Skip to main content

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.

Comments

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…