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On conference call, Forest City exec stumbles over "Pacific Park," calls "definition of affordable... appropriate in the marketplace"

Forest City Enterprises executives on a conference call with investment analysts yesterday were upbeat about the company's prospects, especially for the re-named Atlantic Yards project, but even CEO David LaRue stumbled at one point, calling the project "Brooklyn Park" before correcting it to "Pacific Park Brooklyn."

One analyst casually mis-named the project "Pacific Green," adding, "I guess we can say there's been a sea change there?" and provoking chuckles.

Yes, Atlantic to Pacific represents a sea change. It also implies that Forest City's new partners/overseers, the Chinese government-owned Greenland Group, run the new Greenland Forest City Partners, owning 70% of the project minus the Barclays Center and the first tower.

LaRue said that the joint venture will accelerate development and "significantly reduce the development risk," given that Forest City has less money committed.

Notably, he called the definition of "affordable" "appropriate in the marketplace," a reference, I believe, to fact that half the subsidized units in the next two towers would rent to those earning 165% of Area Median Income, or $141,735 for a four-person household. (That's based on 2013 AMI, which surely will rise by the time the towers are ready for occupancy.)

The new public park?

LaRue noted that the introduction of Pacific Park Brooklyn was accompanied by the announcement of architects for new buildings, a landscape architect, and a "public park that will be prominent amenity for residents and the community."

Actually, as stated in Empire State Development's 2009 Modified General Project Plan (and echoed in the 2014 Final Supplementary Environmental Impact Statement), it won't be a public park:
The publicly accessible open spaces will be built as the parcels are developed. They will be owned by a Conservancy or other not-for-profit entity established by the Project Sponsors... which will include representatives of the Project Sponsors, civic group(s) active in park matters, the owners of surrounding properties and, on an ex officio basis, the local community boards and DPR [Department of Parks and Recreation].
The Greenland deal

Analyst Sheila McGrath asked about the Greenland joint venture, including the notion of 100% affordable properties.

LaRue called it "a major watershed for the project" and "a major, I guess, positive, for us... It allows us to accelerate, as we talked about, the development opportunity." His stumble may have to do with the impairment of $242.4 million, or $148.4 million after taxes, the company recognized on the deal, rather than get its investment back fully from Greenland.

"The market support for this project has increased over time... in terms of rental rates, demand for living and working in Brooklyn," LaRue said. "We are very happy to be in this position."

Regarding the planned condo tower, he called it "a tremendous and strong opportunity given the dynamics that exist in that Brooklyn market, it's a destination of choice."

Affordable housing

Here's LaRue's description of the commitment (my coverage) to complete the pledged 2250 units of affordable housing by 2025: "In conjunction with the city and state initiatives and focus on affordable housing, as we were moving toward closing, we worked with our community partners and revised our development plan and... help the community meet their own goals regarding affordable housing."

I don't think the groups (centered around the BrooklynSpeaks coalition) threatening to sue the developer and state for delays qualified as "community partners," though, now that they've agreed not to sue, and some involved individuals eagerly support the project changes, they may now qualify as "community partners."

"Rather than having these units spread in all the building, we and they agreed that accelerating all-affordable buildings were a benefit to that community and a benefit to us," he said, regarding the two planned all-affordable towers.

Responding to one of McGrath's questions, he noted that "there is an opportunity on the rental buildings for Forest City to receive a promote" in which the percentage of ownership is increased if a certain return threshold is reached, "but it's so early in the partnership... it's hard for us to quantify or estimate what that might be."

Would they sell off the affordable buildings?

LaRue said Forest City (though clearly it's equally if not mainly a Greenland decision) would consider selling standalone buildings, but "these are going to be part of a special place. That place creation is a key and core competency that Forest City has... whether it's all affordable, 80/20, or 50/30/20, it's going to be a long-term accretive opportunity and value creation opportunity."

"We haven't clearly made a decision," he said. "We have to get them started and get them leased, but we are long-term investors and long-term value creators. We'll have to see how the project plays out."

Affordable housing definition "appropriate"

How should affordable buildings be valued, one analyst asked, adding that "they will be subject to rent control, I assume." (All the rental units, including the ones initially leasing up at market rents, will be subject to increases based on rent stabilization, not rent control.)

LaRue, not clarifying the issue of rent regulation, said non-market buildings need public partnership and support, meaning tax breaks and subsidies. "I think the development yields on these buildings are going to be slightly lower than a market building or an 80/20 building," he said. "However, working with our community partners, we have a structure in terms of the definition of affordable that we think is appropriate in the marketplace."

Actually, the community partners had no say in the skewing of "affordable" in the next two towers to the high middle-income group. Which is, apparently, "appropriate."

"We believe that the nature of the affordable unit, and the demand for the particular product,the place it's going to be, that lower return I guess is equivalent to the risk," he said. The likelihood the buildings will lease quickly offsets some of lack of market-rate increases. "Overall, the risk-reward situation, we envision very similar to other developments."

Selling the Nets

Forest City is still in the process of marketing the 20% of the Brooklyn Nets it owns. The value of the team, which on paper seems high ($1 billion-plus, perhaps) despite large annual operating losses, has "been written down over time where there's no book value," LaRue said, so "anything we would receive would be a gain."

Converting to a REIT?

One analyst asked if and when Forest City will convert from a C Corporation to a REIT, or real estate investment trust, defined as "an entity that holds real estate and potentially pays no federal income tax due to a deduction for dividends paid."

"It's a process and an issue we continue to look at," LaRue said. "We still have substantial NOLs [net operating losses] that allow us as a C Corp to continue to be very tax-efficient... As we go through repositioning, and go through non-core asset sales, it gives us some additional flexibility."

Forest City is selling assets in non-core areas like Cleveland, its home base.

"We continue to evaluate REITs, we think it's a direction that we're heading," he said, "but at this point, nothing to announce."

In the future, he noted, "lower levered portfolio and less development on our pro-rata share... bringing in strategic partners, will point to us becoming a taxpaying entity," which means they will have used those NOLs. "We haven't picked a date, but we're heading there [toward a REIT] over that time period."

FCE stock at a discount

One analyst, after congratulating company officials "on the very strong operating results," asked why Forest City stock "still trades at a material discount to NAV [net asset value]... What do you need to do to close that discount?"

"Look, we're frustrated too," replied CFO Bob O'Brien. " I think we demonstrated we set out some strategies and we're executing them... I don't think we're quite where we need to be... About 14% of NOI [net operating income] comes from non-core markets... We're working diligently to get it down to 10% or less."


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