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.
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.
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?