Forest City announces net loss: Greenland deal to cost only $148.4M net of tax; arena underperforms, but Q4 uptick; Nets losses drop

In a press release issued yesterday, Forest City Enterprises acknowledged a net loss and poor performance for the 11 months ended 12/31/13 (the firm switched from a fiscal year that did not match the calendar year), including "underperformance" of the Barclays Center and a paper loss on Atlantic Yards.

But the firm instead stressed a "year of transformation," including reducing total debt by $1.1 billion, property dispositions, new partnerships, and the "definitive agreement" signed with the Chinese government-owned Greenland Group to buy 70% of the remaining Atlantic Yards project. It said it was 90% likely the deal would close.

The Atlantic Yards hit

According to the firm, total FFO (funds from operations) for the 11 months ending December 31, 2013 was $22.3 million, or $0.11 per share, versus $267.4 million, or $1.27 per share, for the previous full fiscal year. The firm said:

Major offsets to these positive factors were pre-tax, non-cash impairments of non-depreciable real estate of $339.8 million ($208.0 million net of tax), including impairments at Atlantic Yards in Brooklyn of $242.4 million ($148.4 million net of tax), and Las Vegas land of $97.4 million ($59.6 million net of tax).

(Emphasis added)

Note that, while Forest City in December predicted "a non-cash impairment in the range of $250 million to $350 million," the actual hit, net of tax, would be less than $150 million. In most cases, according to Investopedia, recognition of an impairment leads to a deferred tax asset.

Operating FFO for the 11 months ended December 31, 2013, was $163.4 million, versus $223.6 million for the previous full fiscal year.

For the 11 months ended December 31, 2013, the net loss attributable to common shareholders was $5.5 million, or $0.03 per share, versus net earnings of $4.3 million, or $0.01 per share, in the previous full fiscal year.

CEO comments

From the CEO, in the press release:

"2013 was a transformational year for Forest City in many ways," said David J. LaRue, Forest City president and chief executive officer. "The continued execution of our key strategies is strengthening our balance sheet and reducing risk, improving the overall quality of our mature portfolio, focusing future development in the strongest markets, and ensuring that we strive for efficient, best-in-class operations. These actions are positioning the company for future growth and value creation."
"While we are pleased with this strategic progress, our FFO results for the 11 months were clearly disappointing. Underperformance of the Barclays Center arena and our Westchester's Ridge Hill regional mall contributed to the shortfall, but the largest factors were the non-cash impairments we recognized in the third quarter on our Las Vegas land project, and at yearend on our investment at Atlantic Yards. While these impairments negatively impacted our 2013 results, they reflect our continued strategic focus on core markets and on activating our pipeline of entitled development opportunities.

(Emphasis added)

Performance of our office portfolio was down, impacted primarily by vacancy at One Pierrepont Plaza in Brooklyn. We expect improved performance in our office portfolio in 2014," he added.

Arena underperforms, but uptick

As indicated in the screenshot at right and in the press release, the Net Operating Income (NOI) for the Barclays Center was $31.5 million over 11 months.

On a 12-month basis, that would mean a NOI of $34.4 million.

That sum is far below the $65 million figure expected in 2016 and not that much above the $27.8 million needed for debt service this year (below).

Indeed, as the Wall Street Journal reported in October, Forest City has already adjusted its expectations:

"We've made an amazing first impression," said Forest City Chief Executive MaryAnne Gilmartin, who predicts annual [net] operating income will be $70 million by 2016. "Now, we turn our efforts toward calibrating the operating expenses."
But arena experts say boosting income by that amount will be difficult. There are tight margins in the concert business, and the arena faces a competitive marketplace, particularly from Madison Square Garden, which has been closed since the early summer for a renovation.

Arena NOI over three-month terms

Indeed, in December, Forest City dialed back to $65 million.

That said, Forest City's efforts to control costs have reaped some results. For the fourth quarter of 2013 (Oct.-Dec), the arena had a $13.7 million NOI, while in the previous quarter (Aug.-Oct.), it was $10.76 million. See graphic at right.

Nets losses drop

Forest City, which owns 20% of the Brooklyn Nets, lost $2.8 million on the Nets in 11 months, but $4.67 million over 12 months. In 2012, they lost $5.25 million over 11 months.

But they lost only $89,000 in fourth quarter of 2013, which indicates a significant uptick.

A B2 nugget

According to the press release:

At B2 BKLYN, the first residential tower at Atlantic Yards, located adjacent to the Barclays Center, delivery of the project's modular apartments began in January 2014. B2 will be a 50/30/20 rental building with a total of 363 rental units: 182 market-rate, 108 middle-income, and 73 low-income units, and is anticipated to open in the fourth quarter of 2014.

While in other documentation released yesterday, Forest City did say delivery of the mods began in December, I'll take the statement above as partial acknowledgment the deliveries in December were a media event.

The Greenland deal

According to the press release:

On December 16, 2013, we signed a definitive agreement with Greenland Group Co. (“Greenland”), a Chinese state-owned enterprise, for a joint venture to develop the Brooklyn Atlantic Yards project. If effectuated, the joint venture will execute on the remaining development rights, including the infrastructure and vertical construction of the residential units, but excludes Barclays Center and the under construction B2 BKLYN apartment community. Under the joint venture, Greenland would acquire 70% of the project, co-develop the project with us and share in the entire project costs going forward at the same percentage interest. The joint venture would develop the project consistent with the approved master plan. All due diligence by Greenland has been completed and no other significant contingencies preventing the transaction from closing remain. The agreement is subject to necessary regulatory approvals but it is expected that all approvals will be received, allowing the transaction to close in mid-2014.
We have analyzed the agreement and determined that, upon closing, the joint venture will be accounted for on the equity method of accounting, resulting in the deconsolidation of the investment in Brooklyn Atlantic Yards and its allocation of the site acquisition costs. Based on the facts described above, we have estimated it is 90% likely the transaction will close and the asset will be sold. As a result, we have classified the assets and liabilities as held for sale on our consolidated balance sheet as of December 31, 2013, and recorded the asset at fair value, less costs to sell, resulting in an impairment of $242.4 million ($289.9 at full consolidation) recorded during the two months ended December 31, 2013.