Tuesday, September 14, 2010

Forest City Enterprises conference call: earnings from Nets sale, concern about the cost of capital, and 80 DeKalb satisfaction

In a conference call yesterday with investment analysts, Forest City Enterprises executives said relatively little about Atlantic Yards, but emphasized moderately positive results, careful attention to the cost of financing, and the challenge of refinancing.

Sale of Nets key

They reiterated that the sale of 80 percent of the Nets to Russian billionaire Mikhail Prokhorov was key to improved second quarter results.

Not only did Prokhorov mean a $31.4 million gain and increased earnings "as we recovered a portion of our losses," said Executive VP Bob O'Brien, so did earnings for the Nets improve by $7.7 million, "primarily due to reduced amortization of player contracts compared to 2009."

I think that means that the departure of some high-priced players meant for a smaller payroll.

See the EBDT (Earnings Before Depreciation and Taxes) graphic from this supplementary document. Click on graphic to enlarge.
Liquidity

"Liquidity remains one of our highest priorities, and we continue to look for cost-effective ways to enhance that liquidity," declared Executive VP Bob O'Brien. "As an example, we are currently exploring the opportunity to bring a joint venture partner into our New York retail portfolio in a fashion similar to the structure we used with a health care REIT on our Cambridge Life Sciences portfolio."

He said company executives are frequently asked two basic questions: How will you deal with all your maturing loans and how much equity capital will you need?

"Forest City has successfully extended or refinanced more than $2.5 billion of loan maturities at 100% over the past two years," O'Brien said. "Perhaps more importantly, we had to pay down less than $100 million of principal to accomplish that refinancing. I think that’s a remarkable accomplishment and a testimony to the quality of our portfolio."

"Clearly, even with that success, it’s not possible to close an extension or a refinancing in every case, particularly if the property faces challenges. Nor is it always sensible, or in the company’s long term best interest to do so," he said, describing the loss of the Simi Valley Town Center retail mall in California.

No loans for construction

While the overall lending environment has improved, he said, loans are available pretty much for operating projects only.

However, loans for land deals or for construction loans--with the exception of those supporting apartments, thanks to federal support via Fannie Mae, Freddie Mac, and HUD--"remain almost nonexistent, which will obviously limit new supply," O'Brien said.

“At the end of the day, it’s all about the cost of the capital. And if we can do it at a reasonable, affordable cost, we’ll do so," he said a bit later. "I think the opportunity exists to bring partners into some of our development projects."

"Certainly, the challenge over the past 12 to 24 months has been the price at which it would take to get that equity invested," he added. "And that cost, from our perspective, management’s decision was it was much too expensive at that point in time to bring in. So we brought it into operating assets at a much lower cost to capital.”

The next $2.5 billion of maturities, said CEO Chuck Ratner, will "be done in a stronger market."

The Barclays Center

The document indicates that FCE will pay $240.5 million of the $940.3 million cost of the Barclays Center arena, which will be 670,000 square feet, with 18,000 seats.

Construction of the arena is fully funded, executive said, and 51% of contractually obligated income--the total of which will account for 72% of expected pro forma revenues--is in place.

The Beekman Tower and 80 DeKalb

Asked about the market for the Beekman Tower in Lower Manhattan, Chuck Ratner pointed to the example of 80 DeKalb Avenue in Brooklyn, "a very positive and pleasant surprise."

In his 40-plus years, Ratner said, he hasn't seen a building of that size, 300-400 units, lease up to 90-95% occupancy in nine months "to within 5% of pro forma... I think, maybe an extra month concession to get it leased."

Actually, it was a two-month rent concession, The Real Deal reported in March:
But Finn said rentals in the neighborhood are "absorbing nicely," noting that Citi Habitats has rented 140 of 80 DeKalb's 292 market-rate units, with a helpful incentive in the form of two free months of rent.
The 5/21/09 press release

The press release on the 80 DeKalb topping off, headlined FOREST CITY RATNER TOPS OFF FIRST HFA 80/20 IN BROOKLYN, and released by the New York State Housing Finance Agency (NHSHFA), is notable for the headline stating it will "Feature Affordable and Market-Rate Rentals."

That is not inaccurate, and affordability is the priority of the NHSHFA, but, of course, the majority (292) are market-rate, with 73 subsidized units.
Unique Brooklyn Residential Tower to Feature Affordable and Market-Rate Rentals

NEW YORK -- THURSDAY, MAY 21, 2009: Union workers raised a 9,000-pound bucket of concrete at 80 DeKalb Avenue today, marking completion of the concrete work at the newest addition to Downtown Brooklyn's skyline. Forest City Ratner Chairman & CEO Bruce Ratner, along with more than 300 people including union workers, elected and government officials and civic leaders signed the 4-foot by 5-foot bucket before it was hoisted 400 feet and poured--to signify the topping out of the 335,000 square foot residential tower.

Designed by renowned architect Costas Kondylis, 80 DeKalb is the first residential tower built by Forest City Ratner Companies (FCRC) in Brooklyn. Unlike many of the surrounding residential buildings, which have predominantly brick exteriors, 80 DeKalb is aluminum and glass, giving the tower a luminous quality.

Located on DeKalb Avenue between Hudson Avenue and Rockwell Place, and bordering the BAM Cultural District, the 34-story tower will include 73 affordable rental units along with 292 market-rate apartments, making it the first 80/20 development in Brooklyn financed with bonds issued by the New York State Housing Finance Agency (HFA), part of "nyhomes." HFA selected 80 DeKalb to receive $109.5 million in tax-exempt bonds and $27.5 million in taxable bonds. The lending institutions involved in the transaction were Wachovia Bank, N.A., and Helaba (both co-agents providing the credit enhancement to the $137 million in bonds issued by HFA), as well as the National Electrical Benefit Fund, which provided a $10 million mezzanine loan and $20 million of credit enhancement.

Bruce Ratner, Chairman & CEO of Forest City Ratner said, "We're very excited about 80 DeKalb. It is a beautiful building at a great location that will provide both affordable and market-rate homes. It will be a valuable addition to the neighborhood and to the Brooklyn skyline. Project milestones are always very satisfying, but they are especially fulfilling in challenging economic times. The success of this project points to the ongoing appeal of Brooklyn as a place to live and work."

Brooklyn Borough President Marty Markowitz said, "It's a thrill to see Forest City Ratner, with support from the New York State Housing Finance Agency, top off its first ever residential tower in Brooklyn--a stunning, 'green' addition that will help transform our Downtown Brooklyn skyline and provide 73 guaranteed affordable rental units for the next century. The construction of 80 DeKalb is also providing jobs for union workers and women- and minority-owned businesses, and its completion--even more remarkable in this challenging economy--will send the signal that Brooklyn is still the best place to live, work and raise a family."

Priscilla Almodovar, President and Chief Executive Officer of the New York State Housing Finance Agency, said, "I congratulate Forest City Ratner Companies on 80 DeKalb--this project creates much-needed affordable rental housing, provides construction jobs to stimulate our economy and promotes residential development in downtown Brooklyn. Just as important, 80 DeKalb offers permanent affordability for its 73 below market rate units, ensuring affordable housing for Brooklyn residents for many years to come."

Unlike most 80/20 developments, 80 DeKalb will remain affordable for 99 years. For the initial 35 years, 62 affordable units will be made available for households earning up to 50% of the area median income (AMI) and 11 units for households with incomes up to 40% of AMI. For the remaining years, all of the affordable units will be made available for households earning up to 90% of AMI. The application process for the affordable units--which is being administered by Phipps House--began on May 7th and will continue through July 5th.

As part of FCRC's continuing commitment to work with minority and women- owned businesses, approximately 20% of the $100 million in contracts awarded for 80 DeKalb have gone to MWBE businesses.

With its slender profile and luminous metal and glass fa├žade, 80 Dekalb is a striking addition to the Brooklyn skyline. The tower's unique silhouette, shaped by projecting window bays and terraced setbacks at the top, will add to the diverse architectural character of the neighborhood. The lightness of the tower is contrasted by a solid base punctuated with retail storefronts that will both anchor the building and enliven the street life. The apartments at 80 DeKalb, which will begin occupancy in the fall of this year, have oversized windows that offer panoramic views and abundant light for residents.

The building, designed to achieve LEED Certification, is expected to meet or exceed the sustainable design measures set forth by the U.S. Green Building Council. 80 DeKalb's "green" features include improved indoor air quality through the use of low or no volatile organic compound (VOC) emitting materials; water reduction through the use of low-flow fixtures; and diverting waste from landfills by recycling over 75% of construction waste and using materials with recycled content.

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