Forest City Enterprises: sale of Nets was crucial to company's bottom line

In a press release issued yesterday, Forest City Enterprises reported that:

• earnings were up
• earnings per share were down, given share dilution
  
• revenues were down slightly
  
• crucial to the bottom line was the sale of the Nets
• more than half of forecast contractually obligated income (e.g., sponsorships) for the arena is under contract
• office space at Atlantic Yards, a main driver of expected new tax revenues, was not even mentioned in the project description
  

From the press release

The company stated:

EBDT

Second-quarter EBDT (earnings before depreciation, amortization and deferred taxes) was $105.6 million, a 10.6 percent increase compared with 2009 second-quarter EBDT of $95.5 million. On a fully diluted, per share basis, second-quarter 2010 EBDT was $0.54, compared with 2009 second-quarter EBDT per share of $0.64. Total EBDT for the six-months ended July 31, 2010, was $176.0 million, or $0.91 per fully diluted share, compared with last year's $137.1 million, or $1.07 per share.

Per-share data for the second quarter and six months reflect the dilutive effect of new Class A common shares issued by the Company during the second quarter of 2009, and the "if-converted" effect of convertible debt and convertible preferred stock issued in 2009 and 2010. For the three months ended July 31, 2010, diluted weighted average shares outstanding were 202.2 million, compared with 148.2 million in the second quarter of 2009. For the six months ended July 31, 2010, diluted weighted average shares outstanding were 199.3 million, compared with 127.7 million for the first six months of 2009.

Net Earnings

Second-quarter net earnings attributable to Forest City Enterprises, Inc. were $122.8 million, or $0.61 per share, compared with a net loss of $1.8 million, or $0.01 per share, in the second quarter of 2009. Net earnings for the six months ended July 31, 2010, were $107.3 million, or $0.54 per share, compared with a net loss of $32.5 million, or $0.26 per share for the same period in 2009. The positive year-over-year net earnings variance was primarily driven by a $125.7 million gain on disposition of rental properties from asset sales and joint ventures, net of tax and noncontrolling interest.

Revenues

Second-quarter 2010 consolidated revenues were $309.2 million compared with $313.7 million last year. First half 2010 revenues were $589.4 million, compared with $623.7 million for the six months ended July 31, 2009.

The sale of the Nets

The press release quoted CEO Chuck Ratner:

"In addition to strong portfolio fundamentals, the dominant driver of our second quarter and year-to-date results was the closing of the sale of an 80 percent interest in the Nets, a key milestone for Forest City, the Barclays Center arena, and the overall Atlantic Yards project in Brooklyn.

Caution on projects

The company remains cautious:

"We continue to respect the market as it relates to new development and project starts. Over the past two years, we've started only two new projects: the long-awaited Barclays Center arena and, most recently, the first building at The Yards in Washington, D.C., financing for which closed early in the third quarter. During that same two-year span, however, we continued to deliver on our pipeline of projects that were already under construction when the financial meltdown began in late 2008. Over that time period, we've completed approximately $800 million of new real estate at our pro-rata share ($650 million at full consolidation) in our core markets. Overall, these high-quality projects have opened well leased and significantly accretive to our results.

Focus on New York

The focus remains on New York, as Ratner said:

"Our current under-construction pipeline consists of four projects in two of our strongest core markets, three in New York and one in Washington, D.C. We have a high level of cost certainty for each of these, and while leasing challenges remain, we believe market fundamentals are improving at the right time to benefit all of these projects. The bottom line is that we've reduced development risk substantially while continuing to create real value."

Arena marketing deals over 50 percent

The company stated:

Barclays Center, the arena at the company's Atlantic Yards project in Brooklyn, is well into the foundation stage of construction. With the closing of Forest City's agreement with interests controlled by Mikhail Prokhorov for the Nets and the arena, together with other in-place financing, construction for the arena is fully funded. In addition, active marketing continues for sponsorships, food and beverage agreements and related revenue opportunities, as well as suite sales and event bookings. To date, approximately 51 percent of forecast contractually obligated income for the arena is under contract. Contractually obligated income, which includes revenue from naming rights, sponsorships, suite licenses, Nets minimum rent, and food concession agreements, accounts for 72 percent of total pro-forma revenues for the arena.

Beekman Tower and Ridge Hill

The company also reported on two other New York projects:

At Beekman, Forest City's luxury apartment high-rise in lower Manhattan, the stainless steel curtain wall enclosing the 76-story, Frank Gehry-designed tower in nearly complete. Interior build-out is progressing on lower floors, and leasing of the building's 904 market-rate units is expected to begin in phases during the first quarter of 2011, while interior build-out continues on upper floors. The rental housing market in New York City continues to be strong and the Manhattan submarket particularly strong, with vacancies currently less than two percent.

Westchester's Ridge Hill, Forest City's mixed-use retail project in Yonkers, New York, continues to be a major focus for the company's leasing teams. At present, the center remains 31 percent leased, with committed tenants including National Amusements, Whole Foods, and Westchester Medical Group as an anchor office tenant. The company is in advanced stages of discussion with several major tenants, including a number of restaurants, and expects to be in a position to announce additional tenants for the center in the near future as these and other negotiations progress to committed leases.

Development summary

The company listed Atlantic Yards at the top of the list of projects under development, but, curiously enough, omitted any mention of the planned office tower, which is delayed for an unspecified time (and would be a major driver of expected new tax revenues):

Below is a summary of our active large scale development projects, which have yet to commence construction, often referred to as our "shadow pipeline" which are crucial to our long-term growth. While we cannot make any assurances on the timing or delivery of these projects, our track record speaks to our ability to bring large, complex, projects to fruition when there is demand and available construction financing. The projects listed below represent pro-rata costs of $554.2 Million ($825.5 Million at full consolidation) of Projects Under Development ("PUD") on our balance sheet and pro-rata mortgage debt of $111.8 Million ($190.7 Million at full consolidation).

Projects Under Development

1) Atlantic Yards - Brooklyn, NY

Atlantic Yards is adjacent to the state-of-the art arena, the Barclays Center, which is designed by the award-winning firms Ellerbe Becket and SHoP Architects and is currently under construction. In addition, Atlantic Yards will feature more than 6,400 units of housing, including over 2,200 affordable units, approximately 250,000 square feet of retail space, and more than 8 acres of landscaped open space.