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Forest City Enterprises reports earnings rise for first quarter 2011, claims Brooklyn office vacancies being addressed, must absorb Nets losses

Forest City Enterprises, whose Forest City Ratner arm is developing Atlantic Yards, reported positive earnings results yesterday, though the company's Brooklyn portfolio may not be as rosy as some of the rest of the business.

As stated in a press release:
First-quarter EBDT (earnings before depreciation, amortization and deferred taxes) was $127.4 million, an increase of $56.9 million compared with 2010 first-quarter EBDT of $70.5 million. On a fully diluted, per-share basis, first-quarter 2011 EBDT was $0.63, a 70.3 percent increase compared with 2010 first quarter EBDT of $0.37.

…First-quarter net earnings attributable to Forest City Enterprises, Inc. were $47.6 million, or $0.25 per share, compared with a net loss of $15.6 million, or $0.10 per share, in the first quarter of 2010. After preferred dividends, net earnings attributable to Forest City Enterprises, Inc. common shareholders was $43.7 million, or $0.24 per share, for the quarter ended April 30, 2011
The most significant driver of results: $42.6 million from the sale of land and air rights to Rock Ohio Caesars Cleveland LLC for construction of a casino in downtown Cleveland, where FCE is headquartered. (Here's the Plain Dealer coverage.)

Looking on the bright side

Outgoing CEO Chuck Ratner referenced the joint venture with Madison International Realty, in which FCE sold 49% of retail properties around New York, calling it "mutually beneficial" and showing "the underappreciated value embedded in our New York retail assets."

Maybe, but Madison's president recently said his company enters when prompted by "the fatigue of the underlying investor.

Brooklyn vacancies drive office decline

David LaRue, the incoming CEO, said that the company's office portfolio was down 2.5%, as expected, "largely due to lease expirations in our Brooklyn office properties." Of the upcoming lease renewals, about 40% are in Brooklyn, he said.

Later, in response to a question from investment analysts, LaRue said, with some decline in the authority of his voice, "We have been very pleased, looking back, 18 months ago, we'd have been a bit more nervous about whether we were going to be able to replace tenants and at what rate we were going to be able to secure tenants."

"We have been very proactive, [Forest City Ratner's] MaryAnne Gilmartin and her team, dealing with existing tenants, to get them to focus on potential early renewals as well as getting new tenant," he added. "So the market has been stronger than we anticipated and we are aggressively going out and dealing with those anticipated lease expirations."

Well, they just addressed in part it by renting to Polytechnic Institute of NYU, which a local real estate broker told the Brooklyn Paper that NYU likely took advantage of a “fantastic deal” and that Metrotech space is “going cheap.”

Where's the AY office tower?

Also, the official press release, in describing Atlantic Yards, didn't bother to include the planned office tower, a key driver of project tax revenue:
1) Atlantic Yards - Brooklyn, NY
Atlantic Yards is adjacent to the state-of-the art arena, the Barclays Center, which is designed by the award-winning firms Ellerbe Becket and SHoP Architects and is currently under construction. In addition, Atlantic Yards will feature more than 6,400 units of housing, including over 2,200 affordable units, approximately 250,000 square feet of retail space, and more than 8 acres of landscaped open space.
AY update

In both the press release and the conference call, FCE officials said that approximately 55% of the forecasted contractually obligated revenues for the arena are currently under contract.

Three months ago, FCE reported the same percentage. In September 2010, the figure was 51%.

"We are also in the process of initial planning, design, and engineering for work on the first residential multifamily building at Atlantic Yards," LaRue added.

Nets losses to hit home

The sale of 80% of the Nets has led to positive results--see the EBDT bridge below--but not in perpetuity.

Regarding the firm's investment of the Nets, LaRue noted that "entities controlled by Mikhail Prokhorov committed to fund up to $60 million of the team's losses from acquisition to the completion of the arena."

"We now that anticipate that $60 million cap will be reached sometime in the second quarter of the year… at which point Nets Sports and Entertainment, the ownership group of which we are the managing member, will need to fund the overage."

Thus allocated team losses for 2011 and about the first half of 2012 "will be in in line with losses" experienced prior to Prokhorov's acquisition, he said. "We previously thought we were done with these levels of losses but it now it appears that the cap will be reached sooner than originally anticipated."

Beekman Tower progress

Ratner cited progress leasing apartments in the Frank Gehry-designed Beekman Tower, now known as 8 Spruce Street, saying 202 of 903 unites had been leased between February 18 and May 31, with more than 100 units already occupied.

The company ethos

Executive VP Bob O'Brien, describing the progress of dispositions, said FCE was focusing on less strategic assets, in which the product and market are not strategic priorities.

"That does not mean we will never again sell core assets in a core market," he added. "As I've said often, every asset is for sale, it's just got to be at the right price."

Forest City Enterprises EBDT Bridge June 2011