Forest City Enterprises reports big drop in quarterly profits, mainly because last year they could sell Nets share; "forecasted contractually obligated revenues for the arena" have risen only from 51% to 56% in one year

Forest City Enterprises's FY 2011 second-quarter and year-to-date results, as noted a press release yesterday, show earnings down, mainly because the company--parent to Forest City Ratner--didn't have shares in a losing Nets team to sell this year.

Also, as noted below, the public statement contained an indication that sponsorship sales for the Barclays Center arena could be more robust.

Earnings down

For this quarter, net earnings declined from $.62/share to $.02/share over last year, a phenomenon that was emphasized by the AP and Cleveland Plain Dealer in their stories.

By another measure, according to the release, the drop was not as bad:

Second-quarter EBDT (earnings before depreciation, amortization and deferred taxes) was $70.7 million, compared with 2010 second-quarter EBDT of $105.6 million. The primary driver of the quarter-over-quarter variance was the second quarter 2010 pre-tax gain of $31.4 million related to the disposition of a partial interest in the Nets basketball team, with no comparable event in 2011.

On a fully diluted, per share basis, second-quarter 2011 EBDT was $0.35, compared with 2010 second-quarter EBDT per share of $0.54. Total EBDT for the six-months ended July 31, 2011, was $198.1 million, or $0.98 per fully diluted share, compared with last year's $176.0 million, or $0.91 per share.

Revenues down, though less than 15%

Second quarter revenues dropped less than 15%, while first half revenues were down only slightly. From the release:

Second-quarter 2011 consolidated revenues were $253.2 million compared with $294.2 million last year. First half 2011 revenues were $561.6 million, compared with $563.0 million for the six months ended July 31, 2010.

Losing the Nets helped

From the release:

EBDT results from the Nets Segment decreased $27.7 million, compared with the same period in 2010, primarily due to the nonrecurring 2010 gain on disposition of partial interest of $31.4 million, partially offset by the decrease in Forest City's allocated share of team losses of $3.7 million.

Arena forecast revenues up only slightly

From the release:

Work continues at Barclays Center at Atlantic Yards, and an official opening date of September 28, 2012 has been set for the arena. Approximately 56 percent of forecasted contractually obligated revenues for the arena are currently under contract.

They haven't made much progress in the past year. Three months ago, the figure was 55%. Six months ago, the figure was 55%. In September 2010, one year ago, the figure was 51%.

At the past year's pace, they won't be that much past 60% in September 2012 when the arena opens. I wouldn't doubt they're working on some deals and that they want a much higher number.

A footnote explains:

Represents the percentage of forecasted contractually obligated arena income that is under contract. Contractually obligated income, which include revenue from naming rights, sponsorships, suite licenses, Nets minimum rent and food concession agreements, accounts for 72% of total forecasted revenues for the arena.

If you're reading tea leaves, last September's press release included that second sentence in the body:

To date, approximately 51 percent of forecast contractually obligated income for the arena is under contract. Contractually obligated income, which includes revenue from naming rights, sponsorships, suite licenses, Nets minimum rent, and food concession agreements, accounts for 72 percent of total pro-forma revenues for the arena.

Success with Gehry building and 80 DeKalb

The release emphasized success with two New York projects:

"Our portfolio continued to show strength in the second quarter, despite the overhang of economic uncertainty, high unemployment and market volatility," said David J. LaRue, Forest City president and chief executive officer. "Our residential portfolio had increased comp NOI, occupancy and net rental income, compared with the same period in 2010, as we continue to see solid fundamentals in multifamily, particularly in our core markets. Our retail portfolio continues to improve, with gains in comp NOI, comparable occupancy and year-to-date comparable mall sales. In office, quarter-over-quarter occupancy was down modestly on the timing of lease expirations, but comp NOI was up due to improved operating performance in our life science office properties.

"During the quarter, we also made important progress in our ongoing effort to improve our balance sheet and overall debt metrics. In particular, the recapitalization and modified financing for 8 Spruce Street and DKLB BKLN, which we announced in early July, reduced our pro-rata share of the debt on these projects by more than $285 million, while also extending loan maturities for both properties. In addition, our successful offering of $350 million of Convertible Senior Notes, which closed July 19, took advantage of a window of opportunity in the debt markets to secure capital at an attractive rate and term. We have used, and continue to use, the proceeds from that offering to address higher-rate, nearer-term maturities, including selectively retiring debt at a discount.

AY tower progress?

LaRue added:

"We're pleased with the overall progress of our under-construction pipeline, particularly the remarkable pace of lease-up at our 8 Spruce Street project in Manhattan. We also continue to take advantage of entitled opportunities at our large, mixed-use projects. These include the 220-unit Novella apartments at Stapleton in Denver, for which we secured construction financing and began preliminary site work in early August, and the first residential building at Atlantic Yards in Brooklyn, for which we filed for building permits in late August."

Elsewhere in the press release, the firm stated:

In Brooklyn, design and engineering work continue for the first residential building at Atlantic Yards, and the company recently applied for building permits.

Note that Forest City did not announce the filing of building permits for that first tower but commented only after Brownstoner broke the news. So it's not clear how ready they are.

The Gehry tower

From the release:

The pace of lease up at the Frank Gehry-designed 8 Spruce Street has been noteworthy and a testament to the quality of the property and strength of the lower Manhattan rental submarket. The leasing office opened February 18 and the first tenant move-ins occurred the week of March 14. As of August 30, more than 450 leases have been executed, or approximately half of the total units in the building at completion, at rents at or above pro-forma for the units leased to date. More than 350 units are already occupied, and build-out continues for units on the upper floors.

Cautious outlook

From the release:

"We are mindful of the slow pace of economic recovery and the resulting market volatility," said LaRue. "Accordingly, our outlook is cautious. Despite the uncertain economic conditions, we continue to see solid real estate fundamentals in our core markets and are pleased with the strength of our portfolio. We are focused on bringing our under-construction projects online as contributors to additional growth."

In the pipeline: AY without office tower?

The first project is described:

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.

Note what's missing, as in the statement three months ago: a plan for an office tower. It's also a bit odd to say Atlantic Yards is "adjacent" to the arena, given that it would surround the arena, and the arena has always been described as part of Atlantic Yards.