Forest City Enterprises reports better year-end results, 82% of forecasted contractually obligated arena revenues (before hockey)

Along with the 10-K document that revealed Forest City Ratner's plans to delay a deck over the Vanderbilt Yard, Forest City Enterprises yesterday issued a press release, Forest City Reports Fiscal 2012 Fourth-Quarter and Full-Year Results, indicating better results, as well as an increase in contractually obligated arena income:

Fourth-quarter FFO [funds from operations[ was $77.5 million, compared with a loss of $40.7 million in the fourth quarter of 2011. On a fully diluted, per-share basis, fourth-quarter 2012 FFO was $0.36, compared with a per-share loss of $0.24 in 2011.
Full-year 2012 FFO was $267.4 million, or $1.27 per share, compared with $178.2 million, or $0.88 per share for 2011. The primary factor contributing to the year-over-year FFO variance was a decrease in the net loss on land held for divestiture activities of $123.8 million ($75.8 million net of tax) related to the company's 2011 decision to divest a significant portion of its land development business.
...Fourth-quarter Operating FFO was $41.9 million, compared with fourth-quarter 2011 Operating FFO of $52.4 million. Full-year 2012 Operating FFO was $234.7 million, compared with $227.5 million for fiscal 2011...
Net Earnings/Loss
Fourth-quarter net earnings attributable to Forest City Enterprises, Inc. were $58.5 million, compared with a net loss of $105.4 million in the fourth quarter of 2011. Net earnings for the fiscal year ended January 31, 2013 were $36.4 million, compared with a net loss of $86.5 million for fiscal 2011.

Better partnerships, but losses in Brooklyn offices

"We made significant progress during 2012 in our strategy of building a strong sustaining capital structure, deleveraging our balance sheet and improving our debt metrics," said FCE CEO David LaRue, citing partnerships with the Arizona State Retirement System for a $400 million multifamily development fund and TIAA-CREF on 8 Spruce Street in Manhattan.

Also, he said, "as we recently announced, we negotiated and closed a new, three-year $465 million revolving credit facility with improved pricing and more flexible, favorable terms."

While "[o]perating FFO from the company's Real Estate portfolio increased $11.9 million for 2012," thanks to lower interest expense, a change in fair market value of derivatives, increased sales at the Stapleton project, and a ramp-up of new properties, there were some offsets, including "non-recurring 2011 lease cancellation fee income of $6.5 million at two Brooklyn office properties."

Presumably there will be some follow-up.

Arena opening; 82% of income

The press release stated:

The largest of the 2012 openings was Barclays Center arena, an anchor element of the Atlantic Yards mixed-use project in Brooklyn. Home of the NBA Brooklyn Nets, Barclays Center opened in September and has already welcomed approximately 1.4 million visitors for concerts, professional and collegiate sports, family entertainment and other events. In October, Forest City announced that the NHL New York Islanders will play their home games at the arena beginning in the 2015-16 season. Eighty-two percent of forecasted contractually obligated revenues for the arena are currently in place and day-of-event revenues (including single-ticket sales and concessions) have been in line with expectations to date.

In September 2012, the contractually obligated revenue figure was 75%, not 82%.

The 2012 Annual Report Supplemental Package states:

b) Annual NOI for the Barclays Center Arena is expected to stabilize at approximately $70 million at full consolidation in the 2016 calendar year. Based on the partnership agreement, we expect to receive 55% of the NOI allocation until certain member loans are repaid. Therefore, we have included a stabilization adjustment to the Q4 2012 NOI to arrive at an annual stabilized NOI of $38.5 million.

It also indicates that the income will go up when the Islanders start paying rent, which suggests the move might be crucial:

[The 82% figure] 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. Percentage at January 31, 2013, excludes anticipated rent from the New York Islanders since the team is not anticipated to relocate to Barclays Center until 2015 and is subject to approval by the NHL.

Arena revenues

The document states:

The Arena naming rights agreement with Barclays Services Corporation, which commenced with the opening of the Arena, has a 20-year term, subject to certain extension rights. Arena naming rights revenue is recognized on a straight-line basis over the contract year.
Arena founding partner and sponsor agreements entitle the parties to certain sponsorship, promotional, media, hospitality and other rights and entitlements. These agreements expire at various terms ranging from one to seven years from the opening of the Arena and is recognized on a straight-line basis.
Arena suite licenses entitle the licensee the use of a luxury suite in the Arena. The terms of the suite license agreements commenced on the date the Arena opened with terms ranging from one to seven years. Revenue is recognized on a straight-line basis over each contractual year.
Ticketing fee revenue is based on the Arena's share of ticket sale fees in accordance with an agreement with Ticketmaster. Revenue from ticketing fees is deferred and recognized upon settlement of the related event.

What about the Nets


According to the annual report 10-K, in the past year Nets Sports and Entertainment still had to fund Nets losses:

The Company's ownership interest in The Nets is through Nets Sports and Entertainment LLC (“NS&E”). NS&E also owns Brooklyn Arena, LLC (“Arena LLC”), an entity that through its subsidiaries oversaw the construction of and has a long-term lease in the Barclays Center arena, the home of The Nets. NS&E consolidates Arena LLC and accounts for its investment in The Nets on the equity method of accounting.
On May 12, 2010, entities controlled by Mikhail Prokhorov (“MP Entities”) invested $223,000,000 and made certain funding commitments (“Funding Commitments”) to acquire 80% of The Nets, 45% of Arena LLC and the right to purchase up to 20% of Atlantic Yards Development Company, LLC, which will develop non-arena real estate. In accordance with the Funding Commitments, the MP Entities agreed to fund The Nets operating needs up to $60,000,000.
The MP Entities met the $60,000,000 funding commitment during the three months ended July 31, 2011. As a result, NS&E was required to fund 100% of the operating needs, as defined, until Barclays Center was complete and open, which occurred on September 28, 2012. Thereafter, members’ capital contributions are made in accordance with the operating agreements. During the year ended January 31, 2013, the Company funded $9,619,000 of The Nets operating requirements, net of the reimbursement
from the MP Entities for funding related to the 2012-2013 season.

But the team value is way up.
Barclays Center financing

The document states:

As of January 31, 2013, we had three nonrecourse mortgages greater than five percent of our total nonrecourse mortgage debt and notes payable. The mortgages, encumbering New York Times , an office building in Manhattan, New York, Westchester’s Ridge Hill  and Barclays Center arena,  have outstanding balances of $640,000,000, $472,000,000 and $371,655,000, respectively, at January 31, 2013.

This is presumably beyond the $511 million in arena financing.

Variable Interest Entities

The document cites various joint ventures, including the arena:

The Company’s VIEs consist of joint ventures that are engaged, directly or indirectly, in the ownership, development and management of office buildings, regional malls, specialty retail centers, apartment communities, military housing, a hotel and The Nets. As of January 31, 2013, the Company determined that it was the primary beneficiary of 31 VIEs representing 22 properties (19 VIEs representing 10 properties in the Residential Group and 12 VIEs representing 12 properties in the Commercial Group).
The creditors of the consolidated VIEs do not have recourse to the Company’s general credit.
...During the year ended January 31, 2013, the Company determined that the entity that owns Barclays Center is deemed to have sufficient equity and cash flows to support its operations without the need of any additional financial support from its partners. As a result, the Company determined that it no longer qualified as a VIE. The impact of the removal of this VIE within the VIE parenthetical disclosures on the Consolidated Balance Sheets were decreases of $552,226,000 to real estate, net, $1,405,000 to
cash and equivalents, $17,574,000 to restricted cash and escrowed funds, $26,681,000 to other assets, $192,958,000 to nonrecourse mortgage debt and $84,908,000 to accounts payable, accrued expenses and other liabilities from the balances disclosed at January 31, 2012.