Wednesday, April 29, 2015

From “China’s Greenland” to the “World’s Greenland”: the vigorous (and potentially precarious) ambitions of the new Atlantic Yards majority owner

We got a good glimpse of the Greenland Group, the Shanghai government-owned company buying 70% of the remaining Atlantic Yards project, in a 3/31/14 Bloomberg News article that described its deals in Los Angeles and Brooklyn.

“In China, you climb a ladder where everything is floating and moving so fast,” Ifei Chang, CEO of Greenland U.S. Holding, told Bloomberg. “We come from a country of 1.4 billion people and a lot of economic growth.. We should all move very fast. We should catch the moment.”

As I wrote, it also suggested that Greenland, even more than Forest City, may feel no qualms about--as Chang described practices in China--stepping "on somebody else's feet."

From Greenland Overseas web page
The new 70% majority owner of Atlantic Yards/Pacific Park (excepting the arena and the B2 modular tower) is an enormous, growing company that is ever more ambitious in its worldwide expansion into key urban markets, as indicated in the map above.

It's part of an effort to diversify from China's overheated economy and more sluggish residential market, and to work in more stable markets, sometimes while joining with significant local partners.

Reasons for wariness

At the same time, Greenland along with other Chinese property developers is being challenged by growth. One major developer failed just last week. Some financial analysts see Greenland, which has bonds rated at the lowest rung of investment grade, as on the path to stability, while others suggest caution.

In other words, though Greenland's debt-funded development suggests deep pockets, it does not ensure safety. Greenland is vulnerable to major forces in China, as well as currency fluctuations and interest rate increases in the United States.

The bottom line for Greenland could change. It could be ever more desirous to drive a hard bargain both with public agencies in New York and even its junior partner, Forest City Ratner.

So it's worth recalling a warning at a 3/28/14 board meeting of Empire State Development, the gubernatorial-directed authority that oversees and shepherds Atlantic Yards.

Gib Veconi of the Prospect Heights Neighborhood Development Council focused on the state’s failure to consider the option of bringing in other developers. The pending Greenland transaction would not represent a multiple-developer strategy, Veconi observed, but rather a single-source development project, one "under the control of a partner exposed to one of the world’s most volatile economies.”

Veconi is not so critical today, now that Greenland and Forest City agreed to a new timetable he and others in BrooklynSpeaks pushed for the affordable housing. But he warned at the time that ESD was "further enshrin[ing] the unprecedented, failed franchise... to a single source developer."

Growing world ranking


As shown in the graphic at right, Fortune ranked Greenland at 268 in the 2014 Fortune Global 500, with $60.7 billion in assets, $41 billion in revenue, a 29.2% rise in revenues and a 11.2% increase in profits.

That was a significant rise from 359 in 2013 and 483 in 2012. The 2015 ranking should be even higher. (It likely will come in July.)

Greenland dwarfs Forest City Enterprises (parent of Forest City Ratner), its joint venture partner, which has nearly $9 billion in assets.

World expansion

According to the "About Us" page on Greenland's English-language web site, Greenland is not only expanding in real estate--"ultra-high rise buildings, large urban complex projects, high speed rail station business districts and industrial park development."

It is also developing "secondary pillar industries including finance, business, hotel operation, subway investment and energy resource." Yes, it is even building subways domestically.

The page on Greenland's world activities, excerpted below, describes a stunning expected rise in overseas business income, growing fivefold from 2013 to 2014, then doubling this year.



Its goal is to rank among the world's top 100 companies in five years, by 2020, while "build[ing] itself into a respectable transnational company featuring sustainable development, outstanding benefit, global operation, pluralistic development and continuous innovation."

The company will then transform from “China’s Greenland” to the “World’s Greenland”.

Lofty rhetoric, savvy operations

The language is notably grandiloquent:
Sticking to the idea of “never stand still with complacency and work hard with an innovative spirit to race to the top”, we firmly believe that an enterprise which dares to have a dream and works hard to realize its dream can definitely create greater miracles. We are fully aware of our grand responsibilities and historical missions to become a global comprehensive operating enterprise of real estate development with a world-class scale and competitive power. In the future development, Greenlanders will keep passion with a pioneering spirit, creating dreams, realizing dreams and going beyond dreams, and aim to turn all the impossibilities possible and write a brand new splendid chapter for the future.
But Greenland is not shy about pursuing advantage.

Consider Greenland's use of EB-5 funding for Atlantic Yards (and other projects), and the way the marketers of such funding quickly used a photo (right) of Mayor Bill de Blasio and Chairman Zhang Yuliang to convey New York City government backing both for the project and for Greenland.

The Los Angeles Times reported 3/27/15 how Greenland, with cooperative local politicians, seeks state legislation to exempt signage and giant electronic billboards in a portion of downtown Los Angeles near its Metropolis project from state limits on their number and location.

Critics call it blight. Assemblyman Miguel Santiago said it would spur construction and provide jobs--i.e., deliver the profit Greenland thinks it needs. (Note that Greenland is one of multiple Chinese developers investing in Downtown L.A.)

New opportunities

Greenland, reported Bloomberg last November, had already found buyers for 60% of the Metropolis condo project, with one-third of the buyers from abroad. (It's unclear how many were from China.)

Greenland, however, was having trouble finding new projects in Los Angeles, Chicago, and other cities, because of high prices.

 Greenland's focus, as Reuters put it, is "on the first-tier cities in developed countries, including Chicago and San Francisco--both cities, I'd note, where Forest City is active.

The "dirtiest" industry

In a Fortune profile last July China's baddest billionaire builder, Yan Jiehe, founder of Pacific Construction Group, China’s largest privately owned builder, offered an interesting quote:
“The industry we’re in is the dirtiest one,” he says. “But what we do is very transparent, very pure. What really happens is that if some people bribe officials, they get imprisoned.” Yan says he’s friends with top officials now in jail. And because Pacific walks away from deals if officials ask for bribes, he’s not concerned about the government’s current crackdown.
That doesn't implicate Greenland, of course, but surely they know that world.

Greenland's growth

Since 2012, Greenland has expended to 13 cities in nine countries on four continents. Among the locations are LondonMalaysiaTorontoSouth Korea, and Australia, among other places.

The Australian, on 9/19/14, published a revealing interview, Greenland Holding’s Zhang Yuliang and the Chinese property investment push, which described Greenland's whirlwind entry into Australia.

Greenland and other Chinese firms have often paid a premium to win sites from domestic firms, but that may not be fiscal foolishness but rather a focus on the long-term.

From the article:
Born in Shanghai in 1958, Zhang was the director of the residential department of the Shanghai government’s agri­cultural committee before setting up Greenland Development in 1992 with funds from the city government, which still owns 51 per cent of the company. He has been at the helm through the company’s 22-year rise....Shaoqun Tan, the chairman of Fuxing Huiyu Real Estate, says the Chinese government has actively encouraged big real estate companies to expand overseas so that they can keep growing without overheating the local market.
A questionable outlook

The Real Deal reported 4/23/15 on the default of Shenzhen-based megadeveloper Kaisa, suggesting it presaged other defaults among developers that have borrowed too much. 

Kaisa defaulted on a bond denominated in dollars; since the dollar has risen in relation to the Chinese Yuan--the currency in which most developer income is denominated--that can stretch them.

At least among the Real Deal's list, Greenland Holdings appears to be the developer working in New York with the largest amount of recent dollar bonds, issuing $2.7 billion in 2014.

Though Greenland has high debt levels, it is rated investment grade. Its debt level is relatively high: 70 percent of capitalization, but Moody's, reported the Real Deal, expects Greenland “to manage its debt leverage down from the current level through contracted sales growth.”

Will there be more defaults? Bloomberg cited Standard & Poor’s as warning “more defaults cannot be ruled out,” though of course that doesn't mean Greenland. (Moody's, on the other hand, is more optimistic about Chinese developers.)

Greenland's fluctuating rating, and signs of concern

Bloomberg reported last November that Greenland's corporate stability was under some question, as ratings company Standard & Poor’s had in September downgraded the company's outlook to negative from stable.

“Greenland Group’s aggressive growth appetite and debt-funded expansion will constrain its financial risk profile in 2014 and 2015,” S&P said, according to Bloomberg. The developer “will continue to make significant land acquisitions and incur substantial construction costs over the next 12-18 months to support its growth plans, including in overseas markets.” Zhang told Bloomberg that the company's growth was healthy.

On 10/9/14, Moody's rated Greenland's proposed dollar bonds Baa3, the lowest investment grade, noting that debt had increased because of slow cash collections. However, increased equity meant the debt level had fallen to about 70% from 75%

Moody's said Greenland's 70-75% debt leverage and near-term earnings/interest ratio of about 2.0-2.5x "weakly position Greenland Holding at its Baa3 rating level and any deviation from such expectations would result in negative rating pressure." (Earnings are expressed as EBITDA, or earnings before interest, taxes, depreciation, and amortization.)

Reduced debt leverage, increased earnings, increased liquidity, and access to offshore funding could upgrade Greenland's rating, Moody's said. On the other hand, declines in profit, weak sales, an increase and debt, as well as increased risk in Greenland's non-property businesses (like energy)  could downgrade the rating.

Moody's stated:
The key credit metrics that Moody's would consider for a rating downgrade are adjusted debt/total capitalization above 70%--75%, and EBITDA/interest below 2.5-3.0x on a sustained basis.
A reduction in the Shanghai government's ownership level in Greenland would also be negative for the rating.
(Emphases added)

Moody's offered its first-ever rating 10/7/13 to Greenland, just four days before it and Forest City signed a tentative Atlantic Yards deal. Moody's stated:
"Greenland's Baa3 issuer rating reflects its large scale, good track record in delivering strong growth in the property development business and leading positions in its key markets, such as Shanghai," says Franco Leung, a Moody's Assistant Vice President and Analyst.
Greenland's rapid expansion of its property business has predominantly been debt funded. Moody's expects its debt leverage -- as measured by debt/total capitalization -- will remain at a high level of around 70% in the next two years. EBITDA/interest coverage will remain around 3.5x.
Note that 3.5x figure is well above the current near-term earnings/interest ratio of about 2.0-2.5x. Indeed, Moody's stated:
The key credit metrics that Moody's would consider for a rating downgrade are adjusted debt/total capitalization above 70%--75%, and EBITDA/interest below 3.5x in the next 1 -- 2 years.
(Emphasis added)

In other words, if things don't get better, Greenland could get downgraded.

The Shanghai connection

In another release, Moody's stated:
Founded in 1992, Greenland Holding Group Company Limited is a China-based company. It was the country's second-largest property developer by contracted sales in 2013. The Shanghai State-Owned Assets Supervision and Administration Commission (SASAC) has an effective shareholding of about 60.7% in Greenland.
Why is that connection valuable? As Moody's explained in a 5/26/14 release:
Greenland's announcement of the proposed [domestic bond] issuance comes at a time of tightness in onshore liquidity, demonstrating that the company has the strong ability to access funding due to its status as a local state-owned enterprise.
New diversification

Greenland's Hong Kong subsidiary, Reuters described 3/27/14, is seeking for banking and e-commerce partners for its finance division, an effort to diversify beyond real estate. Reuters reported 1/30/15 that Greenland sought to "buy an insurer or private bank in Europe in a push to diversify its financial services portfolio." That could take advantage of the low Euro.

By 2020, Greenland expects one-third of its profit to come from financial services, an executive said.

Greenland in North America (see separate post regarding Atlantic Yards/Atlantic Plaza)



Greenland in Europe (from the web site)


 Greenland in Asia


Greenland in Australia



Making a splash

I wrote last June about how Greenland in December 2013 bought advertising signage at Times Square, stating "Here We Come," with Greenland being described as "A Skyscraper Specialist from China." (See bottom right in screenshot below.)

Greenland wants to come in big. The Toronto Star reported 9/18/14 that a property seller in Toronto said Greenland "wanted a trophy project here."

No wonder the company's web site highlights photos of Zhang with world leaders--and, as you can see below, New York Times publisher Arthur Sulzberger.

As the New York Post recently reported, Greenland chairman Zhang Yuliang would not sign the Atlantic Yards deal without meeting then-Mayor Michael Bloomberg.

That explains the photo at right taken in October 2013, posted on Greenland's web page for news releases but not by the mayor's office, as I wrote last June.

The Chinese expansion

Bloomberg reported 12/9/13, China Greenland Sells $250 Million Sydney Apartments at Open, noting that "the expansion of Chinese companies abroad follows an 'explosion' in Chinese individual purchases of luxury western products, overseas holidays and homes."

Greenland is by no means the first outside developer in Australia, where competitors from Singapore, Hong Kong, Malaysia, and Japan already do business.

Similarly, Greenland and fellow Chinese developers are hardly the first international developers in New York, with firms from Canada, Japan, Germany, and other countries long established.

Six major Chinese investors in NYC, and more coming

Last August, The Real Deal reported, These 6 Chinese real estate titans are snapping up NYC property, noting that they are looking abroad for stability. They include:
  • China Vanke, the largest residential developer in China
  • Greenland Holding Group, a Shanghai city enterprise specializing in "ultra high-rise towers" (and, of course, the new Atlantic Yards/Pacific Park investor)
  • Fosun International, China’s largest closely held conglomerate
  • Zhang Xin and Pan Shiyi, a wife-and-husband team who head SOHO China, the country’s largest developer of high-end office space
  • Wang Jianlin, the Wanda Group chairman and China’s richest man
  • XIN Development, the U.S. arm of the Beijing-based homebuilder Xinyuan Real Estate 
Surely more are coming. Consider this 4/21/15 Bloomberg article Vornado, Related Seeking Chinese Partners for Development:
“We do have aspirations to do some things which would involve Chinese capital and Chinese investors,” Steven Roth, chairman and chief executive officer of Vornado, said at a forum Tuesday hosted by the China General Chamber of Commerce at Bloomberg LP’s New York headquarters. “It’s likely that Vornado would do something important with Chinese investors over the next year or two.”

Chinese institutions are becoming a formidable force in New York City real estate as they seek to invest stockpiles of cash. Beijing-based Anbang Insurance Group Co. bought the landmark Waldorf Astoria hotel in February for $1.95 billion, the largest deal ever for a U.S. hotel.
...Skyrocketing prices for New York’s best buildings are the biggest impediment for foreign buyers seeking commercial-property deals in the city, said Extell’s [Gary] Barnett. The Chinese are wary of repeating the mistakes Japanese investors made in the 1980s when they bought at the top of the market and took huge losses in the following decade, he said. 

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