Thursday, March 15, 2012

Forest City Enterprises executives talk at property conference: little apparent change in amount of contractually obligated arena revenue

Forest City Enterprises President/CEO David LaRue and Executive VP/CFO Bob O'Brien participated in a roundtable presentation yesterday at the Citi 2012 Global Property CEO Conference in Palm Beach, FL. It was open to listeners on an audio link.

One question raised by their presentation is how much revenue is committed to the Barclays Center arena, built and (in the majority) operated by subsidiary Forest City Ratner. Contractually obligated income will represent 70% of the total revenue of the arena, O'Brien noted. "Of that 70%, we have more than 50% signed and leased today."

Maybe he was just being casual, but the number isn't too impressive. LaRue said in December, “Approximately 56% of forecasted contractually obligated revenue for the arena is currently under contract,” he said. “This is flat with what we reported at the end of the second quarter, but we expect activity to regain momentum once the NBA season starts.”

We should get a more formal update near the end of the month, when Forest City holds a conference call to discuss its annual and fourth-quarter results.

Last September, Mike Ozanian of the Forbes Sports Money blog tweeted, "Nets say they will not have contracts for all contractually obligated revenue when Brooklyn arena opens 9-12. Say will have 'most sold.'"

Other arena questions

LaRue was asked if the Barclays Center picked up a lot of events because Madison Square Garden is under renovation.

He didn't quite answer, but said "our management team is very aggressively pursuing a number of events."

One slightly contentious question was "why didn't you build this for hockey?" The hockey Islanders, whose lease with the Nassau Coliseum, is up in 2015, are talking with the Barclays Center owners, but a good chunk of seats would have to be eliminated to fit a hockey rink, making it the smallest NHL arena.

"The strategy centered around clearly the basketball team we owned at the time," LaRue said, omitting the need to save money. "The design is specifically for basketball, the sight lines, angles of the seating... We did not have a commitment form the Islanders, to say, Boy, I'd like to be there. We knew we wanted to create a venue that was going to be Class A, and the best use for what we had, and that was for basketball."

Corporate transition

LaRue described Forest City as "in a very strong transition phase," given that large assets--like the Barclays Center--are "moving into operations," the firm is focusing on core markets (including New York, which offers 34% of net operating income), and the the firm is lowering its leverage and thus risk.

LaRue was asked if those changes, as well as a change in the board of directors to enact an independent majority, were prompted by his rise, last year to be the first CEO from outside the extended Ratner family. He was diplomatic, saying it was part of discussions within the executive team.

He also was asked about Forest City's relatively unusual dual-class structure, which maintains family control. It was among the changes, including those noted above, requested last October by Third Avenue Management, which owns 13.3% of the Class A shares.

(Class B shares have super-majority voting rights, which means shareholders have 10 votes for every share of Class B stock owned. Class A shareholders have one vote for each share owned. The holders of Class A common stock elect 25% of the Company’s board of directors.)

Predecessor CEO Chuck Ratner had been asked about the structure, and apparently stonewalled: "This is the way it is. This is the way it's been for a long time." Aren't there other ways to stave off takeovers, LaRue was asked.

Again, he was diplomatic. "I'm not going to sit here today and say, If you don't like, don't deal with it," LaRue said. More than 20% of the company is Class B stock, he said, and that means the ownership is "very aligned with the A class." He noted the percentage has declined with the issuance of equity.

"At some point, that A/B structure will be on the table, because maybe that alignment doesn't exist, but we feel, today, it does exist," he said.

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