May 17, 2019

The American Dream is Still Alive

by Tommy Chan.

Next month marks the two year anniversary of when $1.1 billion of non-rated, high-yield municipal bonds were issued to help fund the development of a once barren stretch of land along the New Jersey Turnpike in the Meadowlands. Development of the area has long been plagued by developer defaults, a downturn in the national economy, and construction delays. More importantly, the opening of American Dream, as the current development is known, is now within sight. Once open, American Dream will feature nearly 3 million square feet of retail, dining and entertainment — including more than 250 stores and restaurants, an amusement park, an indoor water park, an indoor ski slope, and an indoor ice-skating rink.

There’s a lot at stake. Around $5 billion of various forms of capital has been injected into the development. The opening of the project would represent a significant milestone for state and local officials, who first conceived of the project in 2002, only to see it languish for 17 years. American Dream has the potential to spur significant economic development in the area. For state and local municipalities, the development will help spur growth in employment and tax revenues. For the developer, Triple Five Group, their hope is that the development will transform the entertainment & shopping experience of an entire region.

As it currently stands, opening of American Dream is expected sometime in September 2019. This is approximately 6 months behind schedule as originally planned during the 2017 bond financing – not entirely unexpected given the scale/unique nature of the development project. According to the most recent April 30, 2019 construction report, around 84% of the construction has been completed to-date and most of the construction is expected to be completed by late June. Running ahead of schedule is completion of the water park, which has been shortened by three months with completion by late August. In terms of the construction budget, costs are running close to the original projection. The developer’s budget allocation for the final cost of the project is currently within the construction manager’s guaranteed maximum price (GMP) contract of $1.86bn. The developer still has sufficient contingencies & reserves to cover any cost overruns.

As construction wraps up, the project will transition over to the ramp-up/operational phase. For long term bondholders of American Dream, this next chapter will present its own unique risks and challenges. With entertainment venues making up more than half the development, the project will need to attract patrons from the broader New Jersey/NYC metro area to an area that up until now has been known for its sporting events. Further, attracting retail foot traffic, especially at large malls, has been a challenge for some time. Whether American Dream will be an exception to this secular trend remains to be seen. At the moment, 66% of leasable square footage has lease commitments executed or pending, which represents only 173 out of 447 tenant spaces, or 38%.

Foot traffic and spending will all help drive the bottom line for the developer as well as for state and local government tax revenues. For bondholders, the profitability of the development will determine the amount of revenues, in the form of payment-lieu-of-tax (PILOT) payments made by the developer, that flow to pay off the 1st tranche of bonds. The PILOTs are tied to the assessed “market value” of the project, which is largely based on the economic value and income generation of the project. Another 2nd tranche of bonds is repaid with sales taxes generated by the project.

With the general tight yield environment, American Dream bondholders have fared very well to-date, with significant price appreciation and spread compression (please see chart above). Interestingly, much of the spread tightening occurred inside the first six months following the issuance of the bonds in June 2017. For investors, if things continue to go according to plan, the American Dream bonds may prove to be the shiny star within their investment portfolios.  If it doesn’t, the project could be labeled as another ill-conceived speculative municipal finance project development. Only time will tell.

The information contained herein is for informational purposes only.  This article does not express the opinions or views of Refinitiv, any of its subsidiaries or affiliates.  Redistribution of this article or any information referenced therein is expressly prohibited. The article does not provide individualized advice or recommendations for any specific subscriber or portfolio and is not intended for decisions relating to investments, legal, compliance or risk.  Investing involves substantial risk.  Neither the author, the publisher, nor any of their respective affiliates make any guarantee or other promise as to any results that may be obtained from using the information contained herein. While past performance may be mentioned, it should not be considered indicative of future performance. No reader should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence, including carefully reviewing the prospectus and other public filings of the issuer in question.

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