Wednesday, June 10, 2009

Forest City executives to investment analysts: everything's fine with AY

Forest City Enterprises officials, during a first quarter conference call (audio) yesterday with investment analysts, maintained their staunch support for Atlantic Yards while easily ignoring some inconvenient news, notably New York Times architecture critic Nicolai Ouroussoff's slam that morning.

The major players from FCE in the call--CEO Chuck Ratner, Executive VP Bob O'Brien, and Forest City Ratner President Joanne Minieri--participated not from the home base in Cleveland, but from Forest City offices in Brooklyn.

The focus on the FCE presentation was on corporate results, the recent issuance of more than $300 million in new stock, and debt and cash flow expectations.

"We have been saying for some time our highest priority is generating and preserving liquidity," Ratner said, noting that FCE had gone to the equity markets just three times in 50 years.

In fact, he said, members of the families that control FCE spent $20 million of their own "to show our confidence in the ability of the management team."

Update on AY

During the Q&A, about 30 minutes into the call, Analyst Sheila McGrath asked for an update on New York projects, including Atlantic Yards.

Minieri responded: As it relates to Atlantic Yards, yes, there’s been a lot of press on Atlantic Yards, but we maintain, we’re committed to the project. We’re targeting a second part of the year master closing. We’re moving toward finalizing all the necessary negotiations with the public parties. We’re working very closely with Barclays and Goldman [Sachs] on the arena bond financing that is anticipated to occur so that we can go vertical on the arena. You probably have read today that we’ve announced the new architects on the arena. We are moving quickly to complete the design and cost estimates for that. That will enable us to meet our timetable for a second-half master closing.

Not only were the new architects announced, they were denounced. Minieri did not mention that there would be a new General Project Plan, and that there are pending appeals and potential new lawsuits.

In previous conference calls, FCE executives have promised much more optimstic schedules about the start of construction. This time, the consequences for delay are more serious--there's a December 31 deadline for tax-free bonds.

Selling the Nets?

At about 42:50 of the call, Marc Heilweil of Spectrum Advisory Services asked: I just wonder if I can get a little bit more of an idea of the alternatives discussed before the equity offering was decided to go ahead. Were there some serious alternatives… was there any possibility of selling the interest in the team and the arrangement for the arena?… I have to say, as a very long-term shareholder, the amount of dilution that the company faced was not a pleasant thing to face… and I realize problems you’re facing, of course.

Chuck Ratner responded: It was not pleasant for everybody. No existing shareholder can be content or happy when a company dilutes to this level…. It’s a hard thing to do for sure.… But, as I said to everybody we spoke to during this process, in these circumstances--I’ve been here 44 years, never been though anything quite like this… I think liquidity trumps dilution.

As for alternatives, he said FCE didn’t want to add more recourse debt, so its option was to sell a line of business or to sell properties, and it's doing the latter.

He didn't mention the arena or Nets.

Heilweil followed up, asking Ratner if he had any comment on the Nets.

Chuck Ratner: As we’ve said many times… we’re fully committed to proceeding with the Atlantic Yards project, as Joanne said. As part of coming to the end that Joanne talks about, being able to start the arena by the end of the year, we have to get these various steps taken, and part of that crucially includes moving the team here, and we intend to do that.

What he didn't explain was that moving the team raises the value considerably; hence, it's their priority.

Morningstar's take

Morningstar commented:
Although performance held the line this quarter, we are expecting future weakness in the latter half of 2009 and early 2010 across the portfolio. Weakening consumer spending will likely weigh on retail and hotel performance, with rising unemployment affecting Forest City's office and residential segments. We anticipate that the company will face low-single-digit revenue declines and mid- to high-single-digit NOI declines sequentially through 2010. Although we think the company's May equity issuance--raising nearly $330 million in net proceeds--helps to shore up near-term liquidity, with nearly $1.9 billion in maturing obligations remaining through 2010 and almost $505 million left to finance, we still think it will be challenging for Forest City to manage these obligations. In our opinion, an additional equity issuance is possible during the next few years, as we think property sales alone will likely prove insufficient to cover the company's remaining debt maturities.

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