Skip to main content

Forest City noncommittal about selling arena with management in place, tight-lipped about stalled B2, says Brooklyn residential market booming

Executives at Forest City Enterprises, speaking yesterday during a conference call with investment analysts, aimed to pre-empt pesky questions about the stalled B2 tower, the Barclays Center, and the Brooklyn Nets, but they couldn’t avoid follow-ups about the latter two.

CEO David LaRue, before opening the call to questions, said he’d address some “headline issues.” Repeating statements made in previously filed documents, he said that the potential sale of the 20% of the Nets had led some potential buyers to express interest in the 55% of the arena operating company that Forest City owns with partners.

“As we have stated previously, the arena is not a core product for us, although it is a great asset, and we would be able to trade that if the economics were right,” he said. “We now believe there is sufficient information for prospective buyers to assess the significant value we have created in the arena.”

Level of interest in the arena, management in place?

During the Q&A, one analyst asked Forest City to characterize the interest level in the arena, as well as address news coverage regarding the reported desire to keep the current management in place, a reported source of conflict.

LaRue was vague, saying the formal process on the arena hadn’t started. “However, we have determined that, based on the performance of the arena, the number one destination in terms of ticket sales in the U.S. not only in 2013 but year to date in 2014, this is the time to begin that process.” He didn’t mention that net operating income is well below projections.

“As far as how the deal is going to end up, it is to way too early to speculate,” LaRue said, saying “we think the management team does a great job.. there may be buyers that are interested in that.”

“We’re going to make sure we balance all the offers and maximize, which is our responsibility, the value for our shareholders, our partners, and the community, where we do a lot of business and intend to continue to do a lot of business,” he said, somehow suggesting that the goal was not merely shareholder value. “It’s very important we do all those things, for the long-term value of Forest City Enterprises.”

Ownership complications

One analyst noted that one document suggests that Forest City owns only about 38% of the arena, but another suggests that FCE would ultimately get 55% of net operating income.

CFO Bob O’Brien explained that was because Forest City only owns a piece of the holding company, Nets Sports & Entertainment, that owns 20% of the team and 55% of the arena, but it made loans which ensure it would get paid first.

From a Form 10-Q document filed with the Securities and Exchange Commission (SEC):
In the three months ended September 30, 2014, we began discussions with several interested parties for the potential sale of our ownership interests in The Nets. Through those discussions, certain parties have also expressed interest in acquiring a portion of our ownership interests in Barclays Center. Our ownership interest in The Nets and Barclays Center is through Nets Sports & Entertainment (“NS&E”). NS&E owns 20% of The Nets and 55% of Barclays Center. We own approximately 62% of NS&E, with the remaining 38% of NS&E being owned by several minority partners. In the event of a sale of NS&E’s ownership interests, NS&E would be entitled to remaining cash proceeds after assumption of our proportionate share of debt, which approximates $42,000,000 related to The Nets and $349,000,000 related to the Barclays Center and repayment of certain funding requirement made by the majority partner in The Nets on behalf of NS&E of approximately $25,000,000. We have also made certain loans to the minority members of NS&E which are required to be repaid to us prior to the minority partners of NS&E being able to participate in the distributable cash flow from any sale. At September 30, 2014, approximately $216,000,000 of priority member loans and related accrued interest remain outstanding. Any remaining cash flows after satisfaction of the priority member loans would be distributed in accordance with the legal ownership of NS&E (approximately 62% to us and 38% to the minority partners). We do not have an agreement in place and cannot give assurance we will close on the sale of a portion or all of our ownership interests in The Nets or Barclays Center on terms favorable to us or at all.
From an 8-K document filed with the SEC:
c) Annual NOI for the Arena is expected to stabilize at approximately $65 million at full consolidation in the 2016 calendar year. Based on the partnership agreement, we expect to receive 55% of the NOI allocation until certain member loans are repaid. Therefore, we have included a stabilization adjustment to the Q3 2014 NOI to arrive at an annual stabilized NOI of $35.8 million.
“As the arena was being developed, and we were holding onto the Nets,” O’Brien said, using an interesting verb to describe the money losing team, “we advanced dollars.” So there’s a “preferential loan, slightly above $200 million, that gets paid first,” he said. (Actually, it’s now worth $216 million.”

“So it’s our position that we’re going to get 100% of the proceeds” from the team and arena “up and until that $200 million,” O’Brien said. If the Forbes valuation of teams were used, “we would barely get through the repayment of that note,” he said. (The most recent Forbes valuation is actually $780 million, but the price from other team sales suggests a $1 billion value.)

If the sale of the team and arena goes over the value of the note, he said, the proceeds then would be split among the owners.

What about B2

“We don’t have anything new to add” regarding B2, LaRue said in his opening remarks, repeating statements in previously filed documents.

“Our immediate priority continues to be restarting in the most cost-effective manner possible. We are looking at mutiple options to do that. Simultaneously, we are also pursuing legal remedies, including mediation [with builder Skanska]… and enforcement of our fixed-price contract contract.”

There were no follow-up questions.

80 DeKalb and the booming Brooklyn market

Based on the performance of the 80 DeKalb rental tower (80% market, 20% low-income) at the edge of Fort Greene Park, Forest City Ratner is very optimistic about the Brooklyn real estate market.

“The Brooklyn residential market continues to see strong demand across almost every product type and neighborhood,” declared Michael Lonsway, Chief Financial Officer of Forest City Ratner, in the opening remarks.

In September 2009, when 80 DeKalb was leased, the average gross rent was just over $50 per square foot, “and we gave concessions, which is customary," he said. "Today, we’re seeing rents at $60 per square foot, with little to no concession or vacancy.”

Though the pipeline under construction in Brooklyn “is robust,” Lonsway said, “we continue to believe the demand far exceeds existing and anticipated supply for both market and affordable product. That gives us great confidence for the success of Pacific Park Brooklyn.”

That raises the question as to why Forest City needed Greenland Holdings to step in and buy 70% of Atlantic Yards/Pacific Park going forward, with the developer taking a loss.

Ten MetroTech

An analyst asked if Forest City sought a joint venture partner for the recently demolished Ten MetroTech site at 625 Fulton Street--a building converted from factory to office space at the back of 80 DeKalb--or would sell it outright.

Ten MetroTech was leased mainly by the Internal Revenue Service (IRS), LaRue said. “We are able to, when the IRS vacated, turn the zoning rights there through the process to residential… Based on the amount of supply…we determined that for us it was best for us to take this particular opportunity to market to determine what the value is. We had it out of the marketplace for some time…we received numerous bids, everything from joint venture options from equity players to outright bids to buy.”

Note that the IRS vacated in December 2012, while the zoning in the Downtown Brooklyn Plan was changed in 2004.


Popular posts from this blog

Forest City acknowledges unspecified delays in Pacific Park, cites $300 million "impairment" in project value; what about affordable housing pledge?

Updated Monday Nov. 7 am: Note follow-up coverage of stock price drop and investor conference call and pending questions.

Pacific Park Brooklyn is seriously delayed, Forest City Realty Trust said yesterday in a news release, which further acknowledged that the project has caused a $300 million impairment, or write-down of the asset, as the expected revenues no longer exceed the carrying cost.

The Cleveland-based developer, parent of Brooklyn-based Forest City Ratner, which is a 30% investor in Pacific Park along with 70% partner/overseer Greenland USA, blamed the "significant impairment" on an oversupply of market-rate apartments, the uncertain fate of the 421-a tax break, and a continued increase in construction costs.

While the delay essentially confirms the obvious, given that two major buildings have not launched despite plans to do so, it raises significant questions about the future of the project, including:
if market-rate construction is delayed, will the affordable h…

Revising official figures, new report reveals Nets averaged just 11,622 home fans last season, Islanders drew 11,200 (and have option to leave in 2018)

The Brooklyn Nets drew an average of only 11,622 fans per home game in their most recent (and lousy) season, more than 23% below the announced official attendance figure, and little more than 65% of the Barclays Center's capacity.

The New York Islanders also drew some 19.4% below announced attendance, or 11,200 fans per home game.

The surprising numbers were disclosed in a consultant's report attached to the Preliminary Official Statement for the refinancing of some $462 million in tax-exempt bonds for the Barclays Center (plus another $20 million in taxable bonds). The refinancing should lower costs to Mikhail Prokhorov, owner of the arena operating company, by and average of $3.4 million a year through 2044 in paying off arena construction.

According to official figures, the Brooklyn Nets attendance averaged 17,187 in the debut season, 2012-13, 17,251 in 2013-14, 17,037 in 2014-15, and 15,125 in the most recent season, 2015-16. For hoops, the arena holds 17,732.

But official…

At 550 Vanderbilt, big chunk of apartments pitched to Chinese buyers as "international units"

One key to sales at the 550 Vanderbilt condo is the connection to China, thanks to Shanghai-based developer Greenland Holdings.

It's the parent of Greenland USA, which as part of Greenland Forest City Partners owns 70% of Pacific Park (except 461 Dean and the arena).

And sales in China may help explain how the developer was able to claim early momentum.
"Since 550 Vanderbilt launched pre-sales in June [2015], more than 80 residences have gone into contract, representing over 30% of the building’s 278 total residences," the developer said in a 9/25/15 press release announcing the opening of a sales gallery in Brooklyn. "The strong response from the marketplace indicates the high level of demand for well-designed new luxury homes in Brooklyn..."

Maybe. Or maybe it just meant a decent initial pipeline to Chinese buyers.

As lawyer Jay Neveloff, who represents Forest City, told the Real Deal in 2015, a project involving a Chinese firm "creates a huge market for…

Is Barclays Center dumping the Islanders, or are they renegotiating? Evidence varies (bond doc, cash receipts); NHL attendance biggest variable

The Internet has been abuzz since Bloomberg's Scott Soshnick reported 1/30/17, using an overly conclusory headline, that Brooklyn’s Barclays Center Is Dumping the Islanders.

That would end an unusual arrangement in which the arena agrees to pay the team a fixed sum (minus certain expenses), in exchange for keeping tickets, suite, and sponsorship revenue.

The arena would earn more without the hockey team, according to Bloomberg, which cited “a financial projection shared with potential investors showed the Islanders won’t contribute any revenue after the 2018-19 season--a clear signal that the team won’t play there, the people said."

That "signal," however, is hardly definitive, as are the media leaks about a prospective new arena in Queens, as shown in the screenshot below from Newsday. Both sides are surely pushing for advantage, if not bluffing.

Consider: the arena and the Islanders can't even formally begin their opt-out talks until after this season. The disc…

Skanska says it "expected to assemble a properly designed modular building, not engage in an iterative R&D experiment"

On 12/10/16, I noted that FastCo.Design's Prefab's Moment of Reckoning article dialed back the gush on the 461 Dean modular tower compared to the publication's previous coverage.

Still, I noted that the article relied on developer Forest City Ratner and architect SHoP to put the best possible spin on what was clearly a failure. From the article: At the project's outset, it took the factory (managed by Skanska at the time) two to three weeks to build a module. By the end, under FCRC's management, the builders cut that down to six days. "The project took a little longer than expected and cost a little bit more than expected because we started the project with the wrong contractor," [Forest City's Adam] Greene says.Skanska jabs back
Well, Forest City's estranged partner Skanska later weighed in--not sure whether they weren't asked or just missed a deadline--and their article was updated 12/13/16. Here's Skanska's statement, which shows th…

Not just logistics: bypassing Brooklyn for DNC 2016 also saved on optics (role of Russian oligarch, Shanghai government)

Surely the logistical challenges of holding a national presidential nominating convention in Brooklyn were the main (and stated) reasons for the Democratic National Committee's choice of Philadelphia.

And, as I wrote in NY Slant, the huge security cordon in Philadelphia would have been impossible in Brooklyn.

But consider also the optics. As I wrote in my 1/21/15 op-ed in the Times arguing that the choice of Brooklyn was a bad idea:
The arena also raises ethically sticky questions for the Democrats. While the Barclays Center is owned primarily by Forest City Ratner, 45 percent of it is owned by the Russian billionaire Mikhail D. Prokhorov (who also owns 80 percent of the Brooklyn Nets). Mr. Prokhorov has a necessarily cordial relationship with Russia’s president, Vladimir V. Putin — though he has been critical of Mr. Putin in the past, last year, at the Russian president’s request, he tried to transfer ownership of the Nets to one of his Moscow-based companies. An oligarch-owned a…