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Forest City Enterprises (NYSE:FCE.A)

Q3 2012 Earnings Call

December 07, 2012 11:00 am ET

Executives

David J. LaRue - Chief Executive Officer, President and Director

Robert G. O'Brien - Chief Financial Officer and Executive Vice President

Analysts

Sheila McGrath - Evercore Partners Inc., Research Division

Paul E. Adornato - BMO Capital Markets U.S.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Operator

Welcome to Forrest City Enterprises Third quarter 2012 Earnings Conference Call.

The company would like to remind you that today's remarks include forward-looking comments that are covered under federal Safe Harbor provisions. Actual results could differ materially from those expressed or implied in such forward-looking statements due to various risks, uncertainties and other factors. Please refer to the risk factors outlined in Forest City's annual and quarterly reports filed with the SEC for a discussion of factors that could cause results to differ.

This call is being recorded and a replay will be available beginning at 2:00 p.m. Eastern Time today. Both the telephone replay and the webcast will be available until January 7, 2013, 11:59 p.m. Eastern time.

The company would like to remind listeners that it will be using non-GAAP terminology, such as operating FFO, FFO, comparable property net operating income and pro rata share in its discussion today. Please refer to Forest City's supplemental package for an explanation of these terms and why the company uses them, as well as reconciliations to their comparable financial measures in accordance with generally accepted accounting principles. Also please note that exhibits referred to during today's call are available on the Investor Relations page of the company's website, www.forestcity.net. [Operator Instructions]

I would now like to turn the call over to Forest City's President and CEO, David LaRue. Please go ahead, Mr. LaRue.

David J. LaRue

Thank you, Matthew. Good morning, everyone and thank you for joining us today. With me today is Bob O'Brien, our Chief Financial Officer. Our results for the third quarter and first 9 months of 2012 went out yesterday after the close of market, and by now I hope all of you've had a chance to review them. In a few minutes, I'll turn the call over to Bob for his comments on our results. After that, I'll give an update on our pipeline and offer some closing thoughts. Then we'll get to your questions.

Before I turn to our results, I'd like to comment on the impact of Hurricane Sandy and its aftermath. Obviously, this was a powerful storm and the lives and livelihoods of millions of Americans were severely impacted. As you know, the New York City metropolitan area is our largest core market. Thankfully, our assets in the region sustained only minor damage, approximately $5 million in total, all of which we expect to be covered by insurance. New York also represents our second largest concentration of our associates after Cleveland. In the aftermath of the storm, it was remarkable to see the dedication and compassion of all of our associates and particularly those in New York, as they pitched in through volunteering, generous donations and going the extra mile to help those in need even as they faced adverse circumstances themselves. We thank them for their efforts and wish the best for all of those affected. Now let me turn to our results.

As you saw in our press release, results for the third quarter and the 9 months met our expectations. FFO was up 30% quarter-over-quarter, and operating FFO was up 19% for the quarter and 10.2% for year-to-date compared with the same results in 2011. We had comp NOI increases across all of our major products, apartments, retail and office. Our multifamily portfolio was up in line with peers following 4 consecutive quarters of double-digit gains. Comp NOI growth in office was also in line with peers. Growth in retail was below peer averages, primarily due to strategic efforts to improve the merchandise mix and enhance the customer experience at a number of our centers. The resulting short-term vacancies are replaced and the existing tenants are relocated or moved out. These ongoing efforts have resulted in rental increases of 10.7% on a rolling 12-month basis.

We see the largest downside impact to our results from our regional mall assets opened just prior to the recession and in our Midwest specialty retail properties. Our New York retail portfolio modestly exceeded the shopping center REIT average. It was a very active quarter for us and included the grand opening of our Barclays Center Arena in Brooklyn and exchange transaction from a majority of our outstanding 7% convertible preferred stock and significant progress in the previously announced disposition of our land business. We'll have more to that -- more to say on each of these later in the call.

Earlier this week, we announced the addition of a new independent Director, achieving our goal of a majority independent board as part of our ongoing commitment to good governance practice. Kenneth J. Bacon is a seasoned executive, who held positions with Morgan Stanley, The Resolution Trust Corporation and Fannie Mae, where he led the highly successful multifamily division until his retirement earlier this year. He also has outstanding board experience and currently serves as Presiding Director for Comcast Corporation. We are thrilled that he has joined our board.

Before I turn things over to Bob, let me provide an update of 2 other previously announced strategic initiatives. As we announced at our October 22 Investor Day at Barclays Center, we are finalizing a partnership with a large institutional investor to create a $400 million multifamily development fund to invest in 5 of our core markets. The fund will target activation of our existing entitlement, as well as select new opportunities. We expect to complete the partnership agreement later this month and provide investors with more detail at that time. We anticipate that B2, our first apartment building at Atlantic Yards in Brooklyn, will be the first asset the fund will invest in. We're also in the final stages of bringing an additional partner into the ownership of 8 Spruce, our apartment high-rise in lower Manhattan. The transaction, which will monetize some of the substantial value created by this iconic building, values the property at approximately $1 billion and we expect to close this month. As some of you may have seen, 8 Spruce was recently selected as the winner of the covered Emporis Skyscraper Award, naming it the best new skyscraper of the year. I'll be back later on the call to discuss our recent openings and projects that are under construction. Now let me turn the call over to Bob.

Robert G. O'Brien

Thanks, David. Good morning, everybody. On today's call, I'll be referring to our results in our earnings release and supplemental package. They're available in the Investor Section of our website if you'd like to refer to them during this call. I'll focus most of my comments on results for operating FFO, a metric we introduced last quarter. But before I do, let me comment on one item that impacted our reported net loss for the quarter. During the quarter, we made the decision to reposition our Halle Building office property here in Cleveland, after reviewing a number of potential alternatives for the property and how those alternatives fit our larger strategic plan. That decision led to a change in the assets probable holding period for accounting purposes, which in turn required us to adjust the carrying value of the building to its estimated fair market value. As a result, we recognized an impairment of $30.2 million against a cost basis of the asset on our GAAP financial statements.

As you know, impairment of depreciable assets is a noncash charge and does not impact NOI, FFO or operating FFO.

Let me now turn to our operating FFO results. As a reminder, we believe operating FFO provides investors with a picture of how our core operations are performing by removing transactional, onetime and nonrecurring items that tend to distort total FFO in any given quarter.

Bridges depicting the positive and negative factors impacting operating FFO for the quarter and 9 months can be found on Pages 30 and 31 of the supplemental package and also available on the main investor’s page of our website. I won't walk through all the variances, but when you look at the 2 bridges, you see a number of similar factors impacting both the quarter and the first 9 months. Among the common positive factors are increased NOI for the material portfolio, which was up significantly for the 9 months and more modestly for the quarter, reduced interest expense on the mature portfolio and increased FFO from new property openings. A common factor negatively impacting results for both periods was reduced interest capitalized to our development pipeline.

As a reminder, on our 2011 year-end conference call back in March of this year, we referenced the reduction in capitalized interest we anticipated as our large new construction project that came online and the expectation of an increase in our reported GAAP interest expense in the range of $0.08 to $0.11 per share for 2012. The fourth quarter will be the first full quarter with all 3 of our large New York projects fully opened. So we wanted to remind investors the anticipated increase in interest expense, we expect the majority of the $0.08 to $0.11 per share we referenced back in March to be reflected in the fourth quarter.

Overall, operating FFO was up 19.8% for the third quarter and 10.2% for the first 9 months of 2012 compared with the same period last year. Let me touch on some of our key operating results for the quarter and 9 months.

Overall growth in comparable property net operating income increased 1.8% compared with the same period in 2011. Growth in total comp NOI for the year-to-date stands at 3.7%. In the third quarter, by product type, we had increases of 6% in apartments, 0.6% in office and 0.5% in retail. Growth in apartments and office were in line with peers. As Dave indicated in his remarks, overall retail growth was below peers in part due to the re-merchandising strategies we are implementing at a number of our centers. When we look at comp NOI since Q1 '11 or over the past 4 quarters, we are in line or exceed our peer company results.

Comparable quarterly results are impacted obviously by the periods being compared again. So particularly in residential, we are now coming up against very strong prior-year results. For example in last year's fourth quarter, we had comp NOI growth in apartments of 11.9%. We expect our apartment comp NOI growth in this year's fourth quarter to be relatively flat with last year and for apartments to end the year up approximately 6%. Comparable occupancies were relatively flat across all of our major project types.

Turning to rents, trends and lease rollovers continue to be positive. New office leases increased 2.6% over expiring leases and retail same-space leases in our regional malls increased 10.7%, both on a rolling 12-month basis. These increases are a direct result of the re-merchandising strategy mentioned earlier. Year-to-date average rents in our comparable conventional apartments increased 4.6% overall and 5.4% in our core markets. In addition rolling 12-month sales per square foot in our regional malls increased to $465 compared with $461 at the end of this year's second quarter to $434 at this time last year. Year-to-date comp sales in the regional malls were up 5.2% over the same period last year.

Earlier, Dave mentioned other major activities during the quarter including our convertible preferred exchange and the ongoing disposition of our land business. Let me comment briefly on both. We continue to be very focused on building a strong sustaining capital structure and improving our debt metrics and balance sheet. As part of that effort, in mid-October, we executed privately negotiated exchanges for $133.7 million of our 7% convertible preferred stock for common stock in a cash inducement. This transaction substantially reduced the amount of outstanding preferred and it was also non-dilutive to our common shareholders.

The exchange has eliminated approximately $9.4 million in future annual fixed charges in the form of preferred dividends. While I'm on the subject of our work on our capital structure and debt metrics, I know many of you on the call saw the recent upgrade by S&P of their rating on our senior notes. We're pleased with the upgrade, of course, but we're also pleased to hear their positive comments on the steps we have taken to further improve our metrics in the future. This is an ongoing priority for us and we are focused on achieving additional improvement.

As you saw in our press release, we also continue to execute on the disposition of our land business as we focus on core rental properties. During the third quarter, we closed the sale of 8 more land projects in Texas, North Carolina, Arizona, Ohio and Washington. To date we have completed the sale of approximately 3/4 of the land projects targeted for disposition. We're happy with this progress and we continue to remarket the remaining land and expect significant progress in the fourth quarter.

Before I turn the call back to Dave, there are 2 more subjects I'd like to touch on. The first is the opportunity that exists for us to make significant headway in reducing our interest expense. We're pleased that our results reflect a reduction in total interest expense year-to-date and are flat compared to the third quarter of last year. At our pro rata share, we have approximately $850 million in fixed-rate property level nonrecourse mortgages and an average interest rate of just under 6% that mature between now and the end of next year. We believe we can take advantage of the current interest rate environment to drive down the average rate on that maturing debt by approximately 150 basis points. This will reduce our annual mortgage interest expense by over $12 million. Our mortgage finance teams are focused on this opportunity and have a demonstrated track record of successfully refinancing our properties. We are confident we'll be able to capture meaningful interest expense savings through this process. The last item I want to mention is the transition here within Forest City.

Many of you on the call know we've spoken with Mike Lonsway, who has been my right-hand man as Senior Vice President, Capital Markets here in our corporate office. Mike recently accepted an opportunity to assume a new role in our Brooklyn Office as Executive Vice President and CFO of our New York subsidiary. This is a terrific career opportunity for Mike and a real win for the company. He joins an already strong New York team and will work closely with Bruce Ratner, MaryAnne Gilmartin and the rest of their office. We'll miss the daily interaction with Mike. We have great bench strength here in Cleveland to seamlessly manage Mike's prior corporate responsibilities. With that let me turn it back to Dave for an update on the pipeline and some closing thoughts. Dave?

David J. LaRue

Thanks, Bob. Let me add my congratulations to Mike in his new role. As a company, we are focused on aligning our associates where they can contribute to high-priority initiatives and grow to their greatest potential. I also want to acknowledge and thank Matt Messinger. Matt played a key role in our New York office for many years, and many of you on the call know Matt -- or Matt -- or spoken with him over the years. With the completion of our major New York development projects and with development activity moderating, Matt decided to pursue new opportunities. He's agreed to stay onto a transition period as Mike settles into his new role. It is always difficult to lose this great talent but we wish Matt and his family all the best.

Before I review our openings and under construction projects, let me address 2 items related to retail. First is Westchester's Ridge Hill, where we continue to focus considerable attention. The project remains 68% excluding Parcel L, a freestanding pad at the south end of the site. The recent NAREIT conference in San Diego, nearly every meeting included questions about this project. We share investors' frustration with the pace of progress, but believe strongly in the long-term viability of the project. Our small shop tenants reporting average sales of over 400 per square foot, tracking near our portfolio averages, and that's after less than a full year of operations. We believe this encouraging level of performance, together with new store openings and ongoing market acceptance, will enable us to achieve our leasing objectives and stabilize the center.

The second item in retail is the recent announcement by Nordstrom that they intend to leave our South Bay Galleria Center in Redondo Beach, California, in 2015. Of course we're disappointed by the decision. Nordstrom has been a great -- has had a great run of nearly 30 years at South Bay. We're actively evaluating options to reposition and retenant the space when Nordstrom vacates. We believe this asset is very well positioned in the marketplace, with a great location and a densely populated market with strong demographics. We remain committed to the center and the Redondo Beach community.

Turning to our openings and under construction pipeline, the September 28 opening of Barclays Center in Brooklyn was definitely the highlight of the third quarter in an event that drew international attention to the property and to Brooklyn. Since then, the facility has hosted more than 40 events, including Nets basketball, boxing, concerts, family shows and NCAA men's basketball. Initial event day revenue have met our expectations and the quality of customer experience has been overwhelmingly positive. More than 400,000 people have visited the arena. The large majority of the patrons are using public transportation, helping alleviate early concerns over potential congestion in parking issues. Near the end of the third quarter we announced the New York Islanders would play their home games at Barclays Center beginning in 2015 with an anticipated 40-plus games per season. We expect the addition of the Islanders to help us achieve our $70 million annualized target from the arena at stabilization in 2016.

During the quarter we also opened Botanica Eastbridge, a 118 unit apartment community at Stapleton in Denver, which is 27% leased already. Our projects under construction are detailed in our press release and we'd be happy to answer questions on any of them during Q&A. In total, they represent nearly 800 apartment units and approximately 160,000 square feet of retail and office space. They reflect the activation of existing entitlement on our balance sheet and a continued focus on strong core markets, with projects at The Yards in Washington, D.C. and in Boston and Dallas.

We now look forward to our December 18th groundbreaking for B2, the first of our apartment buildings at Atlantic Yards. The 32-story B2 will have 363 units, half of which will be low, moderate and middle income units with the balance market rate. The project will be built using state-of-the-art modular technology that we expect to help reduce cost over time in comparison to conventional construction, as well as improved quality and -- sustainability. As I mentioned, earlier, we expect B2 to be the first project included in our multifamily development fund.

Let me close with some observations on the significance of the quarter just ended and where we have as a company have come. The opening of Barclays Center arena marks the delivery of the last of our last 3 major New York projects; 8 Spruce, Westchester's Ridge Hill and now, Barclays Center. But all those projects were under construction, our pipeline peaked at $2.4 billion at our pro rata share. It is now down to less than $400 million our share. As we stated previously, going forward, our goal is to target projects under construction, in development to total no more than 15% of our total undepreciated assets. This level provides a prudent balance between risk and opportunity from a new development while giving us flexibility to deploy capital where it can be put to the best use. For all of us here at Forest City, the last several years have been a remarkable and challenging journey. Today we are a much stronger company with a high quality, productive and growing portfolio, a dramatically reduced risk profile, a focused strategy, talented associates and substantial future opportunity.

We have demonstrated the capability to meet the challenges, the adaptability to respond to changing conditions and the accountability follow through on our commitments. We recognize there is more to do but we are confident in our ability to succeed and grow. As we look to year end, we expect the fourth quarter operating FFO to be in line with the third quarter before the impact of the increased interest expense that Bob referred to earlier. We remain cautious given global macro factors and the slow pace of negotiations in Washington to address our own country's fiscal future.

Nevertheless we continue to feel good about the long-term real estate fundamentals and confident about our business. With that, let's get to your questions. Matthew.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Sheila McGrath from Evercore.

Sheila McGrath - Evercore Partners Inc., Research Division

Dave, I was wondering if you could talk about goals next year. You accomplished a lot in terms of reducing the development pipeline, reporting FFO, now more independent directors. So what are 2013 priorities to try to improve the valuation of the stock?

David J. LaRue

Well Sheila, thank you for the questions. Again, as we look at our strategy that we've outlined and the strategy that we feel we are executing on, that ongoing execution will continue to drive value into the portfolio into our income statement and then I think become increasingly apparent to investors. We will remain focused on our core operations through our Operational Excellence drive and our initiatives within the company. We will activate, as we've discussed, our development pipeline. In this case, the majority of that will be with a strategic capital partner. And we will continue to remain focused on equitizing our balance sheet and dealing with the debt and making the proper investments as we go forward.

Sheila McGrath - Evercore Partners Inc., Research Division

And is 2013, is that the first year that you -- are you going to convert next year to calendar year reporting or is that the following year?

David J. LaRue

That will be 12/31/2013 will be our year end as we move into 2013.

Sheila McGrath - Evercore Partners Inc., Research Division

Okay. And then a lot of people have been talking about the housing recovery in different ways to play it in the market. I was just wondering if you could talk to us a little bit about Stapleton, the trends that you're seeing there and also the remaining product that you have there and the terms of the option to take down additional land.

David J. LaRue

Well Stapleton is -- I think everybody knows will be our exclusive focus in terms of the housing market on a long-term basis. It's a strategically important asset for us, not only from the positive ongoing sales that we experienced this year and continue to experience through our builders selling homes, but also with the vertical development opportunity that exists with this project. We have purchased approximately 1,800 acres to date. That leaves us just over 1,100 acres going forward. And from a time frame, we would probably estimate that we're about halfway through that time period in the development, and ultimate sellout could take another 10 years or so. So we are very pleased to be able to participate. This project as you know, I think has, even through this housing downturn in the entire national economy, outperformed based upon its place in the Denver market and more particular, the submarket that it sits in, in the Stapleton area. Bob, if you add any...

Robert G. O'Brien

Yes. Well Sheila, I think I may have mentioned when we saw you out in San Diego on the way back from NAREIT I stopped in Denver and spent a day there with the team. It's very fun to go see the real estate. It's really a success. I think this will be the #2 or #3 year in terms of lot sales from the peak years back in '07, '08. We recently completed the interchange that really connect the North side of the site to the South side across I70, where a lot more activity on commercial sites. So the activity at that Stapleton is quite frankly, very encouraging. The office is very positive. The builders are excited about moving North. Just a lot of really good momentum there. And obviously a reflection of low interest rates and the housing market going back. But at Stapleton, it really never went away, it's just going to improve from where it's just kind of leveled out.

Sheila McGrath - Evercore Partners Inc., Research Division

Okay. And just last question on Barclays Arena, the percentage that you own, you're actually will reflect higher cash flows in the short term. Could you just walk us through the different percentages and how you expect that will roll out the next couple years?

Robert G. O'Brien

Sure. Thanks for the question, Sheila. I'll take that. As you'll see in our filings, we show that we own -- our legal interest in the Barclays Center is about 34%. Together with the original partners that we partnered with to buy the Nets and begin the development and acquisition of land at the Atlantic Yards. Together with those partners, we own 55% of the arena. And as the development of the arena went forward, Forest City, as a managing partner advanced capital to the partnership to get the arena built. That capital has a preference, both the return on and off that capital before the equity gets a return. The calculations that we have run show that certainly for a minimum of at least 5 and more likely 7 plus years, we, Forest City, will get a return on and of that advance. So we'll essentially be benefiting from 55% of the economics are coming out of the Barclays Center. Does that help?

Operator

Your next question comes from Paul Adornato from BMO Capital Markets.

Paul E. Adornato - BMO Capital Markets U.S.

I was wondering if you could elaborate a little bit more on the retail, remerchandising that you said is underway. Could you tell us what tenants left and why and who they were replaced with?

David J. LaRue

Yes, Paul, thanks. When we -- when I talked about the re-merchandising and you look at our portfolio, I can just cite maybe 3 or 4 examples of property. First being San Francisco Center, one of the most productive shopping centers in the country. We've been able to bring in new tenants such as, Tiffany and Burberry and Red Valentino. That obviously, requires taking tenants down and then building out their space, they recently opened in the late third quarter. So that overall adds to the improved merchandise of that [ph]. In Charlestown Town Center, we've not only renovated the shopping center, but we're remerchandising, moving tenants such as Coach, Sephora, Francesca's Collection into the shopping center, again improving that merchandising. Robinson Town Center, I think we talked about this a little bit last year, where we signed over 140,000 square feet of leases as the 10-year rollover came in. But as we continue to remerchandise the likes of Victoria's Secret and Ann Taylor Loft, Limited and Kay Jewelers expanding clearly affects us in the current quarter, but sets a strong foundation for growth. And again I think if you look to the statistics of that 10.7% growth continues to really move forward. We have, as we look forward into 2013 and '14, the Short Pump Town Center, again a, clearly a Class A regional dominant center in that market. It is the property. We have been hugely successful in merchandising, but we have an opportunity to continue that and upgrade it. And so we will be approaching that with the same vigor that we've looked at and had success in the balance of the portfolio. And so that rollover will continue as we look through and take advantage of our improving metrics, the increasing in sales and again, as I think as evidenced by the increasing rents.

Paul E. Adornato - BMO Capital Markets U.S.

Okay. And so are you buying out those retail leases or are you working with expirations and existing vacancy to get the new tenants in?

David J. LaRue

It's more of the latter where we work with existing vacancy or tenants that maybe weren't performing as well. We're always focused on the health of the overall center. The tenants that aren't performing generally don't want to stay and have a store that doesn't work for them either. So -- but in cases, we just had discussions in regarding some major space in our New York portfolio where we reached out and are executing some buyouts knowing that we will end up with higher rents and stronger co-tenants for the balance of the shopping center.

Paul E. Adornato - BMO Capital Markets U.S.

Okay. And switching to Ridge Hill, I appreciate your comments. Just trying to get a sense of the traffic or level of interest among retailers. Is this kind of a period where they're just kind of sitting back and looking at how Apple does and how Lord & Taylor does, or is this kind of an inactive period to market that space?

David J. LaRue

Well, we're clearly actively marketing, the most recent opportunity we had as a group obviously was this past week. We had the New York ICSC. Our leasing team, headed by Cathy Welsh, reported very good interest in the success of the retailers. You can hear in our comments, my previous comments of how in less than a full stabilized cycle, our tenants there, our small shop tenants reporting over $400 a foot. And again, as we get the benefit of the holiday shopping season, the benefit of Apple, we get LEGOLAND, which is a tenant that opens in the spring, which is under construction. That continued success and momentum gives us confidence that we will get to a good, stabilized value model for that property. We had a chance to talk with a number of the existing retailers, and the reports that I received back were that the existing tenants are supportive of the center. And again, I think that's a direct result of their own productivity.

Paul E. Adornato - BMO Capital Markets U.S.

Okay. And just one more and that is stepping back. When I look at some of the other companies I follow, they've all either happy or griping about the cap rate compression that they see. I wonder if the current market conditions might entice you to pick up the pace of dispositions over the next year.

Robert G. O'Brien

I'll take that one. I think we certainly have a demonstrated track record of continuing to harvest value from our portfolio. We did it early from some of the higher quality assets as we entered into the recession and our focus has obviously been on some of the non-core markets and non-core assets. As I think I said it at some of our investor meetings and on our last call. Those are taking a little longer but we do see increased interest there. But certainly, the cap rates on apartments and the cap rates on retail in particular haven't gone unnoticed by us. So I think we're looking to strike the appropriate balance between taking advantage of valuation to allow us to continue to make further improvement in our balance sheet and our debt metrics and be selective about that. We want to build from the core, a strong, high-quality portfolio, so we want to be selective in how we're doing that. But I think as we indicated in our Investor Day, out of the non-core assets, there's $100-plus million of capital that should have cash that should come out of those sales in 2013, and we're actively engaged in discussions about where else might it make some sense.

David J. LaRue

Yes, Paul, let me just add one follow-up thought to the question regarding the focus that's obviously on the retail performance just for this quarter. As we went back and looked, as we always do about how our portfolio is doing and focusing on making the right moves in the portfolio, the obvious comparison is to our -- the competitors in the marketplace or the competitors in the space. And as we looked at each of our product groups and focus on regional shopping centers, for the last 4 quarters -- so through the fourth quarter of '11 through the third quarter of '12, the REIT malls, the average REIT mall was 2.3%. Our shopping center portfolio for that same period was that same 2.3%. And again, as I mentioned in my comments, the malls that we opened just prior to the recession are the ones where the growth, that slowdown in housing has affected the most. So I think that's an indication that the balance of the portfolio is doing above that regional mall average. When we look at just shopping centers and the specialty retail, for example, for the 4 quarters, the past 4 quarters, we wrote 2.7% comp increase where the retailers, the reaverage group was at 3.1. And again, those have accelerated. And again, as I mentioned in our Midwest specialty retail area, that's where we've taken the -- I think the biggest hit. So on a longer-term trend, when you look at a full year, where we are today and what actions we're taking to keep our retail centers vibrant, keep our properties interesting to the consumer, investing and retenanting, I think we are doing very well.

Operator

Your next question comes from Rich Moore from RBC Capital Markets.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

To follow-up on that last thread, for a second, if I could. You look at the regional mall space and there's not much more being built. There's probably not any more going to be built. You guys have been a developer, you got some great projects on hand from other spaces, from other sectors. And I'm curious what your long-term strategy for the mall space is because it's very management intensive, you've got, as Paul pointed out, you've got a bunch of repeers that would love to own some of these assets. You have an issue now at South Bay Galleria. So as you look forward, I mean, what are you thinking in general about the regional mall space?

David J. LaRue

Rich, thanks for the question. We think that the -- as we talk about -- think about the regional small space as a total industry, we think that it's going to continue to bifurcate the strong -- getting stronger, the weak being repositioned or decommissioned into other uses. When we look at our portfolio in the productivity and where we fit in that overall marketplace, we think our asset strengths speak for themselves in terms of that quality where the strong get stronger. We have a great group of professional, retail professionals focused on this, aware of what's going on in each of the markets. And we think achieving great things with regard to the properties. We have organic growth built in, we think there's great value enhancement to be done by reinvesting in the existing portfolio. And at this point and looking longer term, we believe we remain competitive, and this is a strategic piece of our overall product offering.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. So Dave, selling some of the better quality regional malls or even doing a joint venture of some kind on some of those is really not something you'd be considering probably.

David J. LaRue

Well, again we've -- you talked about selling some of the better ones or selling some of the joint venture. We've done both of those things. We have 8 Spruce again, just awarded the best new skyscraper, and we've looked at the value opportunity there. And we have an existing partner and a new partner coming in that recognize that same value. So we have monetized where we have seen appropriate value recognition. The capital strategy we've outlined does require us to focus on investment in the balance sheet and does also allow us to activate that existing development. Right now our properties are our most cost-effective sources of capital. So beyond the non-core or non-core product or market dispositions that we've outlined, we always take into consideration opportunities to realize cost-effective capital for future growth.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. Good. And then on the multifamily side in particular, the development fund that you guys have or that you're setting up that you'll close here, will that partner also invest in existing properties that are already stabilized or is that just simply for development going forward?

Robert G. O'Brien

Hey, Rich, it's Bob. It’s primarily a development fund. I think their investment philosophy is that they want to be in these key, core mostly coastal markets. And to acquire existing property as you've referenced earlier, very aggressive, low historic cap rate. So pretty pricey. And they believe in with us that we can create a spread between the unlevered cash high cost returns and the new developments against what those same assets would require once they're open operating and stabilized operating assets. That being said, there's -- they are evaluating an opportunity in one of our existing assets where there is an expansion development opportunity. So rather than having them just being in essentially the expansion half of the transaction, they may come into the existing operating piece of that apartment transaction. But the majority of what we are looking at is ground-up development, an entitlement that basically we already have in our pipeline. As I think we've said previously, it's a smaller pipeline out on the West Coast that we might have to find some new transactions to do there. But certainly they're obviously looking and going to do the first tower at Atlantic Yards, as we [ph] look on the next opportunity at The Yards in D.C., and other places where we already have entitlement.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay, good. And then on the military housing business, guys, is that as vibrant, I guess, as it has been? Do you expect it to continue to be vibrant?

Robert G. O'Brien

Yes, Rich, we often get a question there. Dave and I kind of joke that we get to talk more about military housing with investors than we do internally because it's -- we've got a great management team in place that control that. As we've articulated to the marketplace, we believe that the NOI from that business is going to stabilize out at about $15 million a year. It is, as for everybody else who's in the business, it’s all a -- mostly single-family rental for families and most of that housing for the military arms has already been privatized. So the future opportunity is certainly somewhat limited in terms of adding units because they're being put out there by the military. But we make our money through asset management, property management piece primarily. We have a small participation in the cash flow. And -- we're certainly looking for ways to raise capital and as people have asked, would you sell it or would you raise capital through that. At an appropriate price or at an appropriate valuation, we certainly would consider that. Unfortunately, the market at least thus far is kind of pricing it as a short-term management contract when in reality, it's - there's probably 45 years left on the management contract. And the other, Dave points out that the other opportunity that does exist is the military's intent and Japan's intent to move military bases off of Japan to Guam. That opportunity is very large. It's probably double to triple the size of our installation in Hawaii. So well north of 15,000 housing units. That's been delayed for a few years because of the tsunami issues in Japan. But certainly, we're going to look to that. As long as we stay within the military business.

Operator

Your next question comes from Sheila McGrath from Evercore.

Sheila McGrath - Evercore Partners Inc., Research Division

Dave or Bob, I was wondering if you could give us a little background on 2 smaller multifamily projects that are listed, one in Fairfield, Connecticut and the other one in Boston. Just not as familiar with those projects. If you could just give us a little detail on those 2.

David J. LaRue

Yes, Sheila, thanks. The 120 Kingston, again, a part of a partnership deal that our team found and executed on, it's on the Rose Kennedy Greenway. Again part of our core market strategy, part of our core product offering. We saw the opportunity there to take advantage of what we considered to be a very strong market. You can see its anticipated that we'll open that in the second quarter of 2014. It has 240 units. And again, it's in a market where we can very efficiently add assets and manage those. Stratford Avenue in Fairfield was an opportunity we had been working on for some time. I can see it's a smaller opportunity, not only in terms of number of units, 128 units, but it's a relatively modest cost of $23 million. We believe that very similar to the asset delivery method that we've come up with in our Stapleton project where we can -- at the Aster, where we can do these smaller projects and deliver in phases and pieces, it leases it up very quickly and ends up with a very good return. So it again, activated something we had been pursuing for some time. And give us flexibility to deal with each of these assets as operating assets and determine long-term hold strategies or valuations based upon our core market philosophy.

Sheila McGrath - Evercore Partners Inc., Research Division

And would any of the ones that are listed in Dallas, Connecticut, D.C., would any of those be eligible to be in the new fund or no?

David J. LaRue

The ones that are listed in our pipeline already started. So those would not be part of the new fund. But as we mentioned, if we identify a new opportunity in Boston that would be a potential. We have not done that yet. Washington, D.C. as you know it's a phased multi-property, multi-pad site. So there is a site that is identified there. We are working through the pro formas. And I believe that, that market will also afford the fund an opportunity to invest. We've mentioned New York, that's again, there's capacity that potentially goes beyond B2. But again, we're confident about their interest in B2. So not so much the things that are listed, but it’s in the markets where they -- where we are active and have talent to create the value there, extremely focused.

Operator

Your next question comes from Paul Adornato from BMO Capital Markets.

Paul E. Adornato - BMO Capital Markets U.S.

Just looking at the NAV schedule on Page 13 of the supplement, looking at the net stabilized adjustments, column B, there are a couple of negative adjustments there. I was wondering if you could just tell us what they relate to. Specifically, I'm looking at negative 5.3 in the Other category, under commercial.

Robert G. O'Brien

Yes. Obviously, relatively small, Paul. On Page 13, off the top of my head, I don't know exactly what those are, but I can certainly follow up with you.

Operator

I would now like to turn the call over to Mr. LaRue for the closing remarks.

David J. LaRue

Thank you, Matthew. To all of you, first of all, I want to wish you a happy holiday season with you and your family, and wish the best in this coming new year. I would like also to thank you for your ongoing interest, your support. And again, I think the appropriate level of challenge to our -- the execution of our strategy, it does keep us focused. We appreciate the opportunity to dialogue. And again, I think more importantly show that our strategy is truly creating value and will continue to be evident. So again, I thank you for your time today, and we will talk to you next year.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may disconnect. Good day.

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