Forest City Enterprises Narrows 3Q Loss to $41.9 Million on Stronger Residential Leasing

Real estate developer Forest City Enterprises reported a net loss of $41.9 million, or 25 cents per share, in the third quarter ending Oct. 31, down from a loss of $50.6 million, or 33 cents per share, in 2010.

It had third quarter earnings before depreciation, amortization and deferred taxes (EBDT) of $77.5 million, down from $90.7 million in 2010. Revenue in the third quarter was $261.2 million, down from $287 during the same period of 2010.

Leasing difficulties at a Florida mall and disposition of an office building in Cleveland were cited as main reasons for the third quarter net loss.

The decline in earnings was attributed to a $9 million reduction in revenue that would have been generated by properties sold during the quarter, $4.3 million in losses from unexpected vacancies in two Brooklyn office properties, $4 million in write-offs from abandoned development projects and $3.3 million in losses attributed to unleased space at new properties at 8 Spruce Street in Manhattan and Ridge Hill in Westchester, N.Y.

The company's third-quarter results met our expectations as we continue to see solid fundamentals in our core markets and product types, despite ongoing concerns about high unemployment and lingering economic uncertainty, said David LaRue, president and CEO of Forest City, in a statement.

Net operating income from properties declined 1.5 percent in the third quarter. Multifamily housing led the company's portfolio, with net operating income increased 12 percent. Retail income decreased by 1.5 percent, but retail occupancy was 91.2 percent, up from 90.6 percent in Oct. 31, 2010. Year-to-date mall sales increased 7.3 percent from the previous year.

Net operating income from offices properties decreased by 7.6 percent in the third quarter.

Office was down as anticipated due to the timing of lease expirations at two of our Brooklyn office buildings. Notably, a significant percentage of that office space has now been re-leased and will begin contributing to results in future periods, said LaRue.

In June, Forest City announced 570,500 square feet of leases had been signed at its Downtown Brooklyn office complex, known as MetroTech Center. Polytechnic Institute of New York University expanded by 90,000 square feet, the City of New York took an additional 155,000 square feet and the General Services Administration signed a lease for 120,000 square feet, which will house the Internal Revenue Service. Morgan Stanley also renewed a lease for 200,000 square feet, while Five Guys Burgers and Fries and a French-American bistro took retail spaces.

The company's residential occupancy was 94.7 percent on Oct. 31, up from 93.6 percent last year.

Forest City's prominent residential building, the Frank Gehry-designed 8 Spruce Street, has leased 550 of its 903 apartments, or around 61 percent. The undulating steel tower has 525 units occupied and the developer has certificates of occupancy for 689 units, with the upper floor towers yet to come on the market. The top-level penthouses will have asking rents of $40,000, $45,000, and $60,000 per month.

We continue to see solid fundamentals in our core markets and products. These positives in our business and industry overall are in contrast to the slow pace of economic growth and high unemployment, conditions that leads us to remain cautious in our outlook, even as we feel confident in the underlying strength of our business, said LaRue.

Forest City has eight projects currently under construction, with the company's share totaling $1.3 billion of the $1.9 billion in costs.

The developer's biggest project is Barclays Center at Atlantic Yards in Brooklyn, which will have a new basketball stadium for the New Jersey Nets, scheduled to open in September 2012. More than 90 percent of the steel construction has been constructed and the roof installation has begun, Forest City said. The project will also include apartments and retail.

The company also has two residential buildings under construction in Washington D.C., two apartment buildings in Denver and it secured financing in September for the rental conversion of a commercial building in Dallas. Forest City also agreed to develop and manage 2,185 U.S. Air Force family homes in the Southeast, bringing its military housing portfolio to 14,000 homes.

Our primary strategic direction going forward is to focus on our core markets and products, said LaRue. We will also continue to de-risk the business, both by delivering and opening our major pipeline projects, and by working to further improve our balance sheet and overall debt metrics.