Forest City Enterprises' (FCE.B) CEO David LaRue on Q2 2014 Results - Earnings Call Transcript

| About: FOREST CITY (FCE.B)

Forest City Enterprises, Inc (NYSE:FCE.B)

Q2 2014 Earnings Conference Call

August 8, 2014 11:00 ET

Executives

David LaRue – President & CEO

Bob O'Brien – CFO

Analysts

Samir Khanal – ISI Group

Sheila McGrath – Evercore

Paul Adornato – BMO Capital Markets

Jason Young – YG Partners

Operator

Welcome to Forest City Enterprises Second Quarter and Year-To-Date 2014 Earnings Conference Call. (Operator Instructions). 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 the replay will be available beginning at 4:00 p.m. Eastern time today. Both the telephone replay and the webcast will be available until September 7, 2014, 11:59 p.m. Eastern time.

The company would like to remind listeners that it will be using non-GAAP terminologies such as operating FFO, FFO, net operating income, comparable property net operating income or comp NOI and pro rata share in its discussions today. Please refer to Forest City's quarterly report filed with the SEC and supplemental package, which are posted on the company's website at www.forestcity.net 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. (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 LaRue

Thank you, Phil. Good morning, everyone. On line with me today is Bob O'Brien, our Chief Financial Officer.

Our second quarter press release and filings went out happily into New York Stock Exchange close yesterday. Our results for the second quarter and year-end to-date showed solid momentum in our operating portfolio. Investors will recall that in the first quarter we fully reported operating FFO up more than 40% over the first quarter of last year. Our second quarter operating FFO was up 68% compared to the same period in 2013.

The solid performance validates our strategies and the work we have done over the past two years to focus on high growth, core markets and high quality properties, activate new entitled development opportunities from our pipeline and build a strong sustaining capital structure including improving our balance sheet and creating strategic capital partnerships while reducing risk. Before I comment further on our results let me touch on two items of note in the quarter. On June 30, we closed our Atlantic Yards joint venture with the Greenland USA.

We achieved approximately 200 million in cash from the formation of the JV and Greeland acquired 70% of the project including a proportional share of the project cost going forward. Earlier this week we introduced a new name for the development, Pacific Park Brooklyn, we also announced the selection of architects for the next three buildings and the public parks that will be a prominent amenity for residents in the community. We expect to start two 100% affordable rental buildings and one condominium building within the next 12 months. With the first all-affordable building being started by the end of this year.

Not only will our joint venture Greenland accelerate the development of Pacific Park Brooklyn but it will also -- it does also significantly reduce the development risk. Our development ratio which we define is a total cost of projects under construction and development as a percent of total assets is approximately 6.6% as after this closing. As we continue to active entitled development opportunities that percentage will increase and it will stable our strategic guideline for no more than 15%.

The second item I would like to comment on are the non-cash impairments we recognized in the quarter. Those impairments are three of our Tower City assets in Cleveland, despite the negative impact on our GAAP results of these non-cash charges the underlying actions are aligned with our strategies as we continue to execute targeted disposition of non-core assets. Bob will provide some additional details on these impairments during his comments. Now turning back to our results the mature portfolio achieved solid second quarter quarter-over-quarter increase in comp NOI up 5% overall with growth in all major property types. FFO results were down modestly for the quarter and year-to-date primarily due to lower tax benefit in the quarter and a loss on the disposition of partial interest related to the completion of our joint venture with Greenland USA.

The net loss resulted from an unfavorable condemnation valuation ruling for land parcel as the project. This was one of the three remaining parcels to be acquired as part of the first phase of Brooklyn Park to Pacific Park Brooklyn. While we’re appealing the ruling we have recognized the higher than anticipated cost to our second quarter results. As of these items FFO results have been in-line with consensus estimates.

Our apartment portfolio had another strong quarter with compensation NOI of 4.6% driven by continued rent growth and strong occupancies. As we anticipate in his indicated and in our past conversations, our office portfolio experienced strong comp NOI growth of 7.1% as a majority of the prior vacancy at One Pierrepont Plaza in Brooklyn has leased up.

In retail comp NOI was up 2.3%, we also saw strong increases in new same space leases from our comp malls of nearly 25% over prior months on a rolling 12 months basis. We believe this growth clearly demonstrates the quality of our focused portfolio. We are seeing early benefits from our remerchandising and renovation programs as well as 10 year of lease roll overs at two of our strongest centers, Short Pump Town Center in Richmond and Victoria Gardens in Rancho Cucamonga.

Sales per square foot reached $515 on a rolling 12 month basis in our portfolio. Barclay Center in Westchester's Ridge Hill also continued to contribute to bottom line results, those two properties combined had a total operating FFO increase of $3.6 million in the quarter. At Ridge Hill we completed a three year bridge financing during the quarter and continued to make progress on lease up at the center.

Stapleton and Denver had another great quarter with 5.3 million increases land sales compared to the same quarter of last year. With that let me turn the call over to Bob for his observations and a closer look at these second quarter results. Bob?

Bob O'Brien

Thanks David. Good morning everybody. Our second quarter supplemental package includes operating FFO bridges on pages 35 and 36 that compare results for the second quarter and first half respectively with the comparable periods last year.

Let me touch on some highlights for the second quarter. For the quarter we had increased net operating income for mature portfolio of 6.4 million higher land sales at Stapleton and Denver of 5.3 million, increased interest expense on mature portfolio of 4.7 million and increased operating FFO from new property openings of 3.5 million. In addition you will see on the bridge that we have increased operating FFO from other sources of 10.3 million. That’s primarily reduced expensed overhead as we have continued to activate our entitled development opportunities.

We have noted on previous calls that we needed to retain development talent to manage our near term pipeline of opportunities but we’re now seeing that come to fruition as we ramp up development activity. We also have reduced corporate activities of 8.4 million of which 5 million was reduced corporate interest expense. The balance of that reduction was a onetime recovery of legal cost incurred in a prior period. These positive factors were partially offset by reduced operating FFO from property sold or joint ventured of 14.2 million. It is worth noting that the improved performance of our operating portfolio has more than overcome the short term dilutive impacts of asset sales in joint ventures.

Dave touched on some highlights for the quarter and our operating results. I will try to provide a little more color. Our overall comp NOI increased 5% for the quarter. In office comp NOI was up 7.1% driven by lease up for the prior vacancy at One Pierrepont Plaza in Brooklyn. Of the original vacancy of approximately 300,000 square feet less than one quarter of this space remains to be leased. We expect at least up to continue to drive strong office comp NOI growth for the rest of the year.

Comparable office occupancies were down modestly to 92.1% compared with 92.6% last year driven by a 145,000 square foot vacancy at the end of the quarter at University Park at MIT. We have good prospects for the majority of this space and based on the strength of the market and quality of the assets, we’re confident in our ability to retenant the space.

Our rolling 12 month basis rents in the same space office leases were up 6.5% over prior rents showing good strength in the office portfolio particularly in New York and Cambridge.

Turning to retail, comp NOI increased 2.3% and sales in our regional malls averaged $515 per square foot at a rolling 12 month basis up from $480 per square foot at June 30th of last year.

On a rolling 12 month basis new same space leases in our regional models increased 24.9% over prior rents. You will recall that we reported same space leases up 19.4% in the first quarter so as Dave touched on we’re definitely seeing the benefits of a focus on highly productive centers as well as investments in remerchandising expansions and renovations. Comp retail activities were also up 94.2% at the end of the quarter versus 94% at June 30 of last year.

In the residential portfolio comp NOI was up 4.6% average monthly rents for all of our comparable apartments were up 3.4% to $1386 year-to-date and in our core markets comparable average rents rose 3.9% to $1830 per month. Comparable economic occupancies year-to-date were flat at 94%.

Let me give a little more detail on the non-cash impairments in the quarter that Dave touched on. Those impairments are on three of our Tower City assets in Cleveland, Post Office Plaza, the Avenue Retail Center and Terminal Tower Office. We’re in active negotiations with a single perspective buyer for Post Office Plaza, Skylight Office Tower, The Avenue Retail and our parking asset.

Terminal Tower is not part of these negotiations, we will be happy to answer questions during the Q&A. Year-to-date we have completed 12 dispositions with total proceeds of 81.7 million. Looking ahead including the Tower City assets we have visibility to additional disposition in joint ventures that we anticipate will generate total proceeds in the range of $150 million to $200 million.

Before I turn it back to Dave let me comment on some changes in our filings for the quarter. We have introduced new disclosure in response to ongoing dialogue with investors and in an effort to continue to improve the transparency of our reporting and assist investors in understanding of our value proposition. We have included additional line item detail for revenues and expenses on our income statement on page 9 of our supplemental package as well as new detail on pages 21 and 22 showing comparable revenues and expenses to give investors better visibility to our operating margins. Finally on our schedule of NAV components on page 13 of the supplement, we have also broken out core and non-core apartments to allow investors to more easily apply different assumptions to those assets. With that let me turn the call back over to Dave for some comments on the pipelines and some closing thoughts. Dave?

David LaRue

Thank you Bob. Details of the pipeline are included in the press release and our filings and in addition to covering projects under construction the press release also include some color on expectations for near term project starts from our development pipeline.

Let me touch in just a few highlights here and we will be happy to answer specific questions during the Q&A. During the second quarter we began a phased opened at Radian, a 240 unit apartment community in Boston and a Twelve 12, a mixed use apartment with 218 rental units above a ground-level grocery store and a fitness facility at The Yards in Washington, D.C.

We ended the quarter with seven projects under construction in a total cost of 296 million and full consolidation and 248 million at our pro rata share. Projects currently under construction include apartments projects in San Francisco, Dallas, New Haven, Connecticut all of which are expected to open in the third quarter as well as B2 Brooklyn which opens in the fourth quarter of 2015. Two of our regional malls Antelope Valley Mall in Palmdale, California and Galleria at Sunset near Las Vegas on the midst of an expansion programs that are bringing new tenants and amenities to these centers. Antelope’s expansion will be anchored by new Dick's Sporting Goods and expanded H&M is expected to be completed by the fourth quarter of this year. The expansion to Galleria at Sunset is restaurant driven and will include Brio, Sugar Factory, and Larsen's Grill. It's expected to be completed in the second quarter of 2015.

Also under construction is 300 Mass Aves, a 246,000 square foot fully leased office building at University Park at MIT in Cambridge. It is expected to be completed in the first quarter of 2016.

In our press release we also provided an overview of expected project starts over the next 12 to 18 months. A significant amount of this anticipated activity will be at our major mixed use of projects. Pacific Park Brooklyn, The Yards in Washington D.C., and Stapleton and Denver as well as projects that are part of our Arizona State Retirement system residential development fund.

In total we anticipate residential starts over the next 12 to 18 months and we will represent approximately 3800 rental residential units with a total cost of just over 1.7 billion, our approximately 500 million at our pro rata share. We also expect to start smaller number of commercial projects including Cornel Tech in Roosevelt Island in New York City.

Let me close by saying that we’re pleased with the performance of our operating portfolio for the second quarter and first half. The work we have done to execute on our key strategic drivers can be seen directly in this improved performance. With the strength of our operating portfolio and the quality of our pipeline of future opportunities we are confident in our ability to create significant long term value.

Now with that let’s take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Steve Sakwa from the ISI Group.

Samir Khanal – ISI Group

Actually it's Samir Khanal from ISI. What’s the latest on the REIT conversion at this point and I guess following on that I mean does the sale of the nets obviously from an NOL standpoint and does it kind of accelerate your plans to move forward with the conversion?

David LaRue

I will cover this and I’m sure Bob is going to have to back me up on this. Let me start with the net, we are and again and as we have announced in previous quarters that we are in the process of marketing our 20% non-controlling interest in the nets. That process is still ongoing and we have made progress in terms of interest parties and again anticipate that we will be able to get that closed by the end of the year if we can come to an agreement regarding value. The nets just for your information has been written down overtime to where there is no book value and anything that we would recover or receive from a sale that would actually be a gain.

So, that it helps guess maybe get rid of maybe not readable income but again overall it's a doesn’t have much bearing on any discussions about REIT conversion. To deal with the REIT conversion we have talked to many of our investors and analysts over the past years, it's a process that, an issue that we continue to look at and always look at as most listeners are aware we still have substantial NOLs that allow us as a CCORP to continue to be, it's very tax efficient in our operation and as we go through this repositioning of our portfolio, go through non-core assets, we think some additional flexibility in dealing with gains that maybe recognize our sales that occur from that order probably more depreciated portfolio. So we continue to evaluate REITs, we think it is a direction we’re heading. It's something we evaluate on an ongoing basis but at this time we have nothing to announce on that. Bob, I don’t know if you have anything to add?

Bob O'Brien

No I think you’ve got it Dave.

Samir Khanal – ISI Group

So I guess in terms of timeline I mean at this point I mean we’re kind of assuming maybe something around 2016, is that something that’s is that something that is suitable do you think or is that net --

David LaRue

I think again just stepping back strategically Samir as we as stated and outlined in our strategy, a lower levered portfolio and less development on how pro rata share bring in strategic partners not only from a capital standpoint but also from an exposure and risk standpoint. We will point to us moving towards a becoming a tax paying entity. So depending on where we’re in that deleveraging curve and when we start generating taxable income you can walk over the next number of years and coupled with our sales and say we’re going to use those NOL. So we haven't picked the date but again strategically based upon our stated strategies we’re heading there over that time period.

Operator

Your next question comes from the line of Sheila McGrath from Evercore. Please proceed.

Sheila McGrath – Evercore

Now that the Greeland JV is closed I was wondering if you could provide a little more detail on this venture, I know it's 70:30, is there an opportunity for a promote and just kind of if you could comment on the changes now some of the properties are 100% affordable and what that means to the project?

David LaRue

So as I indicated in my earlier comments this is a major watershed for the project for specific portfolio and for City and Greenland so it's a major I guess positive for us to our company and it allows us to accelerate as we talked about the development opportunities that we realize as we have all talked about and as witnessed in the market, the market supports, this project has increased overtime in terms of rental rates, demand for living and working in Brooklyn. So we’re very happy to be at this position.

The structure of the deal overall still obligates us as the partnership to deliver what we had agreed to in terms with our community partners of 2250 units of affordable housing out of the total 6400 plus [ph] units that are going to be part of the full build out whether rental or kind of.

In conjunction with the City and State initiatives and focus on affordable housing as we’re moving towards closing we worked with our community partners and revised our development plans that would allow us to help the community and meet their own goals regarding affordable housing and therefore rather than having 2250 units of spread in all of the buildings, we and they agreed that accelerating all affordable buildings is a benefit not only to the community but a benefit to us in terms of that acceleration.

So these two affordable buildings will help me demand that clearly exists in the marketplace while also activating the first two -- two of the first buildings at Atlantic Yards. The condos again the building -- the third building that I mentioned is again a tremendous and strong opportunity given the dynamics that exists in that Brooklyn market where it is a destination of choice and so again as we have said in the past our real estate strategy is to service demand and I think the demand clearly exists for this product type. Regarding to your question on promote, when we were going through our negotiations and ultimate execution of our partnership there is an opportunity on the rental buildings to have for City receive -- promote on this rental assets but Sheila, it's so early in the project so early in the partnership and a long term development as you can imagine was 6000 plus units of future construction to go.

It's hard for us to quantify or estimate that make might be and so at this point we have not included that in any of our own internal projections and the upside if we can get there.

Sheila McGrath – Evercore

And then moving to Ridge Hill, I saw that you announced a couple of new entertainment options. Just wondered if you could comment on are those rent paying tenants? Number one. And also just any comments on other leasing activity or potential leasing activity there.

David LaRue

So again we saw this quarter that we reported decrease to 75% of small shop spaces and parcel [ph] and so we have continued to make that progress that we have been talking about. As I said in the past this each dollar of I suppose are accretive to our balance sheet and then was again evidenced in this quarters or moving forward. We have brought in the two tenants I think are very complimentary to the overall mix and place that we want to create average which is regional destination, a family oriented outdoor experience and with the ability to bring in a company iFLY that has the simulated sky diving experience is just that opportunity continue to differentiate our project as a destination in a great market.

There is also a lot of press regarding Dream House which is an effort of DreamWorks. For City’s, one of the two mall owners to see the value proposition and the excitement that this concept will bring to the project so at Ridge Hill and at Victoria Gardens we have the ability to continue to drive traffic with this type of destination during holiday period. The holiday period shopping period over the Christmas Holiday. So again we see these as additive to the mix and in support of the center in driving traffic, that’s one of the things that the retail business in general is struggling with, as you continue to see in reports and as customer traffic, all those sales continue to increase. Traffic is dropping and our objective is to continue to make our shopping center portfolio a valuable part of the community and a destination, within the community by continuing to enhance (indiscernible).

Sheila McGrath – Evercore

Should you think based on adding these two tenants that there has been kind of increasing dialogue with new tenants on the horizon?

David LaRue

I don’t know if I would point specifically to these two tenants, I think it is part of the process that continues to grow. Each tenant that opens, each of the great tenants that we have that open continue to drive more and more traffic. We have reported earlier in our last call that traffic for the first quarter has been up 20% year-to-date. We continue to monitor that, and it is continuing to show strong growth in traffic at the shopping center. So when you can bring in these two tenants and we just recently opened -- Banana Republic is scheduled to open this September. Children’s place opened in July. So again every tenant is building on that momentum and we feel is collectively added to the leasing efforts that our team led by Kathy Welch in New York is leading and I think we can again with the refinancing which gives us time to continue to invest, we’re going to be able to stabilize and improve value on this property.

Operator

Our next question comes from the line of Paul Adornato from BMO Capital Markets. Please proceed.

Paul Adornato – BMO Capital Markets

First to follow-up on Pacific Green, I guess we can say there has been a sea change there? I guess my question relates to the affordable towers that you’re building there, is the intention to hold those properties for the long term and now that the affordable will be in separate towers might be easier to sell them office, if you so desire.

David LaRue

Paul I think that each of the assets that we develop whether it's all affordable or 80:20 or 50:30:20, our plan is always to put them into portfolio because we think that they will create value. I would essentially say these were standalone buildings not part of an overall complex, we probably maybe leaning towards saying we are going to create some value, we’re going to develop a return that we may sell. These are going to be part of a special place and that place creation which we always talk about is the key and core competencies that Forest City enterprises has. I think whether it's affordable, all-affordable or 80:20 or 50:30:20 that is going to be a long term accretive opportunity and value creation opportunity. So we haven't clearly made any decision about whether to sell these or not, we have to get them started first and get them leased but we are long term investors and long term value creators and will just have to see how we the project plays out over its development period.

Paul Adornato – BMO Capital Markets

Okay I guess on that note, how should we think about valuation of the affordable buildings? They will be subject to rent control I assume. So help us think that through.

David LaRue

I think it's obvious in the marketplace when you have a lower a non-market building that needs a public partnership and supports. So I think the development yields on these buildings are going slightly lower obviously than a market rate building an 80:20 building. However working with our community partners, we have a structure in terms of the, definition of affordable that we think is appropriate in the marketplace and supported this with our community partners and we believe that the nature of the affordable unit and the demand from the particular products a place it's going to be that lower return of it I guess equivalent to the risk. We’re going to have much less risk in terms of occupancy. I would anticipate higher occupancy over the term offsetting some of that rent, that market rent and market increase that you don’t achieve because of the controls but overall risk reward situation we have envisioned being very similar to other developments being done in the marketplace.

Paul Adornato – BMO Capital Markets

And then finally I was wondering if you could perhaps give us a market update on office in Brooklyn, there has been a lot of press about the expansion of dot com companies et cetera, so with respect to your own portfolio what’s happening and perhaps a broader view of the market as well.

Paul Adornato – BMO Capital Markets

The Brooklyn market I think in all property types is clearly showing significant strength and ongoing improvement based upon those demand in demographics of what’s happening. So like our residential where we see strong leasing trends and then again evidenced by our ability to lease Pierrepont and you saw the comp increase most in our office portfolio, mostly driven by Pierrepont but again plus across the balance of the portfolio.

I think excluding Pierrepont we still have a very market average increase without Pierrepont at 7% is top of the market. The demand the demographics of new space and moving closed fork and I think that is ongoing support of our that exist in Brooklyn. The MetroTech Center in of itself is in the very high 90s, lease and occupied, it always has been and again we’re pleased with that demand in the marketplace and the fact that we have product to service that demand.

Operator

Our next question comes from the line of Jason Young from YG Partners. Please proceed.

Jason Young – YG Partners

Yes, so I know everyone there has been working very hard. You made a lot of progress restructuring the portfolio and improving the balance sheet, so congrats on that as well. The stock still trades as I’m sure you guys know at a material discount in the NAV probably conservatively at least 30%. So in your view what do you think you need to do close that discount?

Bob O'Brien

I think as management and shareholders were frustrated too. I think we have demonstrated under David’s leadership, we set out some strategies and we’re executing against them and I think we have done particularly good job in that. I’m particularly pleased with this quarter’s results. I think it's a validation from the strategies that we’re pursuing and part of it is just consistent performance like this. I don’t think we’re quite where we need to be in the number of places. We still have or 14% of our NOI comes from non-core markets, we’re working diligently to bring that down to 10% or less. I think the indicative values and the action we took in our Cleveland office portfolio and indicative of our focus on that. That will again focus the portfolio in those core markets, raise amount of some level that will be used primarily to reduce leverage on the portfolio.

And then on the leverage basis while we have made a lot of progress there is still some wood left to chop as we like to say and we’re going to do that through continued exit sales but importantly from this point forward really increases in NOI and in our operating portfolio and as this quarter’s results show definitely some strong results there as an effort to focus that portfolio in these key core markets. So we ticking away I think our list of the things that investors at least have indicated to us that are potential barriers to entry but we think continued execution and demonstrated commitments, unwavering commitments to achieve these goals. We will ultimately play itself up.

Jason Young – YG Partners

Absolutely, and you guys have certainly done that tremendous amount of work and a lot of progress. Just a question about the REIT conversion. I know you get that question a lot but would you consider doing something perhaps a little more creative where by you retain the development pipeline in the CCORP with the NOLs and spin-off one or more pure play REITs?

David LaRue

Jason, now I think we have had a question a lot just because of what’s going on in the marketplace whether it's Vornado spin or Simon spin where they have taken and if I guess a spun out what they felt were opportunities that didn’t add value within their core operation. So we have seen what’s going on in the marketplace we track in that potential value creation structuring, at this point if you think about each of our different businesses whether it would be residential or office or retail I don’t think either one of those on a standalone basis is something that would be a size to be able to effectively compete and carry it's G&A load and expenses of operating. We also as we looked at our strategic view of our investment strategy, even though we serve this demand that we talk about with multiple products, our investment strategy really is core market urban areas which allow us a company to service demand in each of these areas that it's created by the overall market dynamic and so instead of picking one and think we can benefit by servicing each part of the demand. So the split of the business is into individual separate companies is something again we see, we think about, we don’t think it plays to our strength.

We don’t think it plays to the demand in the marketplace and we think our unique investment strategy does play more positively to that long term value creation in realizing the different opportunities that exists. So we again are very aware as you would imagine of what’s going on around us, we look at different options whether it's just a reconversion or sale of recapitalization of great assets whether it's (indiscernible) is opportunities for us to continue to focus and continue to move more towards that focused real estate portfolio and realized value in pay down debt and add all of that up to those strategic drivers we have but again explaining it to a company, it's a different product type. It's not something we would say would be beneficial.

Operator

Our next question comes from the line of Sheila McGrath from Evercore. Please proceed.

Sheila McGrath – Evercore

Yes Dave I was wondering if you could give us an update on Pier 70 and just your thoughts on any new zoning regulations if that would have an impact on that entitlement?

David LaRue

Well any new zoning regulation has an impact Sheila. Pier 70 you know is a great opportunity for us and another gateway market and not only gateway market in the U.S. but it's a world gateway market. And the dynamic the demand in that marketplace was again playing well to that multi-product investment strategy that we were just talking about in response to Jason’s question but we have a property that has 25 plus acres under control and we’re going to a zoning process and in a recent ballot initiative that was passed by the residents of San Francisco limit height along the Water’s Edge. We have been actively engaged Kevin Ratner and Alexa Arena in our San Francisco office and Kevin in the West Coast. Very engaged with the community both the port authority in the city in developing the plan build out that we had envisioned and this height limit initiative that did pass does in fact have an impact on what we had planned.

We’re looking at that impact and there are mechanisms in place that allow you to get your property zoned to the development plan and again since we have been so close and intertwined an agreement with the community, our community partners and other public participants. We think we have a very good chance of being able to execute on our original development plan.

So yes it's one hurdle I think in any major mixed use urban development that we have established in the past and this is just one of those I guess facts of life that is part of this type of development.

Sheila McGrath – Evercore

Last question and maybe it's for Bob, Bob if we look at the net sale, then the Cleveland assets and I think in the prepared remarks you may have said another like 175 million or 200 million of non-core collectively together does that get you to a leveraged level that you’re like -- that to your target or is there still more wood to chop?

David LaRue

I think if you look at our disclosure this quarter, what you see is on a run-rate basis we have just under $600 million of NOI and about 6.5 billion worth of debt. So we’re at about 11 times net debt to EBITDA at the moment but when you stabilize out those property that comes to little over 640 million so we should achieve about 10 times net debt to EBITDA by stabilizing the assets that basically are in place and just need to stabilize. So like Ridge Hill, like some of the new apartment openings in Boston and Washington et cetera. Clearly our focus on the core markets and asset sales are going to help us move that needle little quicker, I would say certainly a 10 times or a bit out of the range of what typical real estate and particularly the REITs and I would highlight to investors that only $700 million of that debt is recourse and all of that is convertible debt and the prices are very near where we’re currently trading. So our near term goal is to have the stack better reflect our value and get that converted and if we can do that conversion of $700 million of debt will bring us down to much closer to nine times and obviously a place where we’re certainly a lot more comfortable, we’re starting to get inside the box if you will of targeted debt levels for most public real estate companies and I think the majority of that concern that investors have expressed about the levels of leverage for City, it's not off the table certainly a concern level will be there.

Operator

Ladies and gentlemen this will conclude the question and answer portion of today’s call. I would now like to turn the conference back over to David LaRue for closing remarks.

David LaRue

Thank you. First of all I want to thank all of you for your interest in participation and your questions today. The insights that we gain from your questions are valuable to us. Again as Bob indicated in some of his comments we continue to try to help our investors and interested parties to better understand the value that opportunity and the value proposition that exists within our operations and make it easier to analyze. The strength of our operating portfolio and the underlying fundamentals of each of our product lines I think is clearly evident in our quarterly results and our year-to-date results. In terms of our future opportunities beyond the growth and the strength of the core markets we’re operating these businesses, activating that development pipeline that we have talked about for a number of years is a great future growth opportunity and a great value proposition for the company as we have said today.

All of this combined and we keep coming back to this and I think it's important is a reflection of a focus to execution on our strategies that we talked about and again we believe that this execution and the strategies themselves are going to continue to increase the value for all of our stockholders. So again we appreciate the time investment and the interest in support of our company and look forward to catching up with you in the future’s -- we continue -- evidenced the value that we know that is in our company. Thank you. Have a good day.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you all for your participation. And you may now all disconnect. Have a wonderful day.

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