Wednesday, September 09, 2009

Forest City reports better results, but continued losses, including losses on the Nets

Forest City Enterprises (FCE) is doing somewhat better than last year, but the company and analysts remain cautious, as losses in general and losses on the Nets continue, albeit with FCE absorbing a somewhat lower percentage of the hit than last year.

In a press release issued yesterday, FCE, the parent of Brooklyn developer Forest City Ratner, announced that second-quarter EBDT (earnings before depreciation, amortization and deferred taxes) was up an 8.1 percent compared with last year, while year-to-date EBDT was up 31.4 percent.

That didn't stop the losses:
The second-quarter net loss attributable to Forest City Enterprises, Inc. was $1.8 million, or $0.01 per share, compared with a net loss of $8.4 million, or $0.08 per share, in the second quarter of 2008. Net loss for the six months ended July 31, 2009, was $32.5 million, or $0.26 per share, compared with $48.8 million, or $0.47 per share for the same period in 2008.

Forest City stock went up 2.47%, to $9.14, a considerable rise from its $3.26 bottom in the past year, but still well below its $40.49 peak over 52 weeks. (A real estate index fund went up 3.22%).

Morningstar has upped its fair value of the stock to $6.50 from $5.50, but still warns that "we believe it will fail to achieve long-term returns in excess of its cost of capital."

Dilution effect

On a per share basis, second-quarter 2009 EBDT was a 22 percent decrease from last year, while year-to-date per share EBDT was up 10.3 percent.

FCE said, "Per-share data... reflect the dilutive effect of approximately 52.3 million new Class A common shares issued during the second quarter of 2009. The losses were spread out as well.

Nets losses slow, but still significant

Revenues were down slightly from last year, but so were costs. FCE said in the press release, "Reduced losses on the Nets provided a pre-tax EBDT increase of $3.0 million."

What does that mean? According to a 10-Q document filed with the SEC:
Our equity investment in The Nets incurred a pre-tax loss of $8,307,000 and $18,988,000 for the three and six months ended July 31, 2009, respectively, representing a decrease in allocated losses of $241,000 and $3,033,000 compared to the same periods in the prior year. Generally accepted accounting principles require us to report losses, including significant non-cash losses resulting from amortization, in excess of our legal ownership of approximately 23%. For the six months ended July 31, 2009 and 2008, we recognized approximately 51% and 57% of the net loss, respectively, because profits and losses are allocated to each member based on an analysis of the respective member’s claim on the net book equity assuming a liquidation at book value at the end of the accounting period without regard to unrealized appreciation (if any) in the fair value of The Nets. For the six months ended July 31, 2009, we recognized a lower share of the net loss than in the prior year because of the distribution priority among members.

Included in the losses for the six months ended July 31, 2009 and 2008 are approximately $10,238,000 and $13,544,000, respectively, of amortization, at our share, of certain assets related to the purchase of the team. The remainder of the losses substantially relate to the operations of the team. Comparable to prior years, the team is expected to operate at a loss in 2009 and will require additional capital from its members to fund the loss.

(Emphases added)

Company caution

FCE CEO Chuck Ratner said in the press release, "While we remain very cautious about the second half of 2009, results for the second quarter and year to date underscore the benefits of the five strategies we adopted in 2008 to address economic and financial-market turmoil: curtailing development, driving out costs, raising capital, proactively managing debt maturities, and taking advantage of opportunities created by market conditions. Together, these strategies focus our team on creating and preserving liquidity - our highest priority as we weather this downturn."

On Friday, FCE will hold a conference call with investment analysts.

In process and AY

Among the projects planned to open this year is the first phase of the East River Plaza retail project in Manhattan. Also in the second half of 2009, FCE will complete the 80 DeKalb residential tower in Fort Greene, with the first units "available for leasing in 2009 and phased lease-up continuing into 2010."

As previously stated, FCE does not plan to begin any more projects this year "[w]ith the exception of the Barclays Arena at Atlantic Yards in Brooklyn, and the fee-development construction of a new City Hall project in Las Vegas."

(DDDB says commencing construction is impossible. Well, it's possible that some aspect of construction on public land, such as the railyard, could begin in December should the eminent domain case be dismissed by then. But the arena site as a whole would not be Forest City Ratner's, it would take much longer to be able to build on property that must be taken by eminent domain.)

Signs of growth

In the last two months, Forest City has announced involvement in two projects: helping the District of Columbia government "with master planning, entitlements, financial feasibility and other services for Poplar Point, a proposed 130-acre, mixed-use riverfront project in Southeast Washington" and serving as "program manager for the mixed-use redevelopment of a 21-block, 100-acre area of San Juan's waterfront district."

Such expansion into "fee-based investment management and third-party services [is] part of Forest City's strategy of taking advantage of opportunities created by current market conditions," the company said.

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