 
 
 
Common Stock Repurchase Program (1) 
—

 
$
—

 
—

 
$
400,000,000

Employee Transactions (2) 
19,743

 
$
25.12

 
—

 
 
Total
 
 
 
 
 
 
 
Share Repurchase Program (1)
—

 
$
—

 
—

 
$
400,000,000

Employee Transactions (2) 
29,485

 
$
24.51

 
—

 
 
(1)
On March 22, 2018, our Board of Directors approved a $400,000,000 share repurchase program. The repurchase program authorizes us to repurchase shares of our Class A common stock on the open market or otherwise in amounts and at such times and prices as the Board of Directors and authorized officers shall determine. The repurchase program has no set expiration date. We had not repurchased any shares under this program through July 30, 2018 and pursuant to the Merger Agreement, we are not permitted to repurchase shares of our Class A common stock prior to the completion of the proposed Merger.
(2)
Class A common stock repurchased to satisfy the minimum tax withholding requirements relating to restricted stock vesting.

69

Item 6. Exhibits
Exhibit
Number
 
Description of Document
 
 
 
2.1
-
 
 
 
+10.1
-
 
 
 
+10.2
-
 
 
 
+10.3
-
 
 
 
+10.4
-
 
 
 
*31.1
-
 
 
 
*31.2
-
 
 
 
**32.1
-
 
 
 
*101
-
The following financial information from Forest City Realty Trust, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited); (ii) Consolidated Statements of Operations (unaudited); (iii) Consolidated Statements of Comprehensive Income (unaudited); (iv) Consolidated Statements of Equity (unaudited); (v) Consolidated Statements of Cash Flows (unaudited); and (vi) Notes to Consolidated Financial Statements (unaudited).

#
Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Forest City Realty Trust, Inc. hereby undertakes to furnish supplementally copies of any of the omitted schedules upon request by the SEC.

+
Management contract or compensatory arrangement.
*
Filed herewith.
**
Furnished herewith.


70

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:
October 30, 2018
 
/s/ ROBERT G. O’BRIEN
 
 
 
Name: Robert G. O’Brien
 
 
 
Title: Executive Vice President and
         Chief Financial Officer
 
 
 
 
Date:
October 30, 2018
 
/s/ CHARLES D. OBERT
 
 
 
Name: Charles D. Obert
 
 
 
Title: Executive Vice President, Chief Accounting Officer and Corporate Controller

71

Forest City Realty Trust, Inc. Reports