FCE anticipates "groundbreaking in the fourth quarter" (could be January); AY mortgage delayed (hard bargain or cash-flow problem?)
Forest City Enterprises (FCE) , parent of Forest City Ratner, today announced third quarter earnings--up 24% from the same period of time last year--and decreased losses--$0.03 per share, compared with $0.19 per share in the third quarter last year.
There were two statements asserting that Atlantic Yards was on track, citing significant milestones, "while challenges remain."
Indeed, there are signs the company still faces cash flow difficulties or, perhaps, is just a hard bargainer. FCE delayed an 11/30/09 payment of $5 million on a $162 million mortgage secured by all land owned in the Atlantic Yards footprint and was granted an extension until December 10, with negotiations continuing about modifying the mortgage. (See highlighted text below.)
A groundbreaking on Atlantic Yards is "anticipated" for the fourth quarter; note that FCE's fiscal year ends January 31.
Should Atlantic Yards not be developed, the company would have to write off $350 million and refund public subsidies already received and incur other costs totaling $230 million--a total of $580 million.
A conference call with investment analysts is scheduled for 11 am Thursday.
From the press release
The Company achieved the following additional milestones either during the third quarter or subsequent to the end of the quarter:
--In late September, Forest City Ratner Companies, the Company's New York-based subsidiary, and Nets Sports and Entertainment signed a letter of intent with an affiliate of Onexim Group, an international private investment fund, to create a strategic partnership for the development of the Atlantic Yards project in Brooklyn, and the Barclays Center arena, the planned home of the NBA's Nets. As part of the agreement, entities to be formed by Onexim Group will invest $200 million and make certain contingent funding commitments to acquire 45 percent of the arena project and 80 percent of the NBA team, and the right to purchase up to 20 percent of the Atlantic Yards Development Company, which will develop the non-arena real estate.
--On November 24, the New York State Court of Appeals issued a key favorable ruling in a lawsuit related to the Company's Atlantic Yards development project in Brooklyn. The suit challenged the State's use of eminent domain related to the project. The court rejected the challenge in a 6-1 ruling, clearing a significant legal hurdle for the project. Subsequently, during the week of December 1, the major bond rating agencies issued investment-grade ratings for $500 million in tax-exempt bonds to finance a portion of the construction of the Barclays Center arena. Both of these events are major positive milestones for the overall project, and while challenges remain, they enable the project to move forward with an anticipated ground-breaking in the fourth quarter.
(Emphasis added)
Warning from the 10-Q
A 10-Q form filed with the Securities and Exchange Commission stated:
Potential Impacts to Our Financial Condition and Liquidity Relating to Brooklyn Atlantic Yards
We are in the process of developing Brooklyn Atlantic Yards (“Atlantic Yards”), which will cost an approximate $4.9 billion over the anticipated construction and development period. This long-term mixed use real estate project in downtown Brooklyn is expected to feature a sports and entertainment arena for the Nets (“Arena”). Due to the nature and magnitude of the project, there is significant development risk as more thoroughly discussed in our “We are Subject to Real Estate Development Risks” risk factor update for Brooklyn Atlantic Yards included in Part II of this Quarterly Report on Form 10-Q (“Risk Factor”).
Significant site acquisition and construction activities have occurred to date but the master closing will not occur until all negotiations with the state and local governmental authorities are completed and agreements finalized including the successful marketing of tax-exempt financing and other sources of funding to support construction of the Arena (“Master Closing”). Master Closing is currently scheduled to occur in late December 2009.
Upon Master Closing and throughout the long-term development of Atlantic Yards, significant private equity will be required from us, our current partners and any future investors to fund infrastructure and construction. During the three-month period ended October 31, 2009, we entered into a letter of intent with an affiliate of Onexim Group, an international private investment firm, to invest $200,000,000 and make certain contingent funding requirements to acquire 45% of the Arena, 80% of the Nets and the rights to purchase up to 20% of the non-Arena portion of the Atlantic Yards development (“LOI”). The LOI requires certain consents and is subject to the satisfaction of various conditions.
While we believe it is probable that the conditions precedent to Master Closing will occur, there can be no assurance they all will be achieved. In addition, there is no assurance that the investment under the LOI will be realized, that our current partners will fund any future equity requirements or that the project will attract any future investors. If any of the foregoing events do not happen, are significantly delayed, or any of the other development risks occur, we may not be able to develop Atlantic Yards to the full scope intended or at all. This may result in a potential impairment or write-off of our investment as well as other potential ramifications as disclosed in the Risk Factor. As of October 31, 2009, we estimate that the maximum at risk for impairment or write-off, if Master Closing does not occur, is approximately $350,000,000 net of prior amortization. In addition, in a worst case scenario, we could be required to refund public subsidies already received and incur other costs together totaling approximately $230,000,000.
Subsequent to October 31, 2009, we have elected to delay a November 30, 2009 scheduled amortization payment of $5,000,000 on our $162,000,000 nonrecourse mortgage secured by all land owned in the Atlantic Yards footprint and were granted an extension until December 10, 2009. We have commenced negotiations with the lender to modify the terms of the mortgage but can give no assurance that these negotiations will be successful. If no agreement is reached under the nonrecourse loan between the parties, we can relinquish the land to the lender in lieu of payment of the mortgage.
(Emphasis added)
More on risks
In the “We are Subject to Real Estate Development Risks” risk factor in our Annual Report on Form 10-K we disclosed risks associated with our Brooklyn Atlantic Yards project. We updated that information as of April 30, 2009 in our Quarterly Report on Form 10-Q. The following further updates that risk factor to provide additional information.
Brooklyn Atlantic Yards. We are in the process of developing Brooklyn Atlantic Yards, which will cost an approximate $4.9 billion over the anticipated construction and development period. This long-term mixed-use project in downtown Brooklyn is expected to feature a state of the art sports and entertainment arena for The Nets basketball team, a member 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 is 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. As a result of prior litigation, this project has experienced delays and may continue to experience further delays.
There is also the potential for increased costs and further delays to the project as a result of (i) increasing construction costs, (ii) scarcity of labor and supplies, (iii) our ability 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 financing, (vi) loss of arena sponsorships and related revenues, (vii) our inability to meet certain agreed upon deadlines for the development of the project and (viii) 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. In addition, as applicable contractual and other deadlines and decision points approach, we could have less time and flexibility to plan and implement our responses to these or other risks to the extent that any of them may actually arise.
If any of the foregoing risks were to occur we may: (i) not be able to develop Brooklyn Atlantic Yards to the extent intended or at all resulting in a potential write-off of our investment, (ii) be required to repay the City and/or State of New York amounts previously advanced under public subsidies, plus penalties if applicable, (iii) be in default of our non-recourse mortgages on the project, and (iv) be required to restore the rail yards that previously existed on the land. Together, costs associated with the risks outlined in (i) through (iv) in this paragraph, are approximately $580 million and could have a significant, material adverse effect on our business, cash flows and results of operations. Even if we are able to continue with the development, or a portion thereof, we would likely not be able to do so as quickly as originally planned, would be likely to incur additional costs and may need to write-off a portion of the development.
Risks Related to Our Business
The ownership, development and management of commercial real estate is exceptionally challenging in the current economic environment and we do not anticipate meaningful improvement in the commercial real estate industry in the near term.
The current economic environment has significantly impacted the real estate industry in which we operate. Unemployment continues to increase and consumer confidence is low, putting downward pressure on retail sales. Commercial and residential tenants are experiencing financial pressure and are placing increasing demands on landlords to provide rent concessions. The financial hardships on some tenants are so severe that they are leaving the market entirely or declaring bankruptcy, creating increased vacancy rates in residential and commercial properties. The tenants with good financial condition are considering offers from the many competing projects in the real estate industry and are waiting for the best possible deal before committing.
The stress currently experienced by the real estate industry is particularly evident in our development projects. Projects that had good demographics and strong retailer interest to support a retail development when we began construction are experiencing leasing difficulty. When the financial markets began experiencing volatility in the second half of 2008 and the economy entered its recession, we experienced a corresponding volatility in retailer interest for our projects. Retailers continue to express interest in the projects, but are reluctant to commit to any new stores in the current economic environment. As a result of this difficult environment, we have delayed anticipated openings, reduced anticipated rents and incurred additional carrying costs, all resulting in an adverse impact on our business.
Until the economy, in general, and the real estate industry in particular, experience sustained improvement, fundamentals for the development and management of real estate will remain weak and we will continue to operate in a difficult environment with no near-term expectation of improvement.
The transaction proposed in our letter of intent with an affiliate of Onexim Group to create a strategic partnership for our Brooklyn Atlantic Yards project may not close, which could subject us to liquidity risks.
The letter of intent that we executed with an affiliate of Onexim Group requires certain consents and is subject to the satisfaction of various conditions. Both parties continue to negotiate reasonably and in good faith to satisfy various conditions of the LOI and execute definitive agreements. However, the transaction proposed in the letter of intent may not close and the strategic partnership for the Brooklyn Atlantic Yards project may not be realized. If the strategic partnership is not formed and the $200 million investment is not received, we could have heightened exposure to the development risks associated with the Brooklyn Atlantic Yards project. See above for a more thorough discussion of the risks associated with the Brooklyn Atlantic Yards project and the impact those risks may pose to us.
In addition, if the transaction proposed by the letter of intent does not close, we could also have heightened exposure to the risks associated with our investment in the Nets. For a more thorough discussion of the risks associated with that investment and the impact those risks may pose to us, please refer to “The Investment in a Professional Sports Franchise Involves Certain Risks and Future Losses Are Expected for The Nets” on page 10 of our Form 10-K for the fiscal year ended January 31, 2009.
Legislative and regulatory actions taken now or in the future could adversely affect our business.
Current economic conditions have resulted in governmental regulatory agencies and political bodies placing increased focus and scrutiny on the financial services industry. This increased scrutiny has resulted in unprecedented programs and actions targeted at restoring stability in the financial markets. There is increasing pressure on the U.S. Congress to finalize a financial regulatory reform plan that would, if enacted, represent a sweeping reform of the current financial services regulation. While we do not operate in the financial services industry, the proposed legislation, as well as other legislation that could be proposed in the future, if enacted, could have an adverse impact on our financial condition and results of operations, perhaps materially, by increasing our costs for financial instruments, such as non-recourse mortgage loans and interest rate swaps, requiring additional cash collateral deposits and further reducing our access to capital.
There were two statements asserting that Atlantic Yards was on track, citing significant milestones, "while challenges remain."
Indeed, there are signs the company still faces cash flow difficulties or, perhaps, is just a hard bargainer. FCE delayed an 11/30/09 payment of $5 million on a $162 million mortgage secured by all land owned in the Atlantic Yards footprint and was granted an extension until December 10, with negotiations continuing about modifying the mortgage. (See highlighted text below.)
A groundbreaking on Atlantic Yards is "anticipated" for the fourth quarter; note that FCE's fiscal year ends January 31.
Should Atlantic Yards not be developed, the company would have to write off $350 million and refund public subsidies already received and incur other costs totaling $230 million--a total of $580 million.
A conference call with investment analysts is scheduled for 11 am Thursday.
From the press release
The Company achieved the following additional milestones either during the third quarter or subsequent to the end of the quarter:
--In late September, Forest City Ratner Companies, the Company's New York-based subsidiary, and Nets Sports and Entertainment signed a letter of intent with an affiliate of Onexim Group, an international private investment fund, to create a strategic partnership for the development of the Atlantic Yards project in Brooklyn, and the Barclays Center arena, the planned home of the NBA's Nets. As part of the agreement, entities to be formed by Onexim Group will invest $200 million and make certain contingent funding commitments to acquire 45 percent of the arena project and 80 percent of the NBA team, and the right to purchase up to 20 percent of the Atlantic Yards Development Company, which will develop the non-arena real estate.
--On November 24, the New York State Court of Appeals issued a key favorable ruling in a lawsuit related to the Company's Atlantic Yards development project in Brooklyn. The suit challenged the State's use of eminent domain related to the project. The court rejected the challenge in a 6-1 ruling, clearing a significant legal hurdle for the project. Subsequently, during the week of December 1, the major bond rating agencies issued investment-grade ratings for $500 million in tax-exempt bonds to finance a portion of the construction of the Barclays Center arena. Both of these events are major positive milestones for the overall project, and while challenges remain, they enable the project to move forward with an anticipated ground-breaking in the fourth quarter.
(Emphasis added)
Warning from the 10-Q
A 10-Q form filed with the Securities and Exchange Commission stated:
Potential Impacts to Our Financial Condition and Liquidity Relating to Brooklyn Atlantic Yards
We are in the process of developing Brooklyn Atlantic Yards (“Atlantic Yards”), which will cost an approximate $4.9 billion over the anticipated construction and development period. This long-term mixed use real estate project in downtown Brooklyn is expected to feature a sports and entertainment arena for the Nets (“Arena”). Due to the nature and magnitude of the project, there is significant development risk as more thoroughly discussed in our “We are Subject to Real Estate Development Risks” risk factor update for Brooklyn Atlantic Yards included in Part II of this Quarterly Report on Form 10-Q (“Risk Factor”).
Significant site acquisition and construction activities have occurred to date but the master closing will not occur until all negotiations with the state and local governmental authorities are completed and agreements finalized including the successful marketing of tax-exempt financing and other sources of funding to support construction of the Arena (“Master Closing”). Master Closing is currently scheduled to occur in late December 2009.
Upon Master Closing and throughout the long-term development of Atlantic Yards, significant private equity will be required from us, our current partners and any future investors to fund infrastructure and construction. During the three-month period ended October 31, 2009, we entered into a letter of intent with an affiliate of Onexim Group, an international private investment firm, to invest $200,000,000 and make certain contingent funding requirements to acquire 45% of the Arena, 80% of the Nets and the rights to purchase up to 20% of the non-Arena portion of the Atlantic Yards development (“LOI”). The LOI requires certain consents and is subject to the satisfaction of various conditions.
While we believe it is probable that the conditions precedent to Master Closing will occur, there can be no assurance they all will be achieved. In addition, there is no assurance that the investment under the LOI will be realized, that our current partners will fund any future equity requirements or that the project will attract any future investors. If any of the foregoing events do not happen, are significantly delayed, or any of the other development risks occur, we may not be able to develop Atlantic Yards to the full scope intended or at all. This may result in a potential impairment or write-off of our investment as well as other potential ramifications as disclosed in the Risk Factor. As of October 31, 2009, we estimate that the maximum at risk for impairment or write-off, if Master Closing does not occur, is approximately $350,000,000 net of prior amortization. In addition, in a worst case scenario, we could be required to refund public subsidies already received and incur other costs together totaling approximately $230,000,000.
Subsequent to October 31, 2009, we have elected to delay a November 30, 2009 scheduled amortization payment of $5,000,000 on our $162,000,000 nonrecourse mortgage secured by all land owned in the Atlantic Yards footprint and were granted an extension until December 10, 2009. We have commenced negotiations with the lender to modify the terms of the mortgage but can give no assurance that these negotiations will be successful. If no agreement is reached under the nonrecourse loan between the parties, we can relinquish the land to the lender in lieu of payment of the mortgage.
(Emphasis added)
More on risks
In the “We are Subject to Real Estate Development Risks” risk factor in our Annual Report on Form 10-K we disclosed risks associated with our Brooklyn Atlantic Yards project. We updated that information as of April 30, 2009 in our Quarterly Report on Form 10-Q. The following further updates that risk factor to provide additional information.
Brooklyn Atlantic Yards. We are in the process of developing Brooklyn Atlantic Yards, which will cost an approximate $4.9 billion over the anticipated construction and development period. This long-term mixed-use project in downtown Brooklyn is expected to feature a state of the art sports and entertainment arena for The Nets basketball team, a member 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 is 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. As a result of prior litigation, this project has experienced delays and may continue to experience further delays.
There is also the potential for increased costs and further delays to the project as a result of (i) increasing construction costs, (ii) scarcity of labor and supplies, (iii) our ability 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 financing, (vi) loss of arena sponsorships and related revenues, (vii) our inability to meet certain agreed upon deadlines for the development of the project and (viii) 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. In addition, as applicable contractual and other deadlines and decision points approach, we could have less time and flexibility to plan and implement our responses to these or other risks to the extent that any of them may actually arise.
If any of the foregoing risks were to occur we may: (i) not be able to develop Brooklyn Atlantic Yards to the extent intended or at all resulting in a potential write-off of our investment, (ii) be required to repay the City and/or State of New York amounts previously advanced under public subsidies, plus penalties if applicable, (iii) be in default of our non-recourse mortgages on the project, and (iv) be required to restore the rail yards that previously existed on the land. Together, costs associated with the risks outlined in (i) through (iv) in this paragraph, are approximately $580 million and could have a significant, material adverse effect on our business, cash flows and results of operations. Even if we are able to continue with the development, or a portion thereof, we would likely not be able to do so as quickly as originally planned, would be likely to incur additional costs and may need to write-off a portion of the development.
Risks Related to Our Business
The ownership, development and management of commercial real estate is exceptionally challenging in the current economic environment and we do not anticipate meaningful improvement in the commercial real estate industry in the near term.
The current economic environment has significantly impacted the real estate industry in which we operate. Unemployment continues to increase and consumer confidence is low, putting downward pressure on retail sales. Commercial and residential tenants are experiencing financial pressure and are placing increasing demands on landlords to provide rent concessions. The financial hardships on some tenants are so severe that they are leaving the market entirely or declaring bankruptcy, creating increased vacancy rates in residential and commercial properties. The tenants with good financial condition are considering offers from the many competing projects in the real estate industry and are waiting for the best possible deal before committing.
The stress currently experienced by the real estate industry is particularly evident in our development projects. Projects that had good demographics and strong retailer interest to support a retail development when we began construction are experiencing leasing difficulty. When the financial markets began experiencing volatility in the second half of 2008 and the economy entered its recession, we experienced a corresponding volatility in retailer interest for our projects. Retailers continue to express interest in the projects, but are reluctant to commit to any new stores in the current economic environment. As a result of this difficult environment, we have delayed anticipated openings, reduced anticipated rents and incurred additional carrying costs, all resulting in an adverse impact on our business.
Until the economy, in general, and the real estate industry in particular, experience sustained improvement, fundamentals for the development and management of real estate will remain weak and we will continue to operate in a difficult environment with no near-term expectation of improvement.
The transaction proposed in our letter of intent with an affiliate of Onexim Group to create a strategic partnership for our Brooklyn Atlantic Yards project may not close, which could subject us to liquidity risks.
The letter of intent that we executed with an affiliate of Onexim Group requires certain consents and is subject to the satisfaction of various conditions. Both parties continue to negotiate reasonably and in good faith to satisfy various conditions of the LOI and execute definitive agreements. However, the transaction proposed in the letter of intent may not close and the strategic partnership for the Brooklyn Atlantic Yards project may not be realized. If the strategic partnership is not formed and the $200 million investment is not received, we could have heightened exposure to the development risks associated with the Brooklyn Atlantic Yards project. See above for a more thorough discussion of the risks associated with the Brooklyn Atlantic Yards project and the impact those risks may pose to us.
In addition, if the transaction proposed by the letter of intent does not close, we could also have heightened exposure to the risks associated with our investment in the Nets. For a more thorough discussion of the risks associated with that investment and the impact those risks may pose to us, please refer to “The Investment in a Professional Sports Franchise Involves Certain Risks and Future Losses Are Expected for The Nets” on page 10 of our Form 10-K for the fiscal year ended January 31, 2009.
Legislative and regulatory actions taken now or in the future could adversely affect our business.
Current economic conditions have resulted in governmental regulatory agencies and political bodies placing increased focus and scrutiny on the financial services industry. This increased scrutiny has resulted in unprecedented programs and actions targeted at restoring stability in the financial markets. There is increasing pressure on the U.S. Congress to finalize a financial regulatory reform plan that would, if enacted, represent a sweeping reform of the current financial services regulation. While we do not operate in the financial services industry, the proposed legislation, as well as other legislation that could be proposed in the future, if enacted, could have an adverse impact on our financial condition and results of operations, perhaps materially, by increasing our costs for financial instruments, such as non-recourse mortgage loans and interest rate swaps, requiring additional cash collateral deposits and further reducing our access to capital.
Two Rent Stabilized tenants live in 624 Pacific Street, and two Rent Stabilized tenants live in 473 Dean Street. And there are other residents living in other buildings. How will groundbreaking occur when the site is still occupied?
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