Monday, March 03, 2014

Forest City Enterprises: one Atlantic Yards tower "hopefully" will start by end of year; exec in Brooklyn had promoted multiple groundbreakings

Forest City Enterprises executives were cautious in speaking about Atlantic Yards plans during a conference call last Friday with investment analysts, indicating that one more building might start this year.

That contrasts with the optimism expressed by Forest City Ratner executive Melissa Burch, who in a 2/19/14 interview with BisNow, was said to be hoping to announce multiple groundbreakings later this year.

Forest City's deal with the Chinese government-owned Greenland Group is expected to close in the second quarter of this year. "We believe bringing a strong global partner to Atlantic Yards will help accelerate this important project and lead to meaningful value creation, " CEO David LaRue said during the conference call. 

Greenland will own 70% of the 15 remaining towers beyond the under-construction B2 and also invest in infrastructure. "The definitive agreement between us and Greenland, this great company, this great development group, is signed and being held in escrow, so that’s not a risk at this point," LaRue said.

One building this year?

"That will allow us, just based upon our own objectives, to get the infrastructure under way, and allow us to move forward with the planning, which we’re already doing, of additional buildings, beyond B2," LaRue continued. "We’re planning additional residential buildings, whether they’re rental or condo. We have that opportunity, as you know, because we have parcels not only on arena block but on [Block] 1129, which allow us to execute before that infrastructure goes in, for the Long Island Rail Road, for the permanent yard and the deck."

Indeed, Forest City since October 2012 has indicated plans to build on Block 1129, site of the above-ground parking lot, before building on the railyard. Overall, Forest City plans 4500 rental units, half of them subsdized, and 1930 condos, with perhaps 200 of them subsidized. 

"Again, they [Greenland] and us are anxious to get this going," LaRue said. "And that affordable housing component, which we remain focused on and committed to, is part of that acceleration. So we’re on track to get hopefully by the end of the year one of those starts that I mentioned, there’ll be another building at the project."

Analyzing the "impairment"

Forest City, which in December warned of an "impairment" to the bottom line of $250-$350 million, announced last week that the sum, at the firm's pro rata share of Atlantic Yards, is $242.4 million, or $148.4 million after taxes.

Asked why it was below the low end of previous guidance, CFO Bob O'Brien said, "We were finalizing agreements with Greenland when we made our announcement." He also said Forest City had been thinking about the entire impairment, without accounting for their partners--the identity and percentage ownership of which remains murky.

"When we net out the interest of our existing partner, it lowered it below 250 [million dollars]," he said.

The arena

On the call, Forest City executives stressed the prominent of the Barclays Center, but downplayed the cash flow, which, as I reported, meant a net operating income (NOI) of approximately $34.4 million, far below the $65 million figure expected in 2016 and not that much above the $27.8 million needed for debt service this year.

"We’re pleased with the acceptance of this fabulous facility, in the heart of Brooklyn, by the entire market," La Rue said. "So the revenue, again, as we’ve stated, is on track. We do have plans in place, I don’t want to get into the specific areas that we’re targeting, for a better investment of those dollars."

Actually, arena/team CEO Brett Yormark has already said the arena was overstaffed and they planned to cut down.

Asked for details, LaRue offered a "broad picture," suggesting that, upon opening, "we had a significant number of hosts" to help people find their way around the arena, but aren't needed now.

"We’ve targeted that $65 million as a stabilized number," he said. "That number does include the hockey operations coming in from Long Island. Right now, based on our view, we can achieve that in that time frame."

Looking at the balance sheet

One analyst referenced one SEC document and asked what would happen regarding $367 million of the "development project held for sale"and the $168 million of debt. "Should I think about that as realizing $200 million in cash?"


"Yes, replied O'Brien. Greenland is "coming to the table with approximately that amount of dollars," which will be used to help fund the permanent railyard and deck. (It's surely not enough.)

"That will go back in over time," he said. "So, we will receive gross $200 million." And while there are "some expenses related to the transaction" and some "other pullbacks," he said, "much of that cash will come to us."

Forest City also will get a 5% development fee for the entire project, so, if the rest of Atlantic Yards costs $3.8 billion--a ballpark figure that likely will rise--and Greenland puts up $2.66 billion, Forest City would earn $133 million.

That's relatively close to the impairment, though, given that the fee would be delivered over time,  a good deal less than the present value. Then again, the joint venture seems poised to save another $100 million or so from EB-5 investor funds.

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