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Forest City not signaling new towers: "we intend to... be prudently cautious in our decision-making"

After representatives of Forest City Realty Trust said nothing of substance regarding the future of Pacific Park Brooklyn in their latest quarterly earnings press release, I thought that maybe investment analysts on the subsequent earnings call yesterday would bring up the issue. They didn't.

However, at about 11:30 of the call, Chief Financial Officer Bob O'Brien made some observations about company activities that, to my mind, certainly derived from past experience with Atlantic Yards/Pacific Park (among other projects), and pointed to caution going forward.

"Before I turn it back to [CEO] Dave [LaRue]," O'Brien said, "let me comment on the construction and development pipeline. Development has always been an important part of our growth and value creation proposition, and the high quality portfolio we own and operate today is primarily made up of assets we conceived, developed, and built."

"At the same time, with hindsight, we also recognize that the size of individual projects and the total volume of activity we undertook, pre-Great Recession, put us in a higher risk position," he continued. "That reality made it imperative that we take a different approach going forward."

In other words they put money up for projects that were too risky.

New cautions

"The result is that, over the past several years, we have dramatically refined our capital allocation process," O'Brien said. "I chair our investment committee. We have imposed a much higher level of rigor in evaluating new opportunities. I believe our new process is reflected in the performance of the majority of the properties that we've opened in the last couple of years, nearly all of which have opened on time, on budget, and have met or exceeded pro forma returns."

Nearly all. Some Atlantic Yards/Pacific Park properties have taken longer than hoped, especially the rental building 461 Dean, and the condo building 550 Vanderbilt has been selling slowly enough for the Greenland Forest City Partners joint venture to switch brokers.

"We recognize we have a higher burden of proof to convince investors that we can continue to do this successfully, but the new project openings in our construction pipeline are no small part of our improved results," O'Brien said.

Launching those "entitled opportunities"

"Most investors recognize also that we have great entitled opportunities embedded in our pipeline," O'Brien said, pointing to projects that have approval but have not yet launched. That includes at least 11 buildings that are part of Pacific Park Brooklyn.

"But we intend to continue to be prudently cautious in our decision making, and we must have a high confidence level in achieving targeted returns that exceed our cost of capital before we will activate, or otherwise create the realized value with those opportunities," he said.

Remember, Greenland USA has said that one, possibly two towers could start this year, while Forest City has been more cautious.

So if they don't "activate" the opportunity--start going vertical--could Forest City "otherwise create the realized value"? Perhaps if that means selling or taking on a partner.

"We are aware of the changing market dynamics and, as Dave noted in the press release, we recognize that we have been and continue to be in an extended economic cycle," said O'Brien. As a result, we made a decision to reduce upper limit of our development ratio from the current 10% to approx 7.5% of total assets going forward."

The question then is whether and when Forest City and Greenland are on the same page.

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