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Forest City: arena income boost still expected by 2016 (?); increased B2 impairment related to delay; arena/team sale now aimed at 2015

Forest City Enterprises acknowledged this week that reaching "stabilized operations" for the arena--$65 million in net operating income (NOI)--"is taking longer to achieve than originally anticipated," something of a euphemism for a gap of nearly $25 million between current revenues and the 2016 goal.

Despite that gap, company officials professed confidence in a conference call yesterday with investment analysts.

Analyst Sheila McGrath of Evercore (which is helping Forest City sell the Nets) noted that the quarterly NOI "has been bouncing up and down," a reference to the fact that the fourth quarter of 2014 brought fewer revenues than the same period in 2013.

McGrath, typically a chummy sort, then asked a potentially tough question quite casually: "I was just wondering if you, y'know, still feel pretty good about stabilization once the [New York] Islanders come into the mix?"

CFO Bob O'Brien attributed the income "bumpiness" to the entertainment mix at the Barclays Center, which in 2013 had Beyonce and Justin Bieber, but noted that 2014 overall was up over 2013. "And again, it 's ramping up slightly behind where we had anticipated," he said, "but we believe certainly with the Islanders coming here, we expect to achieve the stabilized NOI that we projected."

Islanders as savior?

Unless they have evidence--and they haven't shown it--that the 2015-16 arrival of Islanders will bring in huge revenue while not disturbing some other revenue generators, that strikes me as doubtful.

We don't know the details of the Islanders deal, but the Wall Street Journal reported that the arena, rather than getting rent from the hockey team, guaranteed an unspecified annual payment in return for the revenues. So that's variable.

The New York Post reported 3/30/14:
The arena’s owners guaranteed the Islanders about $50 million in annual revenue for regular season games. Barclays would keep anything it collects in sponsorship, suite and ticket sales over that amount.
...The move to Barclays Center is likely to boost attendance, but the owners still run the risk that the Islanders won’t fill enough seats. The Islanders don’t pay rent during the regular season, but they will if they make the playoffs, a source added.
Regarding B2

Given that Forest City has announced a $146 million impairment regarding the B2 modular tower, one analyst asked "how much of that is potentially recoverable through litigation and how much of that should we just think of as sort of a sunk cost because the project got delayed and/or yield expectations came down?"

CEO David LaRue said about $100 million to $110 million was related to the building and the land, with  the balance related to the factory Forest City once ran with Skanska and has since reopened on its own. (More precisely, the factory write-off was $38.7 million, which leaves $107.3 million.)

"So, we can assume there will be some recovery, I can't tell you when," he said. The returns on the building should be solid, he said, given Brooklyn's market.

Paul Adornato of BMO Capital Markets pointed out, however, a $40 million increase in Forest City's hit: the company at a real estate conference previously identified the cost of the impairment, not including the factory, as $70 million, not $110 million.

"When we made that estimate at the end of our third quarter, we had not yet purchased the factory, or understood exactly where things stood there," responded O'Brien."And when we added in the cost of carry and the time delay to restart that factory, that increased significantly the cost estimate that we had at the end of the third quarter to where we see it now."

Selling the arena and team

Officials said they were hoping to sell their 55% majority share of the Barclays Center, and 20% minority share of the Brooklyn Nets, by the end of 2015 in coordination with partner Mikhail Prokhorov's Onexim.

LaRue acknowledged that nothing was certain. Indeed, last May, O'Brien said they hoped to have an agreement on price regarding sale of the Nets by the end of 2014. That didn't happen, and later they decided to sell the arena as well, recognizing it might work better as a package deal.

Were they planning to sell the arena or merely refinance it? LaRue said it was possible to sell a share, as with properties like 8 Spruce Street, the Frank Gehry-designed apartment tower in Lower Manhattan. But the company won't take on additional debt, he said.

More on the sale

The Financial Times reported confusion regarding Prokhorov's sale, quoting one advisor working with potential a bidders: "Am I buying the team? Am I buying the arena? Do I have to buy the team and the arena? Can I buy just the arena or just the team? . . . I don’t know.”

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