Tuesday, December 09, 2008

Forest City suspends dividend, announces major slowdowns, reaffirms commitment to "key projects" (presumably AY)

Facing increased losses and aiming to save what an investment analyst estimated at $30 million a year, Forest City Enterprises announced yesterday that it would suspend its dividend after the December 15 payment and that it was "[s]ignificantly slowing nearly all longer-term development."

However, president and CEO Chuck Ratner, in a press release, indicated that the developer has not formally backed off Atlantic Yards: "We remain committed to projects already under construction and to key, high-profile developments in core markets."

While Forest City Ratner has stalled work at the Metropolitan Transportation Authority's Vanderbilt Yard, spuriously blaming it on litigation, the parent company's announcements yesterday suggested a need to conserve cash flow.

The developer publicly claims that it will open the arena in 2011. (I say 2012 is a likely best-case scenario.) Given the likelihood of 2012, the current stall in work may not delay the arena more than Forest City has internally calculated.

Losses, savings

Forest City reported a third-quarter net loss of 18 cents per share, compared with a net loss of 11 cents per share last year. That loss apparently exceeded expectations; RTTNews reported that three analysts polled by First Call/Thomson Financial expected the company to report a loss of $0.11 per share.

The net loss for the nine months was 65 cents per share, while last year over that period the company earned 38 cents per share.

Forest City also announced that it had cut staff and other overhead costs, thus saving another $30 million a year, with further reductions anticipated.

Some 20 other real estate companies have cut or axed their dividends, analyst Rich Moore told the Plain Dealer.

Long view vs. short view on AY

The decisions suggest a company hunkering down and taking the long view; indeed, Forest City said one tactic going forward would be "[s]electively taking advantage of opportunities created by market dislocations."

And given that the developer's New York affiliate Forest City Ratner has already gained government approvals for Atlantic Yards, it's plausible to believe that Forest City is willing to hold on over the long-term.

"We are terrible, and we’ve been a developer for 50 years, on these big multi-use, public private urban developments, to be able to predict when it will go from idea to reality," Chuck Ratner said in March 2007. "All we know is that if we pick the right place and we’re in with the right people, that over time we’re going to create tremendous value."

On the other hand, the continued losses the company faces owning the New Jersey Nets, as well as the need to build a new arena to spike the team's now-sinking value, has to put pressure on Forest City to move forward.

Optimism about AY

The press release aimed to assure investors about the progress of Atlantic Yards:
During the third quarter and early in the fourth quarter, several important milestones were reached related to the Company's Atlantic Yards project in Brooklyn. In one of the two remaining legal challenges to the project, the New York State Appellate Court in September established an expedited briefing schedule that requires the case to be fully briefed by year-end 2008, with a hearing in the first quarter of 2009. In October, the Internal Revenue Service issued new regulations which confirm that the project is eligible to receive tax-exempt financing. And, in November, Barclays reaffirmed its ongoing commitment to the project as the naming-rights sponsor for the Frank Gehry-designed Barclays Center arena, the future home of the NBA Nets basketball team.


Those are reasons to believe the project ultimately has momentum, even if we don't know whether Barclays reaffirmed its commitment at the same dollar amount and even if one sponsor, financially-troubled Jones Soda, wants to pull out.

Then again, the court schedule was established after the Empire State Development Corporation failed to get the case dismissed. And, as I wrote, delays in building the arena mean it likely would arrive too late to lure free agents like superstar LeBron James.

Investigations by Rep. Dennis Kucinich and Assemblyman Richard Brodsky into questionable aspects of the Yankee Stadium financing could extend into the Atlantic Yards arena. The appeal of a lawsuit challenging the environmental impact statement could cause further delays.

There's been no word on whether the city would make available tax-exempt bonds for the affordable housing. And it's unlikely there's money for the additional direct subsidies the developer apparently has requested.

Betting line on AY

Atlantic Yards obviously would not be built at the timing and scale promised. And much remains in flux.

Still, the state and the developer have to be considered favorites to prevail in court, and there's a lot of incentive to build the arena.

If forced to bet, I'd say the arena, if not the project as a whole, is more likely than not, though its chances have been declining. Then again, there's that Nets official who told Bergen Record columnist Ian O'Connor in October that Bruce Ratner would never raise the money.

Remember, in March, Crain's New York Business estimated that Atlantic Yards had only a 50% chance of being built. Crain's did not separate the arena from the rest of the project, however.

Nets losses

Over the first nine months of the fiscal year, Forest City reported a larger share of losses--$16.8 million pre-tax--for the NBA Nets basketball team compared with the prior year. (Over 12 months, that would be $22.4 million.)

The press release states:
The increased loss from the Nets stems from the Company advancing capital to fund the team's operating losses on behalf of both itself and certain non- funding partners. While these advances receive preferential capital treatment, Forest City reports losses, including significant non-cash losses resulting from amortization, in excess of its 23 percent legal ownership. The overall operating loss for the team is comparable to the prior year.

That's more incentive to get the Brooklyn arena built or at least under construction, whereupon the team's value might increase.

That would give principal owner Bruce Ratner and his ownership group a chance to sell the Nets at a profit. And it might get those mysterious investors from Russia and Dubai to buy a piece of Atlantic Yards.

Indeed, the press release states that "we believe the quality and diversity of our portfolio will create opportunities for selective asset sales and joint ventures as a means of generating incremental liquidity."

Webcast Wednesday

Forest City will hold a conference call and live webcast with investors on Wednesday at 11 a.m. ET "to discuss third-quarter results as well as the suspension of the dividend and other measures being taken to address the current economic environment."

The Plain Dealer pointed out that companies typically hold conference calls only for second- and fourth-quarter earnings reports.

So this one's special.

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