Saturday, October 11, 2008

Forest City's tanking stock price; an impact on AY?

Most people who have money in the stock market are taking a hit, so it's no surprise that Forest City Enterprises (FCE), parent company of Atlantic Yards developer Forest City Ratner, is also suffering big-time.

Still, its decline is pretty dramatic: it closed yesterday at $19.79, near the low point of its 52-week range: $18.84 - $60.36. (Five-year chart at right, from October 2003, two months before the project was announced.)

AY impact?

What does that mean to the company? Well, a month ago, even before the market tanked, President and CEO Chuck Ratner told investment analysts, "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."

While FCE has already "pulled back" on the Atlantic Yards towers, it wants to break ground on the arena as soon as possible--and waiting has its costs, in terms of carrying costs for the property and, most importantly, the losses suffered by the New Jersey Nets.

Assuming legal challenges are overcome (and that's not a given), the developer sure would build the Atlantic Yards arena if tax-exempt financing becomes available. Ditto with the first two towers, assuming tax-exempt housing bonds become available.

Yes, everything's delayed--the best-case scenario for the arena is most likely 2012, not 2011, as I wrote in this week's Brooklyn Downtown Star. And the Nets can't really "over-deliver," as No Land Grab's Lumi Rolley pointed out.

Still, I take issue with claims (from the Brooklyn Paper and DDDB) that the project is "shaky." The developer might be hurting, and the project way delayed, but that still wouldn't stop the project--it just means Forest City Ratner might build the arena and then go at its own pace.

Crunch time coming?

At some point, however, the team's losses, if coupled with delays in getting tax-exempt bonds, may cause some rethinking.

I'm hardly privy to all the factors that go into decisionmaking, but consider some numbers. FCE's net earnings were $52.4 million in the year ending 1/31/08, in contrast with $177.2 million in the year ending 1/31/07. That was a good year: net earnings were $83.5 million in the year ending 1/31/06, $85.2 million in the year ending 1/31/05, and $42.7 million in the year ending 1/31/04.

They undoubtedly will go down.

Meanwhile, as Sports Business Journal reported 7/7/08, the New Jersey Nets reported a quarterly operating loss of $7.2 million for the three months ended April 30--more than double for the same period last year. Forest City Enterprises is responsible for about one-third of those losses, so consider that a $10 million a year loss to absorb.

The New York Times 4/11/06 reported that Bruce Ratner had been trying since May 2005 to find new equity partners to contribute at least $60 million.

I don't know if such partners were found. Still, at some point, the losses must be weighing on the owners, including those in the ownership group outside of FCE and Bruce Ratner.

Financing success

Even in this market, some things will get built. Keep in mind that two weeks ago, FCE closed on $250 million in construction financing for the initial phase of its Waterfront Station project in Southwest Washington, D.C., which will include office, residential and retail components. The site is adjacent to the Waterfront/Southeastern University MetroRail station.

The financing includes the project's first two buildings, totaling 628,000 square feet of office and ground-level retail space--about the size of the first two housing towers planned for Atlantic Yards, after the arena.

Unlike with the unscheduled B1 office tower at Atlantic Yards, the office component in the DC project is fully leased--nice deal if you can get it--to the District of Columbia for various governmental offices.

1 comment:

  1. Stock prices never have too much of an impact on a project's financing, unless one can make the case that the price reflects investors' opinion on the project, rather than their worries about the business' outlook in general. As far as I can tell, the cash equity that FCR will need to contribute to the financing is fairly small.

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