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Forest City CEO: Barclays Center rank in ticket sales "important" measure but, given start-up cost, "not the ultimate outcome" (forecasted revenues at 84%)

Last Wednesday, Forest City Enterprises, parent of Forest City Ratner, held an Investor Day Conference in Washington, DC, and while the discussion leaned toward Washington-related projects, they did discuss the Barclays Center and larger Atlantic Yards project. (Here's a rough transcript from Seeking Alpha, as well.)

CEO David LaRue noted the recent news from Billboard magazine that the Barclays Center was number one in terms of concert/family show revenue (not sports) for the first half of this year. "So, overall, I think that equates to about 183 events that we've had since we've opened, over 50 concerts at Barclays Center," he said. "It's an important measurement, but not the ultimate outcome. As we've said, our goal is to stabilize Barclays Center in 2015, '16 with the New York Islanders moving to the center."

As noted on page 21 of the slide presentation, the Barclays Center has 84% of forecasted contractually obligated revenue in hand, up from 82% in March 2013 and 64% in spring 2012. This raises the question: what would they have done to stabilize income if the Islanders hadn't moved? (Answer: something.)

The Billboard measure, he said, "is important because what we think it's done is established as Barclays Center as a place. And again, as part of our objective of creating distinctive places, I think the acceptance in the marketplace of this center is evidenced by those tickets and revenue numbers. It's our objective, and clearly our responsibility, to translate from revenue down to measurable net operating income. And that's what our New York team has focused on as we move forward to the stabilization of that project."

Start-up costs

Later, LaRue elaborated that "just like any other business, initial start-up costs are much higher than they will stabilize at. Our team is focused on that stabilization and objective of the $70 million [expected revenue]. So, the revenue coming in is great. It's not so great if you have to spend it all. And so we still have not yet made our first anniversary. We opened September last year, on September 28. We are continuing to work with our management team, with the third-party manager of the center, to now focus in on profitability beyond, I think, a venue creation and with the--and do both hand-in-hand for that profitability. So we're still looking at stabilization when the Islanders move in, and again, we're targeting in that 15-16 hockey season when they can move out of that lease in the facility in Nassau.

First tower

LaRue mentioned B2, the first Atlantic Yards tower, built via modular construction: "Modules of steel frames have arrived at the factory. We are starting construction of those steel frames. We'll open that in the second quarter, third quarters, early summer of next year. And again, it will be 363 units of 50% below market, 50% market rate. And, again, we anticipate very strong reception of this product in the market based upon the dynamics that are existing in Brooklyn and the New York market in general in terms of rent--rental rates and levels of demand from renters in the markets."

See p. 23 of the slide presentation.

Two phases

And while state documents have always described the two phases of Atlantic Yards as being west and then east of Sixth Avenue, LaRue explained why Forest City plans to leapfrog to the surface parking lot before building on the railyard. "[O]n both phases, this includes what is Phase 1, land we already own, and then Phase 2, land that will be--er, development rights that'll be created over the MTA [Metropolitan Transportation Authority]." Note that some of that land is not owned by the MTA but is still owned by private owners.

"We ultimately can have--will have rights to 6,400 residential units and 2,250 affordable units," LaRue continued. "This is subject to ongoing--an update of the environmental impact statement and ongoing litigation that we are working our way through from the--with regard to the impact that this has, based upon the development timeline." Indeed, there's a Supplemental Environmental Impact Statement [SEIS] process under way, with a draft SEIS pending, and then a public hearing.

"As we've noted here, this is a significant investment for Forest City where we have approximately $500 million at this time invested in the Atlantic Yards development project," LaRue stated. "But again, in a very strong market and continues to get strong, as evidenced by properties that we own in the market and market studies."

New capital

CFO Bob O'Brien cited Forest City's recent partnership with the Arizona State Retirement Fund. "This is a partnership of which we're very proud of. Arizona really chose to work with Forest City in a development partnership as a reflection of what we've been able to do across the country. Their desire was to invest in some of the key core markets across the U.S., and were finding it difficult to buy into those markets given where cap rates and acquisitions were. They studied our portfolio, they looked at our expertise and, importantly, looked at the pipeline of opportunity that already existed on our balance sheet. Pipeline of opportunity here at The Yards, at Atlantic Yards in Brooklyn and elsewhere."

"As Dave [LaRue] mentioned there, we closed on two transactions, one in Brooklyn and one in San Francisco. They're actively pursuing four more with us currently," O'Brien continued. "So it's not new cash we have to put in. It's activating that development investment we have on our balance sheet, critically important, accelerating the--pushing new development opportunities vertical, bringing them closer and quicker to revenue streams, quicker than we could do with our own equity capital, and a key partner for the future as well."

C Corp vs. REIT

Forest City, O'Brien noted, is often asked why the company is a C corporation rather than a REIT (real estate investment trust), especially "since most of our competitors are organized as REITs. It really boils down to one thing, and that's taxes. We pay almost no federal income tax... Out portfolio has generated tax losses. We can shelter the income. And importantly, as we work to divest of non-core assets in non-core markets, we're able to shelter those gains with over $200-plus million of net operating losses that sit on our balance sheet. So it's something that we consider. We understand that that's different, but the real difference is the tax collection."

" As we monitor that, and plan that out, we want to be prepared," O'Brien  continued. "As Dave [LaRue] and I have said, we'd much rather pay our shareholders than the federal government, so when the time comes and as we reach the time where those net operating losses are gone, and we aren't sheltering our income, that's clearly something that we're going to seriously consider. As we project out, we don't see that happening until beyond 2014 or '15. But that can change, depending upon the acceleration of asset sales and the gains that are embedded in the assets that we do sell."

Also, as noted on page 16 of the slide presentation, Forest City has far more flexibility to retain and invest cash rather than distribute it through dividends.

Brooklyn office market

LaRue pointed to p. 26 of the presentation, which shows a drag in office net operating income, or NOI. Forest City's Pierrepont Plaza in Brooklyn, where "we had the tenant vacate," was "the main driver" of that number.

But, LaRue said, "we are in a strong market. There are strong fundamentals in the marketplace for office... And as we look forward, based upon discussions we have ongoing, we see that 2014 and beyond, we have a great opportunity to reverse that trend, lease that space, and continue to keep our buildings occupied. That again I think is kind of a direct reflection of the strength of Brooklyn in particular... as a place to be."

Demographic drive

Deborah Ratner Salzberg, president of Forest City Washington, pointed to p. 40 of the slide presentation, which noted the region's demographic strengths.

"In DC alone, we've averaged 1,100 new residents annually in the past year--the past several years. Half of these are echo boomers, or people aged 25 to 29. [The slide says 25-34.] Three of the top echo boomers enclaves are in the DC area, in DC, Alexandria and Arlington. The interesting thing is seven of the top eight echo boomer enclaves are in Forest City core markets. You can see them on the map, cities like Boston, San Francisco, Denver, and New York. We have a very low unemployment rate, relatively speaking. We have an unemployment rate of 5%.

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