Forest City reports FFO increase, overall losses, cites condemnation ruling in Brooklyn, increased arena income

In a press release yesterday, Forest City Enterprises issued its second-quarter and year-to-date results, highlighting a 68% increase in operating FFO (funds from operations), though total FFO was actually down about 17% for the three-month period ending in June.

That meant a $93 million net loss, compared with $34.9 million for the second quarter of 2013. The Plain Dealer explained:

The company's losses widened to $93 million, or 47 cents per share, from $34.9 million, or 18 cents per share, thanks in part to accounting for the potential Tower City real estate sales [in Cleveland].
Revenues fell 17 percent, to $229.6 million, due largely to a mall joint venture that impacted Forest City's accounting treatment of seven properties

The Greenland deal--losses

Among the factors cited in the decrease in total FFO including were a "the net loss on disposition of partial interest related to the closing of the company's joint venture with Greenland USA of $16.2 million."

The explanation, in a Form 10-Q document filed with the SEC:

Under the joint venture, Greenland acquired 70% of the entire project and will co-develop the entire project with the Company, along with sharing in the entire project costs going forward in proportion to ownership interests. For its 70% equity interest, Greenland invested cash and assumed 70% of the nonrecourse mortgage debt on the project. At June 30, 2014, $163,660,000, which represents approximately 80% of the cash purchase price, net of transaction costs, was received by the Company. The remaining cash purchase price of approximately $42,991,000 is included in notes and accounts receivable and payable 90 days after closing. The transaction resulted in a net loss on disposition of partial interest in development project of $19,590,000 ($16,211,000, net of noncontrolling interests) during the three and six months ended June 30, 2014. Upon closing, the Company determined it was not the primary beneficiary of the joint venture. As a result, the Company deconsolidated the Pacific Park Brooklyn development project and will account for the joint venture on the equity method of accounting.

David LaRue, Forest City president and chief executive officer, said:

"FFO results were impacted by a significantly lower tax benefit in the period, compared with the second quarter of 2013, and by a net loss on disposition of partial interest related to the completion of our joint venture with Greenland USA. The net loss was driven by an unfavorable ruling during the quarter in a condemnation proceeding for a land parcel at the project. While we are appealing this ruling, we have recognized the higher than anticipated costs in our second-quarter results. Absent these impacts, FFO results would have been in line with consensus estimates.

(Emphasis added)

I'm not sure what unfavorable ruling is being referred to. As reported in May, a judge rejected the state's claim that one piece of property was barely worth $2 million as a gas station, and instead valued it at nearly $9.2 million. That's likely not enough to drive the loss, so perhaps another case will emerge.

The Greenland deal--optimism

LaRue also said:

"On June 30, we closed our Atlantic Yards joint venture with Greenland USA. We received approximately $200 million in cash from the formation of the JV, and Greenland acquired 70 percent of the project and assumed a proportionate share of project costs going forward. Earlier this week, we introduced a new name for the development - Pacific Park Brooklyn - which reflects both the location of Pacific Street as a main thoroughfare, and the eight acres of open space that will be a significant resident and community amenity. In addition, we announced the selection of architects for the next three buildings and the public park. We expect to start two 100-percent affordable rental buildings and one condominium building within the next 12 months, with the first all-affordable building started by yearend 2014.
"Our joint venture with Greenland USA not only accelerates the Pacific Park Brooklyn project, and the affordable housing component in particular, but it also significantly reduces overall development risk for Forest City. With the closing, our development ratio - the total cost of projects under construction and development as a percent of total assets - stands at approximately 6.6 percent. As we continue to activate new development opportunities from our pipeline, this percentage will increase, however, not above our established strategic guideline of no more than 15 percent.

Arena revenues rise

LaRue said:

"Barclays Center and Westchester's Ridge Hill continue to contribute to bottom-line results, with a combined $3.6 million increase in Operating FFO in the quarter, compared with the second quarter of 2013...

Indeed, net operating income (NOI) for the arena, according to a Form 8-K, rose to $9,357,000 over three months from $4,955,000 last year and to $21,221,000 from $10,863,000 over six months. That's still below the ultimate goal. (Forest City gets a 55% share.)

The increased income likely results less from overall ticket sales but by controls on costs, as planned.

According to a note:

Annual NOI for the Arena is expected to stabilize at approximately $65 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 Q2 2014 NOI to arrive at an annual stabilized NOI of $35.8 million.

Nets sale planned, losses not mentioned

LaRue said:

Early in the second quarter, we confirmed that we are exploring the potential sale of our minority interest in the NBA Brooklyn Nets. There has been significant interest from qualified prospective buyers, and we are working with our majority partner to maximize the value of the team in any potential sale. Our goal is to conclude a sale of our interest by year-end, but no transaction can be assured."

According to the Form 8-K, Nets Pre-tax FFO over three months went down to $261,000 from $2,152,000 the previous year, and to $1,414,000 from $2,898,000 over six months.

Forest City and partners own 20% of the team, which is owned mainly by Mikhail Prokhorov's Onexim Group. Prokhorov's entity also owns 45% of the arena operating company.

B2 and Pacific Park

The press release said:

Projects currently under construction include the following:
B2 BKLYN, a 363-unit residential tower and the first apartment building at Pacific Park Brooklyn, is expected to open in the fourth quarter of 2015. Construction has reached the tenth floor, representing 104 of the 363 units at completion.

It also stated:

Major projects under development include Pacific Park Brooklyn (formerly Atlantic Yards)... Anticipated starts from the development pipeline in the next 12 to 18 months include the following:
At Pacific Park Brooklyn, the company, together with its partner, Greenland USA, expects to commence construction on three new buildings in the near term. Two will be 100 percent affordable rental apartments, and the third will be condominiums. The company expects to start the first affordable building before the end of 2014, the condominium building by the first quarter of 2015, and the second all-affordable apartment building by mid-2015.