Tuesday, December 23, 2008

As analysts call Forest City Enterprises stock worthless, local elected officials get a vague update on Atlantic Yards

Yesterday, Brooklyn elected officials representing areas around the Atlantic Yards footprint met at the offices of the Empire State Development Corporation (ESDC) in Manhattan with ESDC officials and representatives of developer Forest City Ratner (FCR) for a status report on the project.

The meeting came shortly after investment analysts at Morningstar brutalized parent company Forest City Enterprises (FCE) as essentially worthless, in an article headlined Five More Stocks with Zero Value: We'd prefer a pack of gum to these businesses.

The analysis, which was picked up by the Washington Post (though not yet by the New York Times) hints at the pressure facing FCE and FCR officials to get Atlantic Yards going, ideally (from their perspective) with some additional government aid.

Timetable uncertain

I have only secondhand reports from the meeting, but it seems plausible that FCR officials would've said that, while they're committed to Atlantic Yards, they can't be certain of a timeline--not for the project nor the Carlton Avenue bridge reconstruction--but hope for lawsuits to be cleared next year, leading to the start of arena financing.

It's also plausible that FCR officials recognize that they can't get more direct subsidies from the city and state --and there was no indication anyone yesterday was offering aid--but still say they need more help. After all, in April, Chuck Ratner of parent FCE told investment analysts "we still need more" subsidies.

A federal bailout?

Such help could be faster payments from the city and slower payments to the state, as the New York Observer reported last week, but a new savior may have emerged: the federal government.

If FCE and FCR could get a piece of federal stimulus money next year--Developers Ask U.S. for Bailout as Massive Debt Looms, reported the Wall Street Journal yesterday--the backers of Atlantic Yards could get a major lifeline.

The Cleveland Plain Dealer, based in FCE's home town, reported yesterday that a letter sent to Treasury Secretary Henry Paulson pointed to "insufficient systemic capacity to refinance expiring, performing commercial real-estate loans." Among the signers of the letter was the National Association of Real Estate Investment Trusts, which includes FCE.

Such aid could bolster Atlantic Yards. After all, FCR owes $177 million to Gramercy Capital, due in February for a repayment or renegotiation.

If the auto and banking industries get federal aid, other industries could be expected to ask, too. Then again, the AY arena is already slated for federal subsidies of $100+ million, given that the feds take the biggest hit on tax-exempt bonds. And there's already an underutilized arena in Newark.

Crunch time: 2009

Call it a chess game, or holding pattern, but both FCE and FCR have suspended nearly all development activity to preserve cash flow. FCE can't keep absorbing $22.4 million annual losses from the New Jersey Nets without some good news, whether it be additional subsidies or new investors.

It looks like 2009 will be a tough year; New York Times columnist Paul Krugman yesterday predicted "months, perhaps even a year, of economic hell," but said he's "fairly optimistic about 2010."

Given FCR's cash flow problems, further delays from lingering lawsuits--even if FCR and the ESDC are likely to prevail--could be painful. On the other hand, if and when Atlantic Yards goes forward, a decline in construction costs could make the project more feasible than it previously seemed.

Major uncertainty

Indeed, Morningstar offered comfort to both bears and bulls. Regarding FCE, it warned:
From the Analyst Report: "At nearly 83%, Forest City's debt/total gross PP&E [property, plant & equipment] is much higher than peers'. With EBITDA/interest [Earnings Before Interest, Taxes, Depreciation and Amortization/interest] expense expected to dip below 1 times during the next three years, Forest City could face severe financial distress, since it may need to refinance debt at ever-increasing interest rates while operating cash flow declines."

At the same time, analysts allowed for major uncertainty:
The point is that even $0 fair value calls are far from a sure thing. All five of the stocks we highlight below carry our very high fair value uncertainty rating. Companies currently flirting with bankruptcy generally have a high degree of financial and/or operating leverage. While that has pushed them to the edge of a cliff in the current downturn, conditions could improve in a way we don't expect, drastically changing the fortunes of these companies.

Stock falls, rebounds

If everyone believed FCE was worthless, there might have been a complete selloff yesterday, as investors unloaded a sinking stock any cost.

In reality, however, FCE stock went down 4.4%, to $5.85 and, as the chart shows, had a recovery in the late afternoon.

That may have been related to the press release, issued at 4:10 p.m., that Forest City Announces Major Milestones for Mesa del Sol Project, a 12,900-acre, mixed-use project in Albuquerque, N.M.

One "major milestone" was a December 5 agreement with Sandia National Laboratories "to partner on research, development and demonstration of energy technologies;" the other was a December 10 ribbon-cutting ceremony for phase one of a new, 210,000-square-foot office building. (How many phases does an office building have?)

The lesson for AY

If the market can move (apparently) after those relatively small announcements, imagine how FCE stock might move if lawsuits regarding Atlantic Yards are cleared and Goldman Sachs goes forward with arena financing?

So, if Forest City Ratner seems to be fighting hard to maintain Atlantic Yards, it may be because the parent company itself is at stake.

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