Tuesday, December 10, 2013

Forest City warns of $250M-$350M "impairment" on Atlantic Yards; investors/analysts dismayed

Forest City Enterprises, the Cleveland-based parent of Brooklyn-based developer Forest City Ratner, dropped some alarming news in its third-quarter investment results yesterday: a potential hefty impairment, or lowering of the value of their Atlantic Yards investment.

If a planned deal proceeds with the Shanghai-based, state-owned Greenland Group buying 70% of the remaining Atlantic Yards project, including 14-15 planned towers and infrastructure, a likely change in accounting treatment--part of granting joint control or losing control of the joint venture--would require Forest City's investment to be recorded "at the lesser of fair value or our current carrying cost."

And that likely would result "in a non-cash impairment in the range of $250 million to $350 million... to more closely reflect current market values," the company said in a press release Monday morning.

Factors in that loss include "construction timing and costs, expected future rents and operating expenses from the vertical development, holding periods, cash proceeds at the end of the estimated holding period," according to Forest City's Form 10-Q submitted to the Securities and Exchange Commission.

Investor dismay

The morning announcement prompted calls from investors and analysts "expressing surprise and disappointment at the size of this potential impairment," Forest City Enterprises CEO David LaRue acknowledged during an afternoon earnings conference call.

"Clearly we are disappointed with this possible impairment as well," he said. "It spotlights two of the hard lessons we've learned coming out of the recession. We need to control land rather than own it, prior to being ready to go vertical, and we need a strong capital partner up front for a project of this magnitude."

(In September, discussing plans to market Atlantic Yards, LaRue said Forest City was not aiming to get more than book value for the land.)

LaRue blamed the recession and lawsuits for the delay. Then again, Forest City Ratner also promised a ten-year buildout while knowing that its large projects, including MetroTech in Brooklyn, typically take longer than announced. 

And Forest City Ratner CEO Bruce Ratner, after long claiming a ten-year buildout, said in September 2010 that ten years "was never supposed to be the time we were supposed to build them in.”

Greenland opportunity, market reaction

Nonetheless, LaRue said, the company remains enthusiastic about Atlantic Yards, and believes the Greenland deal--which is still being negotiated and faces government approval--is the best opportunity to accelerate the $5 billion project. Forest City and its minority partners have so far invested equity of approximately $545 million, with total costs of approximately $770 million, including debt, the company said.

Investors frowned: Forest City's Class A shares on the NYSE dipped 2.9 percent, while the market overall rose slightly. In October, after announcement of the Greenland plan, shares jumped more than 5 percent.

"Basically, you take an impairment when the probability of future cash flows dictate it," CFO Bob O'Brien elaborated. "It’s clear that the costs incurred to date, plus the future costs, as we evaluate them with Greenland, result in the range of impairment that we’ve indicated in our filing. It is accounting driven, but it reflects market values..." 

He further cited the "ten years of carry on our existing costs" and rising infrastructure costs.

Update: Wall Street Journal coverage

The Wall Street Journal later reported, in Value of Atlantic Yards Cut Sharply:
For years, both supporters and opponents of the $4.9 billion Atlantic Yards mixed-use development in Brooklyn agreed on one point: They both believed the complex including Barclays Center and thousands of apartments would be a gold mine for developer Forest City Ratner Cos.
Not quite.
The company this week announced the project was now valued at far less than it once projected. Forest City said in a filing with the Securities and Exchange Commission the $500 million it has invested in the planned 16-tower project likely has a value of no more than half that amount.
"Clearly, we are disappointed," said David LaRue chief executive of Forest City Enterprises Inc., the Cleveland-based parent of Forest City Ratner.
Forest City said it plans to take a write-down of $250 million to $350 million on the development, largely because of higher-than-expected costs.
Atlantic Yards timing

One analyst asked LaRue about the time frame for Atlantic Yards. While the Greenland deal has been touted as a way to get the housing built faster, the CEO wouldn't get specific. "We develop to meet demand and in Brooklyn right now, we think there’s a high demand for residential property," he said, citing the B2 modular tower--the first Atlantic Yards residential building and the world's tallest modular building--that's starting to go vertical. 

Neither B2, built in partnership with the Arizona State Retirement System, nor the Barclays Center arena, operated in partnership with Mikhail Prokhorov's Onexim Group, are part of the proposed Greenland deal.

Greenland funds for infrastructure

Funds from Greenland, LaRue said, would help Forest City build the permanent railyard to service Long Island Rail Road trains that's a prerequisite for building a platform over the Metropolitan Transportation Authority's Vanderbilt Yard. 

And that platform is needed for vertical development of six towers between Pacific Street and Atlantic Avenue east of the arena.

Affordable housing

Until then, he said, Forest City could build six or seven other buildings, "which have a mix of uses, either 80/20 buildings, or 50/30/20 buildings, or potentially condo buildings, because of the flexibility we have," LaRue said. 

Atlantic Yards affordable housing has generally been discussed as 50 percent market, 30 percent moderate- or middle-income, and 20 percent low-income. There's been no discussion, to my recollection, of 80/20 buildings.

While Forest City often highlights affordable housing when talking up Atlantic Yards in Brooklyn, that gets less emphasis with investment analysts. "We understand our obligation regarding meeting the below-market housing of 2,250 units," LaRue said. "But with an inventory of 6,400 units [actually 6,430], we will be able to deliver to the market based upon the demand that we see."

Actually, Forest City doesn't have full control; it faces some relatively gentle New York State deadlines for the affordable housing. Also, some community activists, including BrooklynSpeaks, launched a petition urging that any sale of Atlantic Yards be contingent on an accelerated schedule for that housing.

Also, though Forest City executives didn't mention it during the call, the second phase of Atlantic Yards is not fully "entitled," since a court-ordered Supplementary Environmental Impact Statement, evaluating the impacts of a potential 25-year buildout, has yet to be completed.

Ten MetroTech competition?

LaRue was asked if Ten MetroTech, an office building on Fulton Street in Brooklyn that's being demolished for housing, would affect the timing of Atlantic Yards. He said no.

"It is close, a few blocks away, however, when we see demand in the marketplace continuing to increase, not only in the rents that we’re able to achieve in our 80 DeKalb project [in Brooklyn at the other end of the Ten MetroTech parcel], but we see the market reports," he said. "The main focus is Atlantic Yards." 

LaRue noted two additional building sites flanking the arena--B3 at the southeast corner and B4 at the northeast corner--are ready to go.

"Ten MetroTech will fit into that pipeline and growth opportunity at the appropriate time," LaRue said. Unlike the Atlantic Yards sites, the land was cheap, so ownership in this case apparently poses no burden. 

"And the good thing about it is we own the property free and clear," LaRue said. "We have the ability to activate that when the market dictates rather than having to do it, so we think it’s complementary."

1 comment:

  1. Really? From Forest City Ratner’s perspective the lessons are: “We need to control land rather than own it, prior to being ready to go vertical, and we need a strong capital partner up front for a project of this magnitude”?

    If going forward is truly as uncertain as that for the developer, what insurance should be required of such a private developer before that developer is allowed to commandeer the government power of eminent domain, take property from competing developers and owners and tear down a vast swath of neighborhood? The fact that only the developer’s risk is subject to such cautionary examination and not the public’s is another example of how the cost benefit equation is weighted entirely in the developer’s favor at public expense.

    Yes, these are huge and hugely risky projects to proceed with and that’s what makes them dumb to have undertaken in the first place. If you can’t shoulder the risk don’t do the project, and it certainly shouldn’t be undertaken when the risk is all somebody else’s.

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