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Atlantic Yards
Atlantic Yards

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Published by: Eliot Brown / New York Observer on Jun 29, 2009
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06/29/2009

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Please refer to important disclosures and analyst certification information on pages 3 - 5.
Real Estate Operating Companies
June 25, 2009
Forest City Enterprises Inc.
(FCE.A, $6.44, Outperform, Target: $15.00)
FCE.A: Atlantic Yards-FCEA Improving Risk Profile of Long-TermProject 
 Event--
Media reports have been swirling around this week on variousnegotiations with Forest City and various government entities on new terms for aremaining land transaction for Atlantic Yards. Bottom line - the new termsstretch out the payment for the land over a longer period of time - stagingtakedown of the land. From a risk profile perspective, we believe new terms area significant positive.
s
The Metropolitan Transportation Authority (MTA) and the Empire StateDevelopment Corp (ESDC) both agreed to changes in the land purchaseagreement with Forest City Ratner (Forest City's wholly owned Brooklynsubsidiary). There is a 30-day comment period.
s
Our Take.
While many of the details have not been completely outlinedpublicly, we believe staging a takedown of the land and paying only for thearena portion in Q409 ($20 million) and paying for the air rights portionstarting in 2012 (over 19 years) is a significant positive for Forest City.Pushing cash outlays into the future and securing what essentially is landfinancing in a difficult financing environment is a positive and enhances theoverall risk profile for the project, in our view.
s
Opposition continues
around Atlantic Yards by a small but vocal group. Theirony at this juncture is that the opposition is citing the delays in the projectand a change of architect that should be considered as a negative to voteagainst Forest City and the project. If this project had not been tied up inlitigation for years by the opposition, the MTA would have already closed onthe land for an upfront payment of $100 million several years ago andaffordable housing would already have been under construction.
s
Additional discussion below.
Equity Research
Company Update
Sheila McGrath
212-887-7793smcgrath@kbw.com
Bill Carrier
212-887-3810bcarrier@kbw.com
 
Please refer to important disclosures and analyst certification information on pages 3 - 5.Page 2
s
The Metropolitan Transportation Authority (MTA) and the Empire State Development Corp (ESDC) bothagreed to changes in the land purchase agreement with Forest City Ratner (Forest City's wholly owned Brooklynsubsidiary).
Forest City's joint venture for Atlantic Yards will now pay an initial $20 million for land for the arena atclosing. Forest City would pay $80 million for the air rights parcel (NPV @ 6.5%) of $2 million per year for 2012-2015;and the balance of 15 installments of $11 million per year beginning 6/2016. There were also additional modifications todecrease required construction improvements at the railyards as well.
s
Our Take.
While many of the details have not been completely outlined publicly, we believe staging a takedown of theland and paying for the air rights portion starting in 2012 is a significant positive for Forest City. While the stretched-outtakedown and payments will require a higher total outlay (implied 6.5% annual interest rate) over the 19-year periodstarting in 2012, this reduces current cash outlays in 2009 and near term. In addition, this means that Forest City'stakedown of the additional parcels (or air rights) will be more closely matched with vertical development of stages of theproject. According to the
NY Post,
the new agreement provides "...more time to build the entire project - and moreloopholes not to build." While we await more specific details from the company once terms are finalized (30-day waitingperiod), we believe overall the terms outlined thus far are a positive for Forest City (paying $20 million to close just thearena land in Q409 versus $100 million for the larger closing in Q409). In a difficult financing environment, securing6.5% financing and staggered takedown of land for development is both impressive and necessary.
s
Opposition continues
around Atlantic Yards by a small but vocal group. The project has won every court challenge overmany years. The irony at this juncture is that the opposition is citing the delays in the project and a change of architectthat should be considered as a negative to vote against Forest City and the project. If this project had not been tied up inlitigation for years by the opposition, the MTA would have closed on the land for an upfront payment of $100 millionseveral years ago, and affordable housing would already have been under construction. The litigation has increased thecost of the project and dragged timing of closing into one of the deepest recessions in decades and certainly a mostdifficult financing environment. The MTA and The Empire Development Corporation, with their changes and the vote(MTA voted 10-2 in favor of changes), appear to recognize the change of circumstances - in both the economy and thefinancial markets - and recognize Forest City's investment in the project and the potential economic benefits of theproject for Brooklyn. Forest City has a history of public/private development partnerships like Atlantic Yards, whichhave benefited the company and previously blighted urban areas (MetroTech Brooklyn, 42nd Street development andothers). The next milestone for this project appears to the be the tax-exempt bond offering for the arena - Barclays Center(underwriters Goldman Sachs and Barclays Capital). The bond offering must be completed by year-end in order to betax-exempt. The arena has already secured $500 million of sponsorship deals - the largest being the 20-year $400 millionnaming rights deal with Barclays Bank and eight sponsorship deals worth $100 million.
June 25, 2009FCE.A, Atlantic Yards-FCEA Improving Risk Profile of Long-Term Project
 
Please refer to important disclosures and analyst certification information on pages 3 - 5.Page 3
Q2Q3Q1Q2Q3Q1Q2Q3Q101530456075200720082009
03/05/08I:OP:4707/10/08OP:4410/13/08OP:3312/12/08OP:2204/02/09OP:1406/15/09OP:15
Rating and Price Target History for: Forest City Enterprises Inc. (FCE/A) as of 06-24-2009
Created by BlueMatrix
Distribution of Ratings/IB ServicesKBW*IB Serv./Past 12 Mos.Rating Count Percent Count PercentOutperform [BUY] 126 23.82 24 19.05Market Perform [HOLD] 342 64.65 55 16.08Underperform [SELL] 49 9.26 5 10.20Restricted [RES] 0 0.00 0 0.00Suspended [SP] 12 2.27 4 33.33
*Keefe, Bruyette & Woods, Inc. and Keefe, Bruyette and Woods Limited maintain separate researchdepartments; however, the following chart, "Distribution of Ratings/IB Services," reflects combined U.S.and U.K. information related to the distribution of research ratings and the receipt of investment bankingfees.
We, Sheila McGrath and Bill Carrier, hereby certify that the views expressed in this research report accuratelyreflect our personal views about the subject company and its securities. We also certify that we have not been, andwill not be receiving direct or indirect compensation in exchange for expressing the specific recommendation in thisreport.This communication is not an offer to sell or a solicitation to buy the securities mentioned. The information relatingto any company herein is derived from publicly available sources and Keefe, Bruyette & Woods, Inc. makes norepresentation as to the accuracy or completeness of such information.DisclosuresKeefe, Bruyette & Woods (KBW) Research Department provides three core ratings: Outperform, Market Performand Underperform, and two ancillary ratings: Suspended and Restricted. For purposes of New York StockExchange Rule 472 and FINRA Rule 2711, Outperform is classified as a Buy, Market Perform is classified as aHold, and Underperform is classified as a Sell. Suspended and Restricted ratings are classified as described below.Stocks are rated based on an absolute rate of return (percentage price change plus dividend yield).Outperformrepresents a total rate of return of 15% or greater.Market Perform represents a total rate of return in a rangebetween -5% and +15%.Underperform represents a total rate of return at or below -5%.Suspended indicates thatKBW's investment rating and target price have been temporarily suspended due to a lack of publicly availableinformation and/or to comply with applicable regulations and/or KBW policies.Restricted indicates that KBW isprecluded from providing an investment rating or price target due to the firm's role in connection with a merger orother strategic financial transaction.Companies placed on the KBW Best Ideas Outperform List are expected to
June 25, 2009FCE.A, Atlantic Yards-FCEA Improving Risk Profile of Long-Term Project

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