In Forest City conference call, minimal discussion of Atlantic Yards; Nets losses, as projected in June, continue to grow; arena expected to boost income

There wasn't that much new about Atlantic Yards in Forest City Enterprises' second-quarter conference call (transcript) yesterday with investment analysts that wasn't in the press release two days earlier.

Yes, work continues on the arena, and a permit has been applied for the first residential tower.

FCE President and CEO David LaRue made a comment that echoed the "We control the pace" comment from 2008:

In our core markets and key mixed use projects such as Denver and Stapleton, Atlantic Yards in Brooklyn and The Yards in DC, we have existing entitlements that we are able to activate judiciously.

In other words, they build when they get financing.

More on that first tower: subsidies?

One analyst asked about that first tower.

Paul Adornato - BMO Capital Markets:

First on the multifamily side. I was wondering if you could talk a little bit about the apartment that you're contemplating at Atlantic Yards. What's the concept, what's the price point, and will there be an affordable component to this project?

Matthew L. Messinger, Forest City Ratner:

Yes, the first tower at Atlantic Yards that we're playing with is anticipated to be a 50-30-20, which is a 50% affordable, a combination of middle-income and low-income. So the same 20%, you would find in an 80-20 building, but a targeted middle-income component in bands as well. In general, Atlantic Yards and the market components of Atlantic Yards, as well as the low income for that matter, T2 is just a few blocks from our [80] DeKalb building which we are very pleased with the result, has just stabilized in the last year or so. A few blocks away that building performs very well in what ended up being a fairly competitive time in terms of new openings at the same time and we have a great data point there and great success to sort of draft behind.

Paul Adornato:

Okay. I guess as a follow-up, what specific incentives are related to this project? I mean to this building as opposed to the rest of the project?

Matthew Messinger:

I don't know that there is specific incentives for the Tower per se. There is a 50-30-20 program encouraged by the city which with any 80-20 type program there is obviously the federal law income tax housing tax credits that come along with it. There is certain taxes against financings that bonds that are made available subject to layering in a third-party credit enhancer and depending on where markets are, and there is a city provided small second mortgage which could act as an additional inventive to encourage that middle income component.

He didn't say whether Forest City was seeking, or would get, the additional subsidies it had sought earlier this year. The land for 80 DeKalb was, as far as I could tell, pretty cheap.

Nets losses

Chief Financial Officer Bob O'Brien said:

The Nets had a pre-tax EBDT [earnings before depreciation and taxes] increase to $7.6 million compared to the first half of 2010 due to the decrease in Forest City's share of allocated losses. This was offset by the 2010 gain of $31.4 million related to the sale of a majority Forest City's interest in the team with no comparable transaction in 2011.

Before I leave the Nets, in our first quarter filings we disclosed that we expected to reach the $60 million cap for commitment by the Prokhorov entities to fund team losses in the second quarter. As our second quarter filings indicate, we have funded roughly $20 million of losses year-to-date. For 2011 and 2012, we anticipate that losses impacting EBDT will be in line with pre-sale loss ranges.

In June, LaRue had 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."

Figuring out what the number will be isn't easy. Take, for example, a 10-Q document filed with the SEC in September 2009:

Our equity investment in The Nets incurred a pre-tax loss of $8,307,000 and $18,988,000 for the three and six months ended July 31, 2009, respectively, representing a decrease in allocated losses of $241,000 and $3,033,000 compared to the same periods in the prior year. Generally accepted accounting principles require us to report losses, including significant non-cash losses resulting from amortization, in excess of our legal ownership of approximately 23%. For the six months ended July 31, 2009 and 2008, we recognized approximately 51% and 57% of the net loss, respectively, because profits and losses are allocated to each member based on an analysis of the respective member’s claim on the net book equity assuming a liquidation at book value at the end of the accounting period without regard to unrealized appreciation (if any) in the fair value of The Nets. For the six months ended July 31, 2009, we recognized a lower share of the net loss than in the prior year because of the distribution priority among members.

Included in the losses for the six months ended July 31, 2009 and 2008 are approximately $10,238,000 and $13,544,000, respectively, of amortization, at our share, of certain assets related to the purchase of the team.

Income increasing

O'Brien said the arena would help their bottom line:

That's part of our – deleveraging is part of our plan, but it's a combination of reducing debt at the property level, reducing the debt corporately, but also growing NOI and I think you've seen demonstrated by our portfolio over the last few quarters good and significant growth and continued growth and that is going to be supplemented as we add the arena, as we add Beekman [Tower in Lower Manhattan], as we add Ridge Hill [in Yonkers], as we add (inaudible) to the NOI [net operating income] side of the equation.

O'Brien, arguing that Forest City's assets are undervalued compared to the stock price, pointed to the arena's potential:

So we have probably, certainly over the last three years probably the highest level of cash and liquidity that we've had in some time. The risk in our development pipeline has certainly come down, from a cost exposure standpoint it clearly has. I think the evidence of the lease-up at 8 Spruce is just indicative of the embedded value in the development pipeline, which for quite some time people have discounted and I think not given us much credit in terms of value opportunity there. Clearly, it's being proven at Beekman. The progress while steady at Ridge Hill is not on a pace that we would prefer, but I think it's reflective of the economic conditions, but again continuing to make progress there. I'm anxious to get that arena open. I think it's going to be a great asset for us. All three of those transactions I just talked about are very large obviously and not producing any NOI to help evidence the fact that the leverage levels are at least reasonable and then again as we referenced earlier, the fact that we have an opportunity in today's environment to drive down the cost of our debt portfolio.