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Forest City noncommittal about selling arena with management in place, tight-lipped about stalled B2, says Brooklyn residential market booming

Executives at Forest City Enterprises, speaking yesterday during a conference call with investment analysts, aimed to pre-empt pesky questions about the stalled B2 tower, the Barclays Center, and the Brooklyn Nets, but they couldn’t avoid follow-ups about the latter two.

CEO David LaRue, before opening the call to questions, said he’d address some “headline issues.” Repeating statements made in previously filed documents, he said that the potential sale of the 20% of the Nets had led some potential buyers to express interest in the 55% of the arena operating company that Forest City owns with partners.

“As we have stated previously, the arena is not a core product for us, although it is a great asset, and we would be able to trade that if the economics were right,” he said. “We now believe there is sufficient information for prospective buyers to assess the significant value we have created in the arena.”

Level of interest in the arena, management in place?

During the Q&A, one analyst asked Forest City to characterize the interest level in the arena, as well as address news coverage regarding the reported desire to keep the current management in place, a reported source of conflict.

LaRue was vague, saying the formal process on the arena hadn’t started. “However, we have determined that, based on the performance of the arena, the number one destination in terms of ticket sales in the U.S. not only in 2013 but year to date in 2014, this is the time to begin that process.” He didn’t mention that net operating income is well below projections.

“As far as how the deal is going to end up, it is to way too early to speculate,” LaRue said, saying “we think the management team does a great job.. there may be buyers that are interested in that.”

“We’re going to make sure we balance all the offers and maximize, which is our responsibility, the value for our shareholders, our partners, and the community, where we do a lot of business and intend to continue to do a lot of business,” he said, somehow suggesting that the goal was not merely shareholder value. “It’s very important we do all those things, for the long-term value of Forest City Enterprises.”

Ownership complications

One analyst noted that one document suggests that Forest City owns only about 38% of the arena, but another suggests that FCE would ultimately get 55% of net operating income.

CFO Bob O’Brien explained that was because Forest City only owns a piece of the holding company, Nets Sports & Entertainment, that owns 20% of the team and 55% of the arena, but it made loans which ensure it would get paid first.

From a Form 10-Q document filed with the Securities and Exchange Commission (SEC):
In the three months ended September 30, 2014, we began discussions with several interested parties for the potential sale of our ownership interests in The Nets. Through those discussions, certain parties have also expressed interest in acquiring a portion of our ownership interests in Barclays Center. Our ownership interest in The Nets and Barclays Center is through Nets Sports & Entertainment (“NS&E”). NS&E owns 20% of The Nets and 55% of Barclays Center. We own approximately 62% of NS&E, with the remaining 38% of NS&E being owned by several minority partners. In the event of a sale of NS&E’s ownership interests, NS&E would be entitled to remaining cash proceeds after assumption of our proportionate share of debt, which approximates $42,000,000 related to The Nets and $349,000,000 related to the Barclays Center and repayment of certain funding requirement made by the majority partner in The Nets on behalf of NS&E of approximately $25,000,000. We have also made certain loans to the minority members of NS&E which are required to be repaid to us prior to the minority partners of NS&E being able to participate in the distributable cash flow from any sale. At September 30, 2014, approximately $216,000,000 of priority member loans and related accrued interest remain outstanding. Any remaining cash flows after satisfaction of the priority member loans would be distributed in accordance with the legal ownership of NS&E (approximately 62% to us and 38% to the minority partners). We do not have an agreement in place and cannot give assurance we will close on the sale of a portion or all of our ownership interests in The Nets or Barclays Center on terms favorable to us or at all.
From an 8-K document filed with the SEC:
c) 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 Q3 2014 NOI to arrive at an annual stabilized NOI of $35.8 million.
“As the arena was being developed, and we were holding onto the Nets,” O’Brien said, using an interesting verb to describe the money losing team, “we advanced dollars.” So there’s a “preferential loan, slightly above $200 million, that gets paid first,” he said. (Actually, it’s now worth $216 million.”

“So it’s our position that we’re going to get 100% of the proceeds” from the team and arena “up and until that $200 million,” O’Brien said. If the Forbes valuation of teams were used, “we would barely get through the repayment of that note,” he said. (The most recent Forbes valuation is actually $780 million, but the price from other team sales suggests a $1 billion value.)

If the sale of the team and arena goes over the value of the note, he said, the proceeds then would be split among the owners.

What about B2

“We don’t have anything new to add” regarding B2, LaRue said in his opening remarks, repeating statements in previously filed documents.

“Our immediate priority continues to be restarting in the most cost-effective manner possible. We are looking at mutiple options to do that. Simultaneously, we are also pursuing legal remedies, including mediation [with builder Skanska]… and enforcement of our fixed-price contract contract.”

There were no follow-up questions.

80 DeKalb and the booming Brooklyn market

Based on the performance of the 80 DeKalb rental tower (80% market, 20% low-income) at the edge of Fort Greene Park, Forest City Ratner is very optimistic about the Brooklyn real estate market.

“The Brooklyn residential market continues to see strong demand across almost every product type and neighborhood,” declared Michael Lonsway, Chief Financial Officer of Forest City Ratner, in the opening remarks.

In September 2009, when 80 DeKalb was leased, the average gross rent was just over $50 per square foot, “and we gave concessions, which is customary," he said. "Today, we’re seeing rents at $60 per square foot, with little to no concession or vacancy.”

Though the pipeline under construction in Brooklyn “is robust,” Lonsway said, “we continue to believe the demand far exceeds existing and anticipated supply for both market and affordable product. That gives us great confidence for the success of Pacific Park Brooklyn.”

That raises the question as to why Forest City needed Greenland Holdings to step in and buy 70% of Atlantic Yards/Pacific Park going forward, with the developer taking a loss.

Ten MetroTech

An analyst asked if Forest City sought a joint venture partner for the recently demolished Ten MetroTech site at 625 Fulton Street--a building converted from factory to office space at the back of 80 DeKalb--or would sell it outright.

Ten MetroTech was leased mainly by the Internal Revenue Service (IRS), LaRue said. “We are able to, when the IRS vacated, turn the zoning rights there through the process to residential… Based on the amount of supply…we determined that for us it was best for us to take this particular opportunity to market to determine what the value is. We had it out of the marketplace for some time…we received numerous bids, everything from joint venture options from equity players to outright bids to buy.”

Note that the IRS vacated in December 2012, while the zoning in the Downtown Brooklyn Plan was changed in 2004.