Tuesday, January 13, 2015

Forest City Enterprises announces plan to convert to a REIT, plans 2015 asset sales that surely include Nets, arena shares

Now, after many rumblings about the possibility, Forest City Enterprises is on track to become a dividend-paying REIT, or real estate investment trust, defined as "an entity that holds real estate and potentially pays no federal income tax due to a deduction for dividends paid." (REITs must pay out at least 90% of taxable income in dividends.)

Last August, on a conference call with investment analysts, Forest City Enterprises was asked if and when it would convert from a C Corporation to a REIT.

"It's a process and an issue we continue to look at," CEO David LaRue said. "We still have substantial NOLs [net operating losses] that allow us as a C Corp to continue to be very tax-efficient... As we go through repositioning, and go through non-core asset sales, it gives us some additional flexibility."

Forest City has been selling assets in non-core areas like Cleveland, its home base. Indeed, the Plain Dealer of Cleveland reported yesterday:
The REIT decision follows years of transformation at Forest City, which has left the land business and sold off properties in secondary markets including Cleveland while focusing on office buildings, apartments and shopping centers in major cities.
In the future, LaRue said last August, "lower levered portfolio and less development on our pro-rata share... bringing in strategic partners, will point to us becoming a taxpaying entity," which means they will have used those NOLs. "We haven't picked a date, but we're heading there [toward a REIT] over that time period."

The announcement

Today, Forest City issued a statement, Forest City to convert to a REIT, continue to pursue strategic plan initiatives, indicating REIT status would begin in 2016.

"Since we began implementation of our strategic plan in 2012, we have substantially transformed Forest City from a company known primarily as a real estate developer, to one with a balanced focus on owning, operating and developing high-quality properties in core urban markets," CEO David LaRue said. "During that time, we have significantly improved our balance sheet, focused our portfolio through non-core asset sales, reduced development exposure, raised cost-effective capital through financial partnerships and simplified our business. While we have more work to do, our efforts to date have set the stage for today's announcement to pursue conversion to a REIT structure."

"We will continue to leverage our core competencies in high-barrier markets, while we continue to reshape our business, improve our balance sheet, and transition to a REIT structure," LaRue added. "Further, our undervalued operating portfolio is well positioned to benefit from strong growth in the key urban markets where we are focused, and we have an identifiable pipeline of additional opportunities in those markets that we believe will fuel further incremental growth."

CFO Bob O'Brien indicated that "we expect to utilize the majority of our net operating loss carryforwards during 2015." Becoming a REIT would "allow us to maintain a tax-efficient structure to continue to drive shareholder value, while also instituting a regular quarterly dividend to shareholders." Forest City killed its dividend during the recession.

Asset sales planned surely include Nets, arena

"In addition to becoming a REIT, we continue to execute on the elements of our strategic plan, including ongoing deleveraging," O'Brien added. "As part of that effort, we anticipate executing a number of non-core asset dispositions in 2015 that are expected to generate total net proceeds significantly in excess of our historical averages, which will be used to further deleverage our balance sheet. In addition, we are closely examining and expect to change our organizational structure to better align with our strategies and improve operating margins."

"Non-core asset dispositions" surely include not only the 20% the company and Bruce Ratner own of the Brooklyn Nets, but also the 55% the company owns of the Barclays Center's operating company. 

After all, as the New York Post reported last November, a REIT requires revenue from real estate, not arena-related ticket sales or other event income.

The timing seems curiously coincident--or coordinated?--with the news/leak that Nets principal owner Mikhail Prokhorov is exploring the sale of his share of the team, which at the very least would help Forest City value its share.

Though the announcement was made after the close of trading, Forest City's stock rose 3.8% to $22.21 today, having 19% in the past year, according to Bloomberg.

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