Friday, September 02, 2016

"Reduced development exposure": why Forest City treats Greenland deal as an accomplishment

I'm late on this but it's worth a look.

A 4/7/16 proxy statement (anticipating a 5/25/16 annual meeting) from Forest City Realty Trust (formerly Forest City Enterprises), lists the Atlantic Yards/Pacific Park joint venture with Greenland Holdings as an accomplishment for four of five Executive Officers, who in 2014 received about $1.6 million in bonuses for that deal.

That's because they "reduced development exposure"--on the hook for a smaller amount of future payments for projects--thanks to new partnerships and an increased focus in operating income.

This came after Forest City Enterprises finally at the beginning of the year became 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.)

Regarding CEO David LaRue:
  • Reduced development exposure while activating development pipeline with Greenland Atlantic Yards, LLC, a subsidiary of Shanghai-based Greenland Holdings Group Company Limited (“Greenland”), affiliated entities of QIC, one of the largest institutional investment managers in Australia (“QIC”), and Arizona State Retirement System (“ASRS”)
  • Established Strategic Capital and Operating Partnerships with ASRS/QIC/Greenland
CFO Robert O'Brien:
  • Established Strategic Capital and Operating Partnerships with ASRS/QIC/Greenland
Executive VP James A. Ratner:
  • Reduced development exposure while activating development pipeline with Greenland and QIC. Overall development ratio decreased.
Executive VP Ronald A. Ratner:
  • Reduced development exposure while activating development pipeline with Greenland and ASRS. Overall development ratio decreased.
What it means

So, what does this mean? Wasn't the Greenland deal a disappointment? Or was it something of a success, given that it locked in a short-term loss that could be written off, limited risk, and pointed to future revenues and profit?

LaRue in 2013 said, upon warning of a possible $250 million to $350 million impairment, or writedown of assets, "Clearly we are disappointed with this possible impairment as well. It spotlights two of the hard lessons we've learned coming out of the recession.We need to control land rather than own it, prior to being ready to go vertical, and we need a strong capital partner up front for a project of this magnitude."

But it wasn't quite that bad.  As I wrote in April 2015, Forest City's deal had a stated loss of $148.4 million after taxes. I wrote in May how Forest City harvested losses while a C Corporation, thus allowing tax efficiency.

Since then, the value of buildable land has continued to shoot up, raising the value of the market-rate housing, including condos and rentals, leading to much higher prices per square foot than once projected. Also, the city has agreed to fund subsidized housing at a higher price point than the developer originally promised, thus pointing to higher returns.

Then again, it's likely that Forest City's board lost patience with the long Atlantic Yards/Pacific Park buildout, and wanted to aim at less borrowing and lower risk. So the "reduced development exposure" means both less risk of loss but also less potential benefit--but now a better shot at benefit or, at least, cost recovery.

And it raises the question--as with the sale of the Nets--as to whether a company without quarterly earnings reports might have held on longer.

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