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Forest City executives call AY "real value proposition," say "land prices seem to have come back for new opportunity" (what about that railyard?)

Executives at Forest City Enterprises (FCE), speaking yesterday in a conference call with investment analysts to discuss first quarter results, said their optimism about the real estate market was continuing to grow--and that progress on the Atlantic Yards project was significant.

(The webcast is here. FCE's annual meeting will be held at 2 pm June 16 in Cleveland, and will be webcast.)

"We believe the bottom has been reached for most real estate fundamentals," declared FCE CEO Chuck Ratner, who acknowledged that "clearly that recovery is fragile."

AY progress

"Without question, however, our biggest pipeline-related achievement during the first quarter was obtaining vacant possession in Atlantic Yards in Brooklyn, closing our new partnership with Mikhail Prokhorov for the ownership of the Barclays Center arena and the Nets team and continuing construction work on the arena," Ratner said.

"Vacant possession" referred not to the entire Atlantic Yards site, or even the entire first phase, but the arena block.

"All projected debt and equity needed to complete the arena construction has been fully funded, and we expect to open in late spring/early summer of 2012," he said.

It's unclear what "open" means, given that Forest City Ratner executive Maryanne Gilmartin said in an affidavit in April:
Furthermore, it takes at least three to four months to commission an arena like Barclays Center--i.e., to test and refine the various buildings systems and the various operations (such as security and food services) that must be performing properly and efficiently before the arena can be opened for the professional basketball season. In other words, it is essential that the arena be completed by early July 2012, so that the commission process can be completed by the opening of the basketball season in October 2012.
"Real value proposition"

"Y'know, we’ve had a lot to say about Atlantic Yards in our press releases and in our last conference call," Ratner said. "Suffice it to say, we’re very excited about the progress of the project and the team and our new partner, we’re moving forward aggressively."

"But let me just share this reflection," he added. "Y’know, in the last three to five years, all that anybody ever saw at Atlantic Yards was risk and losses from the basketball team. Look where we are now. We’ve sold 80% of the team, which was a major drag on our earnings, to a well-capitalized owner who is committed to the business. As to the arena, we are investors in a great real estate asset and we are managing partners in a great real estate asset in a great market. We together with our partners own 55% of the arena and we are the managing partner. It is a real value proposition for Forest City."

Construction costs and land costs

Analyst Rich Moore asked, "As you look at construction costs today… would you say, ignoring land, 15-20% lower if you commit to something today, does that sound reasonable?"

"Construction costs did come down," Ratner responded. "As an example, if we were pricing Beekman [Tower] today… we would price it for less, and we got a $20 million savings on Beekman, when we went out into the marketplace and were able to renegotiate some of those contracts. So, I think prices are lower than three years ago."

"I think they’ve remained pretty flat over this last 12 to 24 months, and frankly that I think things aren’t yet penciling," Ratner added. "What I’ve been surprised at, Rich, to be honest with you, is how quickly land prices seem to have come back for new opportunity. We were in California… we were out looking for opportunities to do residential… The price of the land seems to be again very high. So it’s the same struggle I’m afraid that it’s always been. And so far that relationship between the costs and the rents hasn’t yet come back to provide for opportunity."

What about AY?

Note that when Forest City Ratner renegotiated a sweeter deal with the Metropolitan Transportation Authority last in June 2009 for the Vanderbilt Yard--having to put only $20 million down, rather than $100 million, and getting to pay off the rest at a generous interest rate--defenders of the deal, such as mayoral appointee Jeff Kay, declared, “The market is what the market is” and "But there is no other market."

In a 1994 New York Times editorial about a similar dilemma, the newspaper opined, "The most sensible course now is for the city to find out anew the market value of this property, and that cannot be accomplished through negotiations with one bidder."

Ramp up development?

One analyst asked, "Do you think there’s any chance that at the end of the year you will ramp up the development pipeline?"

"The pace of that is always subject to judgment," Ratner responded. "But there's a couple of realities we have to face. In the longer term, [I'm] not worried about the next six months, I’m talking about the next six years, clearly the demographics for the real estate industry… are very good. With a prolonged period of time of very little supply, that’s going to create demand… we feel very good about our positioning."

"Overall, it’s a timing question more than if, which is where we were a year, year and a half ago.
So far, there are very few if any places where the numbers pencil to do new development," he continued. "That is, the rents you can get in today’s markets don’t provide an adequate return on the capital you need to invest… We have not found a tremendous number of opportunities."

"We will start a couple of small buildings, perhaps, in Washington, but other than that we don’t plan any major ramp-up of new development in the time frame you suggest."

First tower on time?

In other words, it doesn't look like the first residential tower, B2, will break ground this year. B2 is supposed to take 21 months to build, according to the Technical Memorandum from the Empire State Development Corporation. For B2 to open in October 2012 along with the arena--it's always been the plan to open the two simultaneously--it would have to break ground by January or February 2011.

Local positioning

"I do want to say," Ratner continued, "We have embedded in the Forest City portfolio today lots of very good opportunity for when that time approaches… and when the numbers work we will be, as we were the last time, one of the first to market. Because in places like the Southeast Federal Center, we call it The Yards, in Washington, Waterfront in Washington, Atlantic Yards in New York, Stapleton in Denver, … in very good markets, we have very well positioned real estate, with lots of investment sitting there to provide the source of our equity to go forward. I don’t think it will happen as early as the end of the year, but we do expect it will happen."

Executive VP and CFO Bob O'Brien added, "There really is almost no debt market available for construction loans… unless it’s a fully leased office building."

In other words, don't hold your breath for Building 1, the office tower once dubbed "Miss Brooklyn."

Share of losses

Given that Prokhorov now owns 80% of the Nets, what percentage of the team's losses will FCE face?

Joanne Minieri, president and COO of Forest City Ratner, responded, "During the pre-Brooklyn period, there's a condition within the sale, Mr. Prokhorov will cover the first $60 million, we have a little bit of exposure. Post Brooklyn, we and partners are 20% owners. I would say that Mr. Prokhorov as the managing member.. .will likely handle most of the losses going forward."

Reasons for optimism

In closing, Ratner cited three factors that give retailers a sense of optimism. People are less concerned about job losses, "the personal savings rate, which had gone way up… has been somewhat moderated," and people feel more confident about the value of their homes.

80 DeKalb Avenue

Also on the call, the executives were asked about the apartment tower in Brooklyn known as 80 DeKalb. The 365-unit building, said Executive VP David LaRue, is "currently 85% leased, which we are very pleased about … this has been done in basically the last six months of this year, which is a very quick lease, on historical standards."

"With regard on the refinancing," he said, "we do have some time to do that… we have the ability to finish leasing the building. Over the course of the next year, we feel comfortable we’ll come up with a solution."

O'Brien added, "That is financed with tax-exempt bonds, so the cost of that capital is much lower. We’ve alluded to the fact that the initial rents are somewhat lower than our initial pro forma was, but the lease-up is much faster than anticipated, and remain confident we’ll be able to address the permanent financing."


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