Wednesday, December 10, 2008

Chuck Ratner repudiates cousin Bruce's AY 2018 pledge, says marketplace determines pace of project

Despite Bruce Ratner’s pledge in May that “[w]e anticipate finishing all of Atlantic Yards by 2018,” his cousin Chuck Ratner, president and CEO of parent Forest City Enterprises today told investment analysts in a conference call that, while Atlantic Yards would take longer than expected, he couldn’t predict a timeline because it would be determined by the market.

(He was assuming that legal challenges would be cleared.)

Chuck Ratner, who though questioned would not estimate the costs of delay, also reaffirmed the developer’s commitment to the project and declared that city and state officials maintained that commitment. Also, unchallenged by the analysts, he flatly stated that the developer had completed all the work it could at the Metropolitan Transportation Authority's Vanderbilt Yard.

Ratner's statements about Atlantic Yards--firm commitment at no announced pace--suggest that Forest City is hedging its bets, hoping to attract new investors and/or additional government subsidies.

Indeed, Ratner predicted a dramatic decline in the dollar value of construction starting next year--one building, with the exception of the Atlantic Yards project.

However, in another example of hedging his bets, he refused to attach a dollar value to Atlantic Yards construction even though, should the $950 million arena proceed as pledged, the value of construction in the developer's portfolio would not decline as dramatically as predicted.

(Update: Here's coverage from Crain's and the Daily News, which pointed out that Ratner's refusal to commit to a timeline was "a reversal from an earlier 2018 target date.")

Somber tone

Still, the overall tone was very somber, as Ratner declared that, though he'd seen many challenging times in 42 years of business, "I must confess, I’ve never seen anything quite like this. We believe conditions will worsen."

Ratner said FCE's near-term priority is maintaining liquidity, hence the decision to suspend the dividend and to hold a rare conference call after the release of third-quarter financial results. (Typically the calls are scheduled after second- and fourth-quarter results.)

The market reacted by sending Forest City's stock down more than 15%, closing at $6.97.

Nearly everything has slowed

Forest City has stalled nearly all new development. “The dynamics of the market have changed dramatically, and with rare exception, the returns available on new development do not justify the required equity commitment," said CFO Bob O'Brien.

Chuck Ratner declared, "The near-term effect of these [moves] will be to transition Forest City from a development company with an operating portfolio to an operating company with a development capacity. We’ve done this before, most recently in the early ‘90s, when we cut development in response to market conditions and ultimately emerged stronger from that downturn.”

"Despite the slow-down, we retain our core development capacity, as well as a reservoir of entitled opportunities where we can re-start additional vertical development, largely on our schedule, with modest carrying costs," he said. "When conditions improve, we will be able to take advantage of these opportunities."

“In fact, we’ve already been approached to fix broken development deals, participate in the purchase of deeply discounted project debt, and review distressed sellers’ situations," Ratner said. "To date, we’ve taken action on very few of these opportunities, and we believe the risk-adjusted returns need to be extraordinary before we’ll consider committing incremental capital.”

What have they closed down? "We had several one off retail opportunities that we elected not to proceed with," Ratner said. "We had next phases on several of our residential projects in Oakland, in Texas, in other places, elected not to proceed… We were ready to start the first building at our project in Washington, we're not going to start for a while. On the big mixed-use ones, as we indicated, we feel good about those. We’re going to sit—we had another building we were ready to do in Boston… if a tenant comes along and we can get a fully leased building… we’ll do it.

Committed to AY

Despite putting "virtually all new development on hold," Ratner declared, "I need to emphasize here again that we remain committed to our projects under construction and we will meet our obligations and maintain our entitlements, including at our large multi-phase, mixed-use projects, such as Stapleton in Denver, Mesa del Sol in Albuquerque, Central Station in Chicago, the Yards and Waterfront Station in Washington, and of course, to Atlantic Yards in Brooklyn, where we continue make progress and remain committed to the project, despite hurdles that we still need to overcome."

Note that the obligations, as so far expressed in the City and State Funding Agreements, give Forest City Ratner, the developer's New York affiliate, a long leash.

AY snags?

Analyst Rich Moore asked, "Looking at Brooklyn, real quick, can you give us a little color on how you guys feel about it. Obviously it’s a big project that comes up a lot… something that eventually could be an issue, could have impairments possibly, could have issues for you guys?"

"There’s lots of ‘coulds,’ OK?" Ratner responded. "There’s lots of things that could happen. We’ve been here before, right? We’re here with Brooklyn, 25 years ago, at MetroTech. We’re here with University Park at MIT. We were here with San Francisco Center for almost a decade. That doesn’t mean everything works out, you saw our project write-offs are up."

(Well, it depends on what "here" means. After all, Forest City Enterprises and Bruce Ratner have never had principal ownership of a basketball team, nor built a sports arena.)

"We’re very committed to this project, we believe very strongly in the market, which continues to be good," he continued. "The apartment market, the rental market, in Brooklyn, for that matter in Manhattan, continues to be strong. Yeah, there’s going to be more hurt and it’s going to go down before it goes up. But we remain very committed to this markets and these products, longer term."

Note that he didn't say anything about the availability of scarce bonds to finance the affordable housing.

Why work is stalled

"Specifically to Atlantic Yards, there were some articles in the newspaper, you probably saw them, that we’ve stopped work," he said. "We stopped work because the work we were doing came to an end. We did what we were supposed to do on the demolition and the railyards. Until we get our lawsuits resolved and some of the hurdles overcome, we appropriately stopped what we were doing."

Wrong.

"We remain committed to this and when we get--and we believe we will--successfully through the last of the litigation in 2009, we’ll evaluate the market at the time and see what our next steps are. But at this point in time, Rich, we don’t see any, uh—we don’t see any, uh, any potential impairment or any issue with our continuing to develop this property. It will take longer than we thought it was going to take, as it already has."

Loan renegotiation

Ratner then described a mortgage loan: "I’ll just preemptively reference one of the maturities in ‘09 that everybody asks about, which is the Gramercy loan… obviously, that’s a loan on the land at Atlantic Yards, it matures in February of 2009, and we’re actively engaged in a negotiation on extending the terms."

(Correction: I previously described the mortgage loan as $40 million; the Wall Street Journal says $153 million.)

The costs of delay

Another analyst asked a question that didn't get answered: "Jumping over to the Atlantic Yards project, thanks for addressing your commitment to it. I’m wondering, how long can you delay that project if you needed to and what’s the extra cost of carrying that?"

"How long can we delay the project?" Ratner responded. "We’ll continue to work with the public parties, they’re still very committed to the project, both the city and the state. And I say we’ve been here before, and I think we can successfully do that until we are prepared to start."

"I can’t tell you today in this market when that will be, but we certainly intend with 2000--when we have these legal problems behind us, we intend to evaluate the market, the financing, and then proceed," he continued. "I don’t know the answer specifically to how long we could delay. It’s not a question of entitlements, it’s a question of the marketplace."

Hedging, hedging on AY

An investment analyst asked when it would be clear that Forest City is spending significantly less on capital projects.

"In each of last four years, we have averaged $800 million of construction starts… much of that funded with mortgage debt, some of that funded with our equity," Ratner said, noting that the company has very little equity left.

"In the coming year, with the exception of Atlantic Yards, which we’ve talked a lot about, which we’re very committed to, and are prepared to deal as soon as we get-—as we resolve our issues with the lawsuits, with the exception of Atlantic Yards, we still do not expect to start more than one building," he said. "That will be the most immediate and dramatic effect of what we have done."

"Atlantic Yards is a big project, but leaving that aside, until we make a decision to do more, that’s where you’re going to see the most dramatic effect of the reduction of our development," he said.

However, a $950 million arena, even over three years, is more than $300 million a year. A first residential building would cost well over $100 million, parceled out over two years.

In other words, Ratner could have said that Forest City Enterprises expects to proceed with nearly half a billion dollars in development next year.

He didn’t.

Atlantic Yards remains very, very murky.

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