Friday, September 06, 2013

Forest City Enterprises reports losses: arena not expected to stabilize until 2016; risks disclosed regarding partial sale of Atlantic Yards

Developer Forest City Enterprises yesterday announced its second-quarter results, with increased FFO (funds from operations and Operating FFO but a $16.3 million net loss, compared with a net loss of $43.7 million in the second quarter of 2012.

The net loss for the six months ended July 31, 2013, was $35.6 million, compared with a net loss of $21.0 million for the same period in 2012.

One reason, not fully unexpected, was the cost of operating the Barclays Center, which has sold tons of tickets but still is not as profitable as expected. (Is that because they signed not-so-profitable deals to get events in the building?)

"While our mature portfolio continues to demonstrate solid fundamentals," CEO David LaRue cited several factors, including "the ongoing ramp up of two major assets, the Barclays Center arena and Westchester's Ridge Hill, which has been slower than originally anticipated. While the arena has received excellent market acceptance and performed well from a revenue standpoint, we do not expect it to achieve stabilization until 2016, as we have stated previously. We anticipate that Ridge Hill will achieve stabilization within that same timeframe, but the current pace of lease-up at the property has not met our expectations. Nonetheless, we remain confident in the outlook for both properties, and we have teams focused on driving results to achieve our targeted returns for both Barclays Center and Ridge Hill."
(Emphasis added)

Still, if they're "driving results," they are surely aiming to increase revenues and decrease costs at the arena. The arrival of the New York Islanders will help solve the first challenge. But lowering costs may involve fewer employees or other flexible spending.

Moving the goalposts

Note that, while Forest City executives stated in March 2013 that they do not expect to achieve stabilization of arena revenues until 2016, given that's when the Islanders arrive, as of March 2012 they were predicting stabilization by 2014, the second year of operation.

Two other factors

LaRue also cited "our strategic decision to reduce our development pipeline as part of building a sustainable capital structure, reducing risk and improving our development ratio," a process that ultimately should lead to improved operating margins.

Finally, LaRue cited "the impact of increased interest expense due to reduced capitalized interest," primarily due to opening "several large development projects, including 8 Spruce Street, Barclays Center and Westchester's Ridge Hill," for which, during construction, the related interest expense was capitalized to the projects. 

Going forward: marketing Pierrepont, other savings

"Even with these near-term challenges, we continue to see solid fundamentals in our operating portfolio," he said, given growth in income and occupancy "across all of our core products."

Net operating income was down in office due to vacancy at One Pierrepont Plaza in Brooklyn," he added. "Excluding that property, Comp NOI from our office portfolio was up modestly. Notably, we are in the process of finalizing new leases for approximately half of the space that was vacated over the past year at Pierrepont, and we are actively marketing the remaining space to prospects.

LaRue cited new bond issues that would saving money, as well as an expanding "our bank revolving credit facility to $500 million, adding a new line bank and receiving increased commitments from two existing line banks."

Also, they've been selling "non-core assets and assets in non-core markets," including:
  • the Sheraton Station Square, a hotel in Pittsburgh
  • the Higbee Building, an office building in Cleveland
  • the Liberty Center complex in Pittsburgh
Marketing Atlantic Yards

The Form 10-Q document Forest City Enterprises filed yesterday with the Securities and Exchange Commission cited significant milestones since the end of the second quarter, including:
• Being selected by Nassau County, New York to renovate the Nassau Coliseum. Plans call for a renovated 13,000 seat arena, a 2,000-seat indoor theater, an outdoor amphitheater, restaurants, an ice-skating rink, a movie theater and retail space;
• Engaging CBRE to market a stake of up to 80% of the remaining development opportunities at the Brooklyn Atlantic Yards project;

That sale is not without risks, according some language in the Form 10-Q:
In addition, we are pursuing joint venture partners for the future development of Brooklyn Atlantic Yards. We are very early in the discussion process and can give no assurance as to whether we can find a joint venture partner for all or any part of the development opportunity at terms acceptable to us. However, if we are successful, it could result in forming joint ventures whereby we grant joint control or lose control of the asset. If that were to occur, we may have to deconsolidate the individual asset and its allocation of the site acquisition costs. Upon deconsolidation, our investment balance in the joint venture would be compared to estimated fair value and recorded at the lesser of fair value or book value. Additionally, evaluation on a quarterly basis for other than temporary impairment of the investment would be required. This could result in future impairments, some of which would likely be significant.

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