Friday, July 18, 2014

Evercore (not without conflicts) touts Forest City joint venture with Greenland as "certainly a positive" (but murkiness remains)

From Barrons: Research Reports: How analysts size up, Moody's, Forest City and a half-dozen other companies., 7/4/14:
by Evercore
The commercial and residential real-estate development company announced the closing of the much-anticipated deal with Shanghai-based Greenland, forming a Joint Venture for further development at Atlantic Yards (AY) in Brooklyn, NY. This is certainly a positive for Forest City.
We are reiterating our Overweight rating for Forest City. Moreover, we believe that FCEA shares are still at significant discount to our net-asset-value estimate of $24, which we set as our price target.
Simplification of its financing, refinancing its Ridge Hill project in Westchester County, accelerating the AY project, and deleveraging should all contribute to a closing valuation discount for the company.
Now Evercore has some skin in the game--having been hired to advise Forest City on its sale of its 20-percent stake in the Brooklyn Nets. But I don't doubt that the joint venture is a reasonable deal, "de-risking" the project.

After all, four top Forest City executives just got $1.6 million in bonuses. And the faster the project gets built out, the faster Forest City gets its 5% development fee.

Murkiness remains

Without further information, however, several things around the deal appear murky to me.  

Greenland is paying Forest City $200 million for a 70% share of the project (without the arena and B2) going forward, after the developer and partners invested some $545 million (or $547M), which has led Forest City to announce an impairment of $242.4 million or $148.4 million net of tax.

The company once hoped to break even, so that looks like a loss, at least on paper.

But the value of land in nearby Downtown Brooklyn has simply skyrocketed in the last few years. That suggests Forest City's holdings--despite the carrying cost, and the future cost of the railyard deck--are quite valuable.

That's surely one reason why Greenland--despite Forest City's claim it was only cost-effective to build modular--is planning to build the next few towers through conventional means.

Is it that Forest City's board just ran out of patience?

If so, will the Atlantic Yards deal resemble in some ways the deal to sell 80% of the Nets at a discount to Russian oligarch Mikhail Prokhorov, who has since seen the value of the team leap? If so, that would reflect of the challenges for a publicly owned company--even one controlled by a family--in taking a longer-term view.

Another question: if Forest City's modular plan--not delaying the first tower, B2, by a year--would they have needed to seek a joint venture partner, or would they have entered a joint venture on different terms? 


  1. In the small-world and small-world-equaling-conflicts-of-interest department it is worthwhile to note that Evercore, a spin-off of Stephen Schwarzman's Blackstone Group, comes up in the context of the sell-off and shrinkage of New York City libraries where Forest City Ratner also makes some strikingly prominent appearances.

    David Offensend, one of the founders of Evercore, took the position of Chief Operating Officer at the New York Public Library, where he was in change of, and apparently helped initiate and push for, library real estate sell-offs and shrinkage deals like the Donnell Library sale and the Central Library Plan, while at the same time Stephen Schwarzman, an NYPL trustee (with Marshal Rose, another trustee in the real estate business), pushed for the same at the board level. Schwarzman transferred $100 million to the NYPL with the understanding that such plans go forward.

    Meanwhile, we see the Donnell deal being replicated with the proposed sale of the Brooklyn Heights Library, decided upon and apparently conceived of in the same time frame as the Donnell sale (2007/2008). The Brooklyn Heights Library is immediately adjacent to Forest City Ratner property just the way that the other library pushed to the fore for sale by the BPL (the Pacific Branch) also is. The Brooklyn Heights Library is part of the same zoning lot with the Ratner property in such a way as to constitute Ratner a gatekeeper for that transaction with Ratner even holding unused development rights that will certainly be used in a deal if the library is sold. See link to article below.

    Offensend has also been involved (as it happens with others who are Brooklyn Public Library trustees) with approving development deals in Brooklyn Bridge Park where questions have rightly been raised about whether the public is getting a good bargain with what is being substituted to exempt developers from regular real estate taxes.

    Obviously, as these small-world relationships multiply, so too do the opportunities for conflicts of interest and potential for their abuse.

    Friday, September 20, 2013
    Forest City Ratner As The Development Gatekeeper (And Profit taker) Getting The Benefit As Brooklyn Heights Public Library Is Sold

  2. One has to wonder what specially credentials Evercore as an adviser with respect to selling an interest in a sports team?-

    There is more to think about and figure out here.

    Let me see- Blackstone has that relationship with the Chinese (though the Chinese did not do well at all in that deal at all). . . And the Chinese are Greenland and also the wealthy EB-5 green card investors - Humm.