Monday, February 01, 2016

Forest City details arena/Nets sale: only $54M in cash after taxes/closing costs, two loans totaling $217.7M, at 4.5%

A press release today, headlined FOREST CITY CLOSES SALE OF EQUITY INTEREST IN BARCLAYS CENTER, BROOKLYN NETS TO ONEXIM SPORTS AND ENTERTAINMENT, offers some intriguing numbers about the sale to Russian billionaire Mikhail Prokhorov's company, which was already 80% owner of the team and 45% owner of the arena operating company.

While the Nets were valued at approximately $875 million and the arena holding company at $825 million, inclusive of debt, Forest City received far less than its 20% interest in the team and 55% interest in the arena held by its subsidiary, Nets Sports and Entertainment (NS&E).

Nor did it get much cash or a high interest rate on the notes. That's because of other obligations, apparently.

The purchase price for NS&E's interest in the team was $125.1 million, which is actually about 14.3% of $875 million. For its interest in the team, NS&E received a 5.5-year promissory note totaling $125.1 million, with interest at relatively low 4.5% a year.

The purchase price for NS&E's interest in the arena was $162.6 million--about 19.7% of $825 million--which takes into account "certain outstanding capital obligations between NS&E and Onexim."

NS&E got $70 million in cash at closing, before transfer taxes and closing costs, which lower the take to $54 million. Prokhorov also offered a 3-year promissory note totaling $92.6 million, again paying 4.5%.

In case Prokhorov sells or recapitalizes (restructures) either asset, the deal requires accelerated repayment.

Drilling down

"Based on total 2015 unaudited net operating income for Barclays Center, the purchase price for NS&E's interest in the arena represents a cap rate [rate of return based on investment] of approximately 5 percent."

In other words, Prokhorov isn't expecting to make much money (yet) from the arena, though that could change. Perhaps that's why the promissory notes have such a low interest rate.

That cap rate is relatively low compared to other Forest City asset sales. For example, it sold shares in its New York retail portfolio in 2011 at a 6.9% cap rate, shares in eight regional malls in 2013 at a 5.75% cap rate, and the full sale of a Philadelphia retail center in 2014 at a 6.5% cap rate.

It seems to me that Prokhorov ultimately had more leverage; the NBA wanted Prokhorov to own both the team and arena, thus restricting Forest City's ability to sell its shares And Forest City was very eager to divest itself of the two holdings before the end of 2015, so as to complete its transition to a real estate investment trust (REIT).

The press release in full below
Forest City Realty Trust, Inc. (NYSE: FCEA and FCEB) announced today that its subsidiary, Nets Sports and Entertainment, LLC (NS&E), has completed the previously announced sale of its equity interests in both the Barclays Center arena and the Brooklyn Nets basketball team to Onexim Sports and Entertainment Holding USA, Inc. (Onexim). As previously disclosed, the transaction values the team at approximately $875 million and the arena at $825 million, inclusive of debt for each asset. The transaction was approved in December by the Board of Governors of the NBA, and achieves the NBA's objective of having ownership and control of both assets under one owner.
"We are pleased to complete this important transaction, which aligns with our strategic focus on core retail, office and apartment assets in strong urban markets, and on using proceeds from non-core asset sales to further improve our balance sheet and selectively invest in entitled development opportunities in our core markets to drive future growth," said David J. LaRue, Forest City president and chief executive officer.
The purchase price for NS&E's non-controlling 20 percent equity interest in the team was $125.1 million. For the arena, the purchase price for NS&E's 55 percent equity interest was $162.6 million, after adjusting for the settlement of certain outstanding capital obligations between NS&E and Onexim. Based on total 2015 unaudited net operating income for Barclays Center, the purchase price for NS&E's interest in the arena represents a cap rate of approximately 5 percent.
Forest City owns approximately 62 percent of NS&E. NS&E expects to receive total proceeds, in a combination of cash and notes receivable, of approximately $287.7 million. For its interest in the arena, NS&E received $70 million in cash at closing, before transfer taxes and closing costs, together with a 3-year promissory note with principal of $92.6 million, paying semi-annual interest at 4.5 percent. Of the cash at closing, Forest City expects to receive approximately $54 million, after closing costs and estimated transfer taxes, in reduction of a priority loan advanced on behalf of the NS&E partners. For its interest in the team, NS&E received a 5.5-year promissory note with principal of $125.1 million and interest at 4.5 percent per annum accruing through maturity. Onexim principal Mikhail Prokhorov provided credit enhancement of the notes with an Operating Support Agreement. The terms of the notes include accelerated repayment provisions in the event of a sale or recapitalization of either asset prior to maturity. NS&E also has limited rights to transfer, assign or sell the notes, subject to approvals from Onexim and the NBA.
Evercore ISI advised NS&E on the sale of its interests in the team and arena and provided a fairness opinion to NS&E.

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