Tuesday, May 05, 2015

In bumpy conversion to REIT, Forest City announces plan to raise $750 million by issuing new stock

Forest City Enterprises, attempting a complicated conversion to a dividend-paying real estate investment trust (REIT) by 2016, yesterday announced quarterly losses as well as an effort to raise some $750 million by issuing 32.5 million shares of common stock. (The stock price is about $24.)

That represents inevitable dilution of the company's stock value, though the last--and rare--time Forest City issued stock, during the recession, it turned out to be a bargain, since the stock sold at $6.60.

As stated in a press release, the company intends to use up to $400 million of the net proceeds to finance its previously announced acquisition of the 49 percent equity interest of Health Care REIT, Inc., as well as pay off/reduce debt and for general corporate purposes.

Converting to REIT

Forest City framed it all as progress. Another press release quoted CFO Bob O'Brien:
"Since we launched our strategic plan at the end of 2011, through March 31, 2015, total debt plus preferred equity has been reduced by $2.4 billion, at pro-rata ($2.3 billion at full consolidation), with reduced corporate recourse obligations of $847 million and lower annual fixed charges of $53 million," O'Brien noted. "Over that period, our ratio of net debt to net operating income (NOI) has gone from more than 13 times, to 11 times today. We expect to accelerate our deleveraging activities with the objective of reducing our leverage to the range of 7 to 8 times net debt to NOI over the next 18 to 36 months."
The planned REIT conversion involved costs of $6.2 million ($3.8 million, net of tax) for the first quarter, and such costs will continue through the REIT conversion next year. Forest City CEO David LaRue also said the company will reinstate a quarterly dividend shortly after the REIT conversion.

Forest City plans to sell its shares of the Barclays Center and the Brooklyn Nets before conversion to a REIT.

First quarter results

A press release, Forest City Reports 2015 First-Quarter Results, highlighted the following
- Operating FFO up 20% over first quarter 2014
- Overall Comp NOI up 5.3%, led by retail and apartments
- Strength in regional malls: comp sales hit $550 psf; new, same-space leases up 27%
- FFO negatively impacted by loss on extinguishment of debt, REIT conversion costs
- Arena annual stabilized NOI estimate revised downward to $55 million (see my coverage)
While Operating FFO (funds from operations) was indeed up, the company also had a quarterly net loss of $54.2 million, or $0.27 per share, compared with net earnings of $15.5 million, or $0.08 per share, for first quarter of 2014. In 2014, Forest City's results were positive because it had sold several properties.

"Our first-quarter results reflect the positive impact of our strategies of growing NOI from our mature portfolio and deleveraging at the corporate and property levels," said  LaRue, Forest City president and chief executive officer. "Operating FFO was up significantly for the quarter, primarily driven by increased NOI from the mature portfolio and lower interest expense. FFO was negatively impacted primarily by loss on extinguishment of debt from our first-quarter exchange transactions that resulted in $288.8 million of Senior Notes being converted to Class A common stock."

"Growth in office comp NOI continues to reflect the lease-up of vacancies at One Pierrepont Plaza in Brooklyn," LaRue said. That's where Hillary Clinton's campaign took two floors.

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