Monday, March 30, 2009

Forest City Enterprises announces losses, asserts that AY arena is one of only two new projects to launch in 2009

In another sign that the Atlantic Yards project is crucial to its struggling business, Forest City Enterprises (FCE) today announced in its year-end fiscal results that it would continue to significantly slow development, anticipating that it would commence construction on only two new projects, "the arena at our Atlantic Yards project in Brooklyn, and a fee-based development project in Las Vegas."

However, there are several doubts regarding arena construction, including pending legal cases disregarded by the developer and the availability of financing. While Forest City is indeed closer to starting construction than in previous years, consider that in 2007, for example, FCE CEO Chuck Ratner and other executives asserted that the arena would open in 2009, and New Jersey Nets CEO Brett Yormark has consistently shifted the goalposts.

In fact, in a 10-K document filed today with the Securities and Exchange Commission, the developer acknowledges that 2011 is hardly certain:
The Nets are currently operating at a loss and are projected to continue to operate at a loss at least as long as they remain in New Jersey, which is expected to be until at least 2011, and possibly longer.

Other delays

The 10-K document also acknowledges the potential for continued delays:
Brooklyn Atlantic Yards. We are in the process of developing Brooklyn Atlantic Yards, a long-term $4.0 billion mixed-use project in downtown Brooklyn expected to feature a state of the art sports and entertainment arena for the Nets basketball team, a franchise of the NBA. The acquisition and development of Brooklyn Atlantic Yards has been formally approved by the required state governmental authorities but final documentation of the transactions are subject to the completion of negotiations with local and state governmental authorities, including negotiation of the applicable development documentation and public subsidies. Pre-construction activities have commenced for the potential removal, remediation or other activities to address environmental contamination at, on, under or emanating to or from the land. There is also one lawsuit pending challenging the use of eminent domain which may not be resolved in our favor resulting in Brooklyn Atlantic Yards not being developed at all or not being developed with the features we anticipate. As a result of the foregoing, this project has experienced delays and may continue to experience further delays. There is also the potential for increased costs and delays to the project as a result of (i) increasing construction costs, (ii) scarcity of labor and supplies, (iii) our inability to obtain tax-exempt financing or the availability of financing or public subsidies, or our inability to retain the current land acquisition financing, (iv) our or our partners’ inability or failure to meet required equity contributions, (v) increasing rates for financings, (vi) loss of arena sponsorships and related revenues and (vii) other potential litigation seeking to enjoin or prevent the project or litigation for which there may not be insurance coverage. The development of Brooklyn Atlantic Yards is being done in connection with the proposed move of the Nets to the planned arena. The arena itself (and its plans) along with any movement of the team is subject to approval by the NBA, which we may not receive. If any of the foregoing risks were to occur, we may not be able to develop Brooklyn Atlantic Yards to the extent intended or at all. Even if we are able to continue with the development, we would likely not be able to do so as quickly as originally planned.

The importance of AY

Atlantic Yards has a significant upside for the developer, not only the control of a "great piece of real estate" (in Chuck Ratner's words) but the opportunity to stanch significant losses on the operation of the Nets, $35 million in the past year. A new arena would bring new revenues and also raise the value of the team, which has actually declined since an ownership group led by Forest City Ratner's Bruce Ratner bought the team in 2004.

So Atlantic Yards will be a fight to the finish, as the developer anticipates "continued challenging business conditions in 2009."

The AY overview

The press release states:
The Company's Atlantic Yards project in Brooklyn has had two significant achievements since the end of the fiscal year. The first is the previously mentioned $161.9 million land loan refinancing. The second is a ruling in New York State Appellate Court that upheld a prior State Supreme Court finding that the state met all of its obligations in the public approvals and environmental review process associated with the project. The ruling marks the 22nd consecutive court ruling in favor of the project, with only one material lawsuit still pending.

Is only one material lawsuit still pending? No, there's also an attempt to appeal the case challenging the environmental review. And an appeal in another case, involving renters in two footprint buildings, won't be filed until July; while this may not be a "material lawsuit" to Ratner, it would be somewhat harder to pursue financing with any lawsuit pending.

Earnings and losses

Forest City has decreased revenue:
EBDT (Earnings Before Depreciation, Amortization and Deferred Taxes) for the full year ended January 31, 2009, was $218.9 million, or $2.05 per share, a 17.0 percent decrease on a per-share basis compared with last year's $265.7 million, or $2.47 per share. EBDT for the fourth quarter was $70.5 million, or $0.66 per share, a 22.4 percent decrease on a per-share basis compared with last year's fourth-quarter EBDT of $91.2 million, or $0.85 per share. For an explanation of the variances, see the section titled "Review and Discussion of Results" in this news release.

The net loss for the full year was $112.2 million, or $1.09 per share, compared with net earnings of $52.4 million, or $0.51 per share, in 2007. The net loss for the fourth quarter was $45.1 million, or $0.44 per share, compared with net earnings of $12.6 million, or $0.12 per share.


Cash and credit available

Forest City says it has reserves:
At January 31, 2009, the Company had more than $500 million in cash and credit available, including $181.6 million in cash and $318.6 million of available borrowings on the Company's revolving line of credit.

Given that FCR owes the Metropolitan Transportation Authority $100 million cash for the Vanderbilt Yard, and must spend hundreds of millions of dollars more for an upgraded railyard, the parent company's cash/credit doesn't seem like a huge cushion. Hence the effort to gain indirect subsidies.

The 10-K document acknowledges potential challenges in obtaining financing:
Our high leverage may adversely affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions, development or other general corporate purposes and may make us more vulnerable to a continued downturn in the economy.

Nets losses, and loan

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.

Cost savings

Chuck Ratner noted that, "during the last four years, Forest City has begun construction of more than $3.4 billion in new real estate, including $1.0 billion in 2008," but will cut back significantly this year, though it will continue to complete projects already under construction, as well as to actively pursuing and maintaining entitlements on long-term developments in key markets. Forest City has laid off "approximately 30 percent of our non-property staff."

Refinancings in Brooklyn

And it has "proactively" managed debt maturities, several relating to Brooklyn:
In late January, 2009, the Company secured an extension on the financing for Two MetroTech Center, a 521,000-square-foot office building at the Company's MetroTech Center corporate campus in Brooklyn. In early February, we closed a $161.9 million refinancing from Gramercy Capital Corp. and certain co-lenders on a land loan associated with our Atlantic Yards project in Brooklyn. In mid-March, we announced an extension from JPMorgan Chase, N.A., of a credit facility related to the Nets.

80 DeKalb and Beekman

The press release suggests that the apparent halt in work at the Beekman Tower in Lower Manhattan is not related to a cutting it in half but rather to achieve savings on construction--perhaps renegotiation of contracts with contractors eager for work:
In the residential portfolio, construction continues on 80 Dekalb, a 34-story 80/20 residential tower in Brooklyn, Presidio a 161-unit adaptive re-use apartment community at the foot of the Golden Gate Bridge in San Francisco, and Beekman, a Frank Gehry-designed residential high-rise in lower Manhattan that will have approximately 900 market-rate apartments as well as a pre-K through eighth-grade school, and an ambulatory care center.

In light of economic and market conditions, including falling prices for construction, the Company has initiated a study of costs and timing for Beekman to identify possible options to achieve savings on completion of the project. Work continues at the site and both the school and ambulatory care center will open on time, as scheduled.

3 comments:

  1. The 10-k sec document regarding potential delays is stunning, especially the part about the relocation of the nets to brooklyn still needing nba approval, which ratner "may not receive".

    This suggests that nba commissioner stern is losing patience with ratner and may have privately given him a deadline to begin full construction of the arena. If there is such a deadline, i would love to know what it is.

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  2. Actually, they've said that before, so it's boilerplate--I should've pointed that out.

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  3. Boilerplate or not, this contradicts the widespread myth that ratner had already received final nba approval for the move, or that such approval was a mere formality.

    David Stern has a very long history of changing his mind on things, not the least of which was the suitability of oklahoma city for hosting an nba franchise. A few years before the sonics relocated to o.c., stern stated publicly that o.c. was "not an acceptable location for an nba franchise."

    Funny how "a changing playing field", to use marty markowitz's words, can change a commissioner's mind.

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