Thursday, May 08, 2014

Forest City: arena revenues jump, B2 delay won't hit bottom line, at least 2 buildings to start in 12 months (vs. 3 this year)

Forest City Enterprises, reporting 2014 first-quarter results yesterday, said the Barclays Center had achieved a notable jump in income, apparently thanks to staff cuts and other efficiencies related to the second-year operations. "More remains to be done, but this progress is encouraging," said CEO David LaRue.

The company, apparently attempting to assauge investors' concerns about the announced one-year delay in the B2 modular tower, said the delay wouldn't impact anticipated returns, given "a fixed-price contract with the construction contractor."

Unmentioned was that the contractor, FC Skanska, is a joint venture between Forest City Ratner and Skanska. (Nor was there mention of the impact of the delay on affordable housing.)

Also, Forest City suggested additional Atlantic Yards towers will launch after the joint venture with the Chinese government-owned Greenland Group closes in June, "with initial construction of at least two new apartment buildings anticipated within the next 12 months."

That pledge differs from what the Times reported 4/19/14, as Forest City would "start work later this year on three additional buildings."

More on the arena

According to an 8-K filing, arena net operation income (NOI) over three months more than doubled from the period in 2013, from $3 million to $6.4 million. (The company, using different metrics, also reported $3 million in Funds From Operations.)

Last October, Forest City predicted annual arena NOI of $70 million by 2016, then in December dialed it back to $65 million. The most recent 12-month figure was estimated at $34.4 million. 

An addition of $12 million this year--extrapolating crudely from first-quarter results--would get NOI to more than $46 million. That's well below $65 million, but, by 2016, the Islanders will be in Brooklyn and the arena will presumably have rising revenues.

Overall results

According to the press release,
Operating FFO for the three months ended March 31, 2014 was $48.5 million, a 42 percent increase compared with $34.0 million for the three months ended March 31, 2013....
The largest positive factor impacting first-quarter 2014 Operating FFO (OFFO), compared with the first quarter of 2013, was reduced interest expense of $11.1 million...) as a result of the company's ongoing deleveraging efforts. Other positive factors included increased OFFO from land sales at Stapleton in Denver of $6.7 million; increased OFFO from new property openings of $5.4 million, primarily related to improved performance of Barclays Center and Westchester's Ridge Hill...
For the three months ended March, 31, 2014, net earnings attributable to Forest City Enterprises, Inc., were $15.5 million, compared with a net loss of $19.6 million for the first quarter of 2013.
About B2

According to LaRue:
"In April, we updated investors on a revised completion date for B2 BKLYN, our first residential tower at Atlantic Yards. The delay is disappointing and is a function of slower than planned delivery of modular units out of the factory. It is important to note that we have a fixed-price contract with the construction contractor to deliver the completed modular units and construct the project. As a result, we do not expect the delay to have a material impact on our anticipated returns for the property, and we expect to open the project into a Brooklyn rental market that continues to be one of the strongest in the country."
Selling their 20% of the Nets

According to LaRue:
"Also in April, we confirmed that we are exploring the potential sale of our minority interest in the NBA Brooklyn Nets. Having successfully brought major-league professional sports back to Brooklyn and developed the world-class Barclays Center as the anchor for our Atlantic Yards project, we are now focused on accelerating development of the residential component of Atlantic Yards. Given the strong market acceptance of the arena, the success of the team, and growing values of NBA franchises, now is an appropriate time to explore such a sale."
About Atlantic Yards and the joint venture

According to a Form 10-Q filing:
In addition, our capital strategy includes potentially entering into equity joint ventures that can provide capital through the sales of partial interests of operating properties or reduce our equity requirements and development risk on our development opportunities. Entering into these joint ventures could result in us granting joint control or losing control of the asset and, accordingly, the asset would no longer be consolidated. 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 for other than temporary impairment on a quarterly basis would be required. This could result in future impairments, some of which could be significant, that would not otherwise be required if the real estate asset remained consolidated.
We are in the process of developing Brooklyn Atlantic Yards, which is comprised of two phases. Phase I is comprised of the Arena and eight buildings totaling approximately 3.4 million square feet. Phase II consists of seven buildings totaling approximately 3.3 million square feet.
In order to construct the seven buildings in Phase II, substantial additional costs for rail yard and infrastructure improvements, including a platform over the new permanent rail yard will be required. We have provided an $86,000,000 letter of credit to the Metropolitan Transit Authority (“MTA”) as collateral for the permanent rail yard construction. Our agreement with the MTA requires us to commence construction on the permanent rail yard and post the completion guaranty by June 30, 2014, and it must be substantially complete by September 1, 2016. If we do not commence construction on the permanent rail yard by June 30, 2014, the MTA may assert that we are in default of various MTA project agreements and pursue a draw down of our $86,000,000 letter of credit. A default under the MTA agreements would also result in our loss of development rights of Phase II resulting in a significant charge related to abandonment of this development opportunity.
On December 16, 2013, we entered into a definitive agreement with Greenland Group, a Chinese state-owned enterprise ("Greenland"), for a joint venture to developBrooklyn Atlantic Yards. The joint venture will execute on the remaining development rights, including the infrastructure and vertical construction of the residential units, but excludes Barclays Center and the under construction B2 BKLYN apartment community. Under the joint venture, Greenland will acquire 70% of the project, co-develop the project with us and share in the entire project costs going forward at the same percentage interest. If effectuated, the joint venture will develop Phases I and II of the project, including the permanent railyard, consistent with the approved master plan. All due diligence by Greenland had been completed as of December 31, 2013 and no other significant contingencies which could prevent the transaction from closing remain. The agreement is subject to certain government and regulatory approvals. We have fulfilled all of our pre-closing requirements. The approval from the United States Federal Government has been received and necessary approvals from China are progressing. As such, it is anticipated the joint venture will close during June 2014. We have analyzed the agreement and determined that, upon closing, the joint venture will be accounted for on the equity method of accounting, resulting in the deconsolidation of our investment in Brooklyn Atlantic Yards and its allocation of the site acquisition costs. Based on the facts described above, we estimate it is likely the transaction will close. As a result, we have classified the assets and liabilities as held for sale on our consolidated balance sheets as of March 31, 2014 and December 31, 2013 and recorded the asset at estimated fair value less costs to sell, resulting in an impairment of $289,864,000 ($242,417,000, net of noncontrolling interest) recorded during the 11 months ended December 31, 2013. Additionally, upon closing, evaluation on a quarterly basis for other than temporary impairment of our equity method investment will be required. This could result in future impairments of our equity method investment. The closing of this transaction will significantly reduce our equity requirements for the full build-out of this project thereby reducing our development risk and improving our future liquidity.
(Emphasis added)

Note that Forest City is asking the MTA for an extension on that September 1, 2016 railyard completion date, on the grounds that it can get certain work needed for the platform at the same time.

Banking on Brooklyn but not AY office space

The slide below is from the updated investor presentation. It's the first time I remember a page devoted to Brooklyn. Note that there's no claim Atlantic Yards will contain office space as planned and approved, just residential and retail.

Buying back from Bruce

According to the Form 10-Q filing, Forest City Ratner Chairman (and FCE Board member) Bruce Ratner has been required to sell his shares of projects he developed to FCE, gaining $14.3 million in exchange:
The Company and certain of its affiliates entered into a Master Contribution and Sale Agreement (the “Agreement”) with Bruce C. Ratner (“Mr. Ratner”), an Executive Vice President and Director of the Company, and certain entities and individuals affiliated with Mr. Ratner (the “BCR Entities”) in August 2006 to purchase a total of 30 retail, office and residential operating properties and service companies in the Greater New York City metropolitan area. Pursuant to the Agreement, certain projects under development would remain owned jointly until each individual project was completed and achieved “stabilization.” Upon stabilization, each project would be valued and the Company, in its discretion, would choose among various ownership options for the project following stabilization in accordance with the Agreement. Pursuant to the terms of the Agreement, on January 2, 2014, the Company caused certain of its affiliates to acquire the BCR Entities' interests in three stabilized projects, 8 Spruce Street, an apartment community in Manhattan, New York, DKLB BKLN, an apartment community in Brooklyn, New York, and East River Plaza, a specialty retail center in Manhattan, New York. In accordance with the purchase agreements, the applicable BCR Entities assigned and transferred their interests in the three projects to affiliates of the Company and received cash of $14,286,000, resulting in an increase in investments in and advances to unconsolidated affiliates. Prior to the transaction, the Company accounted for the three projects using the equity method of accounting and will continue to account for the projects as equity method investments as the partners continue to have joint control.

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