The worsening slowdown in the Manhattan luxury housing market is having a negative impact on the results of US developer Gary Barnett's real estate company, Extell. Five months in to 2016, the company has not sold a single one of the 60 apartments in the One57 apartment high-rise, its flagship project.
Extell's first quarter reports show a $30 million loss, compared with a $49 million net profit in the corresponding quarter last year. The company's free cash flow was a negative $79 million, following a $429 million negative cash flow in all of 2015. Since the beginning of 2015, the company has been financing itself by taking on debt (including $148 million raised in Israel last year), giving it a $296 million positive cash flow from financing activities over the past 15 months.
Extell develops and constructs projects in New York City, and specializes in luxury housing. Two years ago, the group established a subsidiary in the British Virgin Islands, into which it put some of its holdings in various development projects. Against the holdings, the company has raised $1.65 billion since that time in two bond series for mutual funds and private investors in Israel, which it will have to repay in three payments on December 31 in 2018, 2019, and 2020.
Extell's report for projected cash flow does not indicate financial problems in the coming two years. The company expects to make it through 2016 with $68 million in revenue from apartment sales, a $140 million return on its investment in the One Manhattan project (assuming that surplus financing for its construction is obtained), and $38 million in additional loans. $152 million in dividends and other returns on investments, together with $339 million in additional construction loans, should leave Extell with $160 million in cash at the end of March 2018. Nine months later, however, Extell will have to make its first repayment of principal, NIS 525 million ($136 million) to bondholders, and this is a matter of great concern to the bondholders. The bonds today responded to the financials with a 2% dip, giving an annual yield to redemption of 13%. The bonds from the two series have lost almost 20% of their value since the beginning of 2015.
In response to the reports, IBI Investment House real estate analyst Yaniv Saylan emphasized that Extell needs financing like we need air to breath. "Things will get worse before they get better," Saylan writes, "The cash is running out, and the company needs capital quickly. As of now, the controlling shareholder has not begun the process of selling properties, and is still investing capital in development of projects."
Saylan finds one piece of good news in the financial statements: "The financing bank in One Manhattan does not plan to demand immediate repayment of the loan. In a scenario in which the controlling shareholder gets the financing in the short term, he will be entitled to use $100-150 million of the RXR money for any purpose. This development should give him a breathing space of a year and a half." At the same time, Saylan emphasizes that "Without financing or introducing partners in the projects during the coming year, the company will encounter very serious cash flow problems requiring it to begin selling properties."
Published by Globes [online], Israel business news - www.globes-online.com - on June 1, 2016
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