|FOREST CITY REALTY TRUST, INC. filed this Form 10-Q on 10/30/2018|
FINANCIAL CONDITION AND LIQUIDITY
Apartment performance has begun to moderate due to increased supply throughout many areas in the United States, especially in some gateway cities. The increased supply has put pressure on near-term occupancy levels and rental growth. Office and retail performance, to varying degrees, is dependent on product type and geographic market. Access to bank credit and capital remains open with banks and permanent lenders originating new loans for real estate projects. Lenders continue favoring high quality operating assets in strong markets. While banks continue to originate construction loans for multifamily projects, construction loans for office or retail projects remain difficult to obtain, unless the project has substantial pre-leasing in place or higher than historical equity commitments from the developer.
Source of Funds
Our principal sources of funds are cash provided by operations including land sales, our revolving credit facility, our term loan facility, nonrecourse mortgage debt and notes payable, dispositions of operating properties or development projects through sales or equity joint ventures, proceeds from the issuance of senior notes, common or preferred equity and other financing arrangements. We have consistently disposed of assets in an effort to recycle capital and reposition our portfolio. Over the last five years, we have generated cash proceeds from dispositions of full or partial interests in rental properties, development projects and other investments averaging well in excess of $400,000,000 per year. Given the diversity of our portfolio by market and product type, we believe the market for property dispositions will continue to be available. We believe the current market conditions will allow us to continue our historical strategy to recycle capital and reposition the portfolio through asset sales or equity joint ventures.
Our strategic plan drives our capital strategy and business focus on core products located in core markets. In order to achieve our strategic goals, we believe we can maximize cash provided by operations by concentrating our portfolio in the markets we believe are best positioned for long term growth. Additionally, we evaluate each individual asset in our operating and development portfolio to identify those having the best opportunity to provide capital through full or partial sale in conjunction with our strategy of focusing on core products located in core markets. This process may result in reductions to estimated holding periods and the total estimated undiscounted cash flows used for impairment calculations on our individual consolidated real estate assets. In some cases, this may result in estimated undiscounted cash flows being less than the carrying value of the consolidated asset and necessitating an impairment charge to write down the asset to its estimated fair value.
In addition, our capital strategy includes evaluating potential equity joint ventures to provide capital through the sales of partial interests of operating properties or to reduce our equity requirements and development risk on development opportunities. Entering into joint ventures could result in us granting joint control or losing control of the asset and, accordingly, the asset would no longer be consolidated. Upon deconsolidation, our investment balance in the joint venture would be compared to estimated fair value and recorded at the lesser of fair value or book value. Additionally, evaluation for other than temporary impairment on a quarterly basis would be required. This could result in future impairments, some of which could be significant, that would not otherwise be required if the real estate asset remained consolidated.
Retail Portfolio Disposition
During 2017, we signed definitive agreements with both QIC and Madison International for the disposition of 10 of our regional mall assets and 12 of our specialty retail assets, respectively. Due to an anticipated deed-in-lieu transaction, Shops at Northern Boulevard in Queens, New York, was removed from the specialty retail asset agreement with Madison during the three months ended March 31, 2018, resulting in the disposition of 11 specialty retail assets to Madison International.
We have begun and expect to redeploy the remaining equity from the Madison specialty retail assets and the four remaining regional malls into apartment and office assets that align with our focus on core markets and urban, mixed-use place-making projects. We plan to give strong consideration to buying out our partner’s share of core assets as a method of equity redeployment as we understand the operations of the underlying asset and the reduction of joint venture partners will help simplify the business.