Wednesday, September 10, 2008

FCE's Chuck Ratner: "this is a time to pull back" (but not AY?)

Chuck Ratner, President and CEO of Forest City Enterprises (FCE), parent of Forest City Ratner, didn't tell investment analysts yesterday anything as arresting as his claim last March that "we still need more" subsidies or his March 2007 acknowledgement that "we are terrible" at predicting when projects "go from idea to reality."

Still, in yesterday's second quarter conference call, Ratner expressed considerable caution about the timing of projects in FCE's "shadow pipeline" (or development pipeline), which includes Atlantic Yards.

So, even though Ratner claimed that the developer was aiming to close the complicated Atlantic Yards bond transaction by the end of the year, his overall tone contrasted with FCR CEO Bruce Ratner’s claim last May that the project is on track, and that “[w]e anticipate finishing all of Atlantic Yards by 2018.” (After all, other signs—such as the absence of renderings of Phase 2—suggest such a finishing date is doubtful.)

Several cautions

Early in the call, at about 3:55, Ratner suggested that FCE has flexibility, citing a large shadow pipeline that promises real opportunity when the time is right and the economy picks back up.

(The quotes come from listening to the webcast; the transcript is available from Seeking Alpha.)

Later, at about 22:10, Ratner returned to the shadow pipeline:
Let me preface this section by saying that, as a company, we’ve always respected the market… a number of our analysts and investors, including some on the call, have observed that, in today’s market, development is a four-letter word. I understand and respect the sentiment. In fact, we’re focusing considerable time and effort on balancing the realities of current conditions with our commitment to continue to grow… We know and have learned well that you can’t time the market, but you must respect the market. We demonstrated that in the early 90s…

Pulling back?

He continued:
To a great degree, our pipeline gives us the ability to pull back on slow projects as markets weaken or, if the outlook improves, to move projects at a faster pace. Clearly, from everything that we see, this is a time to pull back and that’s exactly what we’ve done. So let me tell you about the steps we’re taking, and why these actions give us comfort, that with the adjustments we’ve made, and continue to make, we’re on the right course.

Immediately after saying that "this is a time to pull back," Ratner discussed Atlantic Yards, without predicting a slowdown:
Let me begin with an update on Atlantic Yards in Brooklyn, our largest pipeline project. Overall, the project continues to move forward. During the first half, we received a favorable legal ruling when the U.S. Supreme Court decided not to hear an eminent domain appeal brought by project opponents.

Lawsuits resolved by November?

Ratner continued with some dubious predictions of when legal cases would be resolved:
There are only two material lawsuits remaining, one concerning the project’s environmental impact statement, which will be heard and expected to be decided in the third quarter, and a state court action challenging eminent domain, which we expect to be resolved within the same time frame.

Is he saying the appeal of the case dismissing the environmental review will be decided by the end of October (the third quarter in FCE's fiscal year)? Given that oral argument is September 17, it's unlikely, not to mention the inevitable effort at an appeal, which would further delay resolution.

As for the eminent domain case, I reported that, while the defendants likely will try to get the case dismissed, it likely won’t be heard until January or later.

Financing coming?

Chuck Ratner continued:
We’re working very closely with the city, the state, and the MTA. We continue to make progress on financing for the Barclays arena, including ongoing discussions with the rating agencies concerning the bonds. Our team is working very hard to achieve a closing on the transaction by the end of the year. There are many moving pieces on this project, as you can well imagine, and lots to do, but it is a major focus of our New York team and we’re confident that we’ll be able to make it happen.

Pulling back on existing projects

At about 28:00, Ratner expanded on the company's caution regarding projects ahead of Atlantic Yards:
In our development business, we have said previously we have pulled back on a number of projects, slowing some and eliminating others. As you can see, from the numbers we shared in our press release, even though our overall development pipeline includes 15 projects representing more than $900 million of cost, we are committed to begin construction in the next 12 months on just four projects, representing approximately $250 million at cost of the company’s pro rata share. We believe that’s a very prudent and doable number, with strong individual projects.

A press release quoted Ratner:
"We continue to believe strongly in development as a core strength and primary lever to add value over the long term, but we have pulled back from a number of projects in our pipeline, eliminating some and slowing others. We have raised our risk-adjusted return requirements to ensure that we pursue only those projects with the opportunity to create significant value, even in this volatile environment."

In control of the timing

He added:
Just think about where we are with these major projects and the position it puts us in. And that is the reason we’re so optimistic. We have a tremendous reservoir of opportunities that we have been creating for the better part of the past five to seven years. The Yards in Washington, Waterfront Station, Mesa del Sol, Johns Hopkins, Stapleton, and soon Atlantic Yards. These are all places where we are really just starting to build a great future. To a significant degree, the pacing of that future and those opportunities is within our control. If you look back, for example, at University Park at MIT and MetroTech Center in Brooklyn, there were certainly challenging times for those projects as well. Today, we count them among our most valuable assets.

“Within our control”? The City and State Funding Agreements for Atlantic Yards offer rather flexible deadlines before penalties are levied—6+ years to build the arena, 12+ years for Phase 1—but ESDC officials have said that yet-unfinished documentation would require “commercially reasonable” efforts to move forward.

Note that while Chuck Ratner mentioned six projects, the press release highlighted four, omitting Atlantic Yards and Johns Hopkins.

Are cities tougher?

At about 1:15:15, Rich Moore of RBC Capital asked about the changing environment:
You guys have such close relationships with the cities... What is their view in all of this economic distress: Are they tougher on you guys, are they easier on you guys?...

Chuck Ratner responded:
Y’know, that’s a very, very important question. We don’t know enough yet, I don’t think, because we too have pulled back, to give any real concrete answer. But I can tell you that, in the places where we have these large public-private partnerships, Washington, Denver, New York, elsewhere, we believe we still have very strong and very good relationships, and the partnership is very strong. And every commitment that’s been made has been lived up to, by both our side and the side of the public…

Indeed, at an Assembly oversight hearing July 2, city official Seth Pinsky said that no new requests for funds had been made by Forest City Ratner, but "we all know that we’re operating in a difficult economic and financial environment."

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