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Forest City Enterprises Inc. (NYSE:FCE.A)

Q3 2011 Earnings Call

December 9, 2011; 11:00 am ET

Executives

David LaRue - President & Chief Executive Officer

Bob O'Brien - Chief Financial Officer

Matt Messinger - Executive Vice President of Investment Management

Analysts

Paul Adornato - BMO Capital Markets

Sheila McGrath - KBW

Richard Moore - RBC Capital Markets

Operator

Welcome to the Forest City Enterprises third quarter 2011 earnings conference call. The company will 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 pm Eastern Time today. Both the telephone replay and the webcast will be available until January 9, 2012 at 11:59 pm Eastern Time.

Also, please note that exhibits referred during today's call are available on the Investor Relations page of the company's website www.forestcity.net. At this time all participants are in listen-only mode. Participants on the call will have the opportunity to ask questions following the company's prepared comments.

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 operator and good morning everyone. Thank you for joining us today. Sharing remarks with me today is Bob O'Brien, our Chief Financial Officer. Matt Messinger, our EVP of Investment Management of our New York office is also on the call and available to answer questions during Q&A.

By now I hope all of you have seen our third quarter press release and the filings, which went out at the close of business yesterday. In a few minutes, Bob will review our financial and operating results and after that I’ll get to our pipeline, offer some closing thoughts and then we’ll get to your questions.

Let me begin by addressing the news we just announced this morning, regarding the sale of the Ritz-Carlton Hotel here in Cleveland to Rock Ohio Caesars for $36.5 million. This was a non-encumbered asset.

As most of you know, we have been working closely Rock as they have moved forward with their casino development here in Cleveland. In early February this year we announced an $85 million land and air right sale to Rock for future casino adjacent to our Tower City Center property. Later that month we announced the five-year lease with Rock, on 300,000 square feet of space in our Higbee Building at Tower City for a phase one casino. That casino is currently under construction and is set to open in March of 2012.

Additionally Rock announced this morning that it had recently purchased that auction, the mortgage securing the 250 Huron building. 190,000 square foot office building that is five floors below the Ritz, which occupies floors six through 14. 250 Huron was a single tenant office building of ours that had been vacant since 2008 when JP Morgan Chase moved out.

As you will note in our disclosure this quarter, we recently made a determination that we would not hold the property long term and we took a corresponding GAAP impairment in the quarter. We have an agreement with Rock and expect to transfer 250 Huron to Rock in full satisfaction of the remaining balance of the mortgage and we expect to realize a gain and a disposition at year-end roughly equal to the third quarter impairment.

The Ritz-Carlton sale which was expected to close later this month is a great transaction for us and reflects our ongoing strategy of focusing on our core apartment, office and retail products and concentrating our investments in our primary core markets, including Washington, New York, Boston, Denver and California. We continue to believe that Rock’s investment at Tower City Center will benefit our adjacent assets and we look forward to continuing to work with them. We’ll be happy to answer any questions on this transaction during Q&A.

As we indicated in our press release, our third quarter results were in line with our expectations overall. We are pleased with where we are through the first nine months of the year. We continue to see solid fundamentals in our core product types and markets, and our residential multi family portfolio in particular continues to perform very well. That portfolio experienced double-digit percentage increases in comparable property net operating income in the quarter, compared with the same period last year, as well as increased comp occupancy in net rental income.

Office was down modestly as expected, primarily due to the timing of lease expirations and vacancies in two Brooklyn office properties, two MetroTech and one Pierrepont. The significant portion of that space has already been released and will be coming back onto line to contributed future periods. We’ll be happy to provide additional color on this during the Q&A.

The quarter-over-quarter decrease in retail was disappointing, but we believe that it’s a temporary one. The drop reflected the timing of vacancies during the third quarter at a number of our centers. The largest individual impacts were rent concessions and vacancies at the Village of Gulfstream Park and Hallandale Beach, Florida, which Bob will speak to in a few minutes in the avenue at Tower City Center here in Cleveland.

They are both centers we are actively working to reposition in the respective markets. As you can imagine, with the casino opening here at Cleveland next year, there will be significant opportunity to remerchandize and reposition the avenue and improve it’s operations.

The other meaningful impact in the retail for the quarter was the unanticipated vacancy at East River Plaza in Manhattan, where one of our original tenants failed. Fortunately East River has performed very well since the last year and there is strong interest from perspective tenants. We expect to be able to announce replacement tenant for the space in the near future.

Despite the disappointment in the retail comp NOI for the quarter, we continue to see positive trends in key fundamentals, including rising sales per square foot in our comparable malls, both on a rolling 12-month basis and year-to-date. Our year-to-date increase of 7.3% comparable malls when compared to the same period in 2010 are excellent. Our portfolio has now demonstrated 21 straight months of comp increases.

Turning to our pipeline, we continue to make progress on our current project and to have made and have selectively taken advantage of existing entitlement in our core markets to commence construction on new ones, focusing primarily on strong demand in multi family. Have more to say on the pipeline later in the call.

Let me take a moment to comment on some of our recent meetings and communications with investors. As many of you know on the call, we attended NAREIT, REITWorld Conference in Dallas in early November. While there we conducted an investor tour of the Mercantile Place on Main, a multi family property in downtown Dallas. At the conference we had approximately 25 one-on-one meetings with investors and analysts.

Last week Bob, along with Mary Anne Gilmartin from our New York office attended Goldman Sachs Real Estate symposium in New York and had another round of one-on-one meetings with investors. We enjoyed the opportunities and events to discuss our strategy, the strength of our portfolio and the future growth opportunities.

The feedback we get from investors is always helpful and appreciated. Many share owners comment to us on the efforts we’ve made over the past several years with Bob’s leadership, to improve the quality of our disclosure and include additional disclosure and new schedules in our supplemental package, to help investors better understand our model and our performance. But we recognize that we need to continue to improve disclosure and are committed to doing so.

We are currently in the process of finalizing our strategic time for 2012 through 2015. The four key things of our new plan are straightforward and I’m pleased to share them with you. First, we’ve got a strong sustaining capital structure, by continuing to improve balance sheet and de-risk the business.

Second, to drive operational excellence with optimized growth from our portfolio that matured and newly opened assets. Third, to promote additional growth by primarily focusing on activating existing entitlement to develop new assets and core product types in core gross markets. And fourth, align our talent with our key strategies. In short, a better balance sheet, operational excellence and focus on the core and to line our talent.

Obviously there is a lot of detailed planning behind those things and we are committed to be disciplined to execute in this execution, holding ourselves accountable in implementing the plan and meeting our goals for the next four years.

With that, let me turn the call over to Bob for a review of results for the first nine months. Bob.

Bob O'Brien

Thanks Dave. Good morning everybody. On today’s call I’ll be referring to our results in our earnings release, our 10-Q filing and our supplemental package. If you don't have access to them, you can contact us for a copy or visit our website for reference during the call. I'll also refer to our EBDT bridge, which depicts the positive and negative factors impacting our results. It's in our supplemental package and available through a direct link on our Investors page of our website.

I want to remind everyone that we will be using non-GAAP terminology such as EBDT, comparable property, net operating income or comp NOI and pro rata share in our discussions today. Please refer to our supplemental package for a thorough explanation of these terms and why the company uses them, as well as reconciliation’s to their comparable financial measures in accordance with generally accepted accounting principles. As most of you know, we use EBDT as a key indicator of our performance.

Third quarter 2011 consolidated revenues were $261.2 million compared with $287 million last year. For the nine months 2011 revenues were $822.8 million compared with $850 million for the nine months ended October 31, 2010. The third quarter net loss attributable to Forest City Enterprises was $38 million, compared with a net loss of $46.8 million in the third quarter of last year. Net earnings for the nine months ended October 31 were $17.7 million compared with $60.5 million for the same period in 2010.

As you know, although we have substantially recurring cash flow from our properties, we can experience significant variances in net earnings between periods as a result of such earning depending on asset sales, joint ventures or other transactions. Net earnings are also impacted by GAAP impairments and we have two primary impairments here in the third quarter. The one David mentioned a moment ago, 250 Huron here in Cleveland, where we expect to realize a gain on the disposition of the asset by the end of this year.

Let me take a moment to address the other primary impairment, the Village at Gulfstream Park and Hallandale Beach, Florida, where we recognized a $34.6 million impairment in the third quarter. The lease up of Gulfstream began during the death of the recent recession and has continued through what remains a challenging retail leasing environment, particularly for new properties.

Our house wares, home furnishings and restaurants at the Gulfstream have done well, but our fashion tenants have struggled and we are actively working to remerchandize the center to match the demands of the market. Repositioning that component of the center will require additional investment. Also the original construction loan for this equity method property matures in September of next year. The uncertainty of the repositioning, together with the standard of the loan required us to impair our investment.

Long term we continue to believe in the strength of the market and will focus on repositioning the asset to meet the needs of the market. We also have additional future entitlements at the site that we can activate when economic conditions and the performance of the center improve.

Turning now to EBDT, total EBDT for the third quarter was $77.5 million compared with $90.7 million for the third quarter of 2010. Total EBDT for the first nine months was $275.6 million compared with $266.7 million for the nine months ended October 31, 2010.

I’ll refer now to the year-to-date EBDT bridge on page 25 of the supplemental package and on the Investor Relations page of our website for details on the factors impacting our EBDT for the first nine months of 2011. Factors impacting the quarter were covered in the press release and will be asked to provide additional color in the quarter during the Q&A.

On the left hand side of the bridge you see our EBDT for the first nine months of 2010 of $266.7 million. The next 10 blocks show the company’s combining commercial and residential segments, what we also refer to as our rental properties portfolio. You can see that in total, pre tax EBDT from the portfolio increased $40.7 million for the first nine months of 2011 versus the same period last year. Obviously a key factor in that increase was our first quarter Cleveland Casino Land and air rights transaction, which is shown in the first block as a $42.6 million positive.

I won’t cover all the individual factors, but continuing to the rate, you can see the other positive impact, including a gain on early extinguishment of debt of $14 million, which is primarily related to buying out the existing loan on land we own in Las Vegas at a discount, lower interest rate on the matured portfolio of $51.1 million and increased income from the sale of tax credits of $4.6 million.

The increase in that portfolio were partially offset by lower EBDT from new property openings of $4.3 million, primarily due to the anticipated lease of losses at 8 Spruce Street in Manhattan, Presidio Landmark in San Francisco and Westchester's Ridge Hill and Yonkers. $5.5 million in decreased EBDT primarily related to the vacancies in our Brooklyn office portfolio that were anticipated as Dave mentioned earlier, increased write offs of abandoned development projects of $6.7 million and reduced EBDT from property sales and joint ventures of $19.4 million.

Continuing to the right you can see that the company's land segment was up modestly. $4 million for the first nine months compared with the same period in 2010 due to increased sales and early extinguishment of debt. The net had a pre tax EBDT decrease of $34.6 million for the first nine months, compared with first nine months of last year, due to an increase in Forest City shares allocated losses as anticipated and the 2010 gain of $31.4 million related to the sale of the majority of Forest City's interest in the team with no comparable transaction obviously in 2011.

Our corporate segment had a pre tax EBDT decrease of $20.2 million compared with the same period last year, primarily as a result of an inducement payment to note holders related to the exchange of $40 million of our 2016 convertible notes for common stock that we completed in early May. The inducement was accounted for as a loss on early extinguishment of debt.

Finally, for the first nine months of 2011 we had a larger tax benefit of $19 million compared with the prior year, which bring us to a total nine months EBDT of $275.6 million. Again, we can provide color on any of these EBDT variances during the Q&A.

As Dave mentioned, our operating results for the third quarter were in line with our expectations overall, and we are pleased with where we are for the nine months. Overall comparable profit and net operating income for the third quarter decreased 1.5%, compared to the same period a year ago. Comp NOI for the quarter increased 12% in apartments, decreased 1.5% in retail and decreased 7.6% in office.

For year-to-date, overall comp NOI was basically flat up 0.3%, with increases of 6.7% in apartments and 1.1% in retail of comp NOI and office was down 3.1% year-to-date related to the anticipated vacancy in Brooklyn. Third quarter comparable retail occupancies were 91.2%, compared with 90.6% at October 31, 2010, and comparable office occupancies decreased to 90.5% compared with 91.2% last year.

In the residential portfolio, comparable average occupancies at October 31 increased to 94.7% compared with 93.6% last year. Year-to-date comparable residential net rental income, defined as gross potential rent less vacancies and concessions, increased to 92% compared with 89.6% in the same period in 2010. As David mentioned earlier, we feel great about the performance of our multifamily portfolio through the first nine months of 2011.

Our comparable regional mall sales through the end October averaged $440 per square foot on a rolling 12-month basis, and year-to-date comparable mall sales increased 7.3% compared with the same period in 2010.

Before I turn it back to Dave, let me make a few comments about our continued work on the balance sheet and share our perspective of what we are seeing in the capital markets. We continue to make good progress on de-risking our balance sheet. We are bringing the properties under construction online, getting them leased up and on the path to contribute to our EBDT. The reception the new properties have received in the markets is encouraging and it validates the strength of the markets in which we have additional entitlements.

We are continuing to delever our balance sheet. Total debt on a pro rata basis is down over $100 million this quarter and almost $600 million since the beginning of the year. We paid off the $47 million of corporate bonds that matured this past quarter, and have selectively paid down some non-recourse mortgage debt, as they came due in order to drive down our mortgage rates.

By utilizing a modest amount of our liquidity to reduce certain property mortgages from about 70% loan to value down to 60% or 65% loan to value, we are lowering our interest rate substantially, earning a low double-digit return on incremental equity investment.

The debt capital markets remain open, although lenders remain selective. The most robust lender demand is for high quality assets in the top markets; thankfully where the vast majority of our portfolio sits.

The macro environment; lately the daily headlines of the troubles in Europe and the challenges with the budget and continued political gridlock here in the U.S., make it difficult to sustain a sense of optimism. We are well aware that those macro factors can and will impact our business, but I have a growing sense of optimism in our own business and the value of our enterprise. We need to do a better job of highlighting that for investors, increasing transparency and helping the market to better understand the tremendous unrecognized value in our business.

With that, let me turn it over to Dave for an update on the pipeline and some closing thoughts.

David LaRue

Thanks Bob. Our press release contains updates on all of our under construction projects. We'll be happy to comment on any of them during Q&A. For now I'm going to focus on a few of our major pipeline projects and our new starts during the quarter.

We're obviously pleased with the continued lease up of 8 Spruce in Lower Manhattan. As of the end of November, 550 leases has been executed, representing 61% of the total units at completion, with rents consistent with our pro forma for the units leased to date. We currently have certificates of occupancy for 689 units, and more than 525 units are already occupied, while build-out continues for the remaining units on the uppermost floors.

We are now in a traditionally slower time of year for apartment rentals, but we continue to see a strong interest. In the apartments, the building continues to receive a claim for its beauty and a symbol of the rebirth of the lower Manhattan residential market.

At Westchester’s Ridge Hill in Yonkers, we celebrated the opening of 12 additional restaurant and retail tenants, including Cheesecake Factory, Gap, H&M, L.L. Bean, Old Navy, Orvis, Sephora, Whole Foods, Yard House, Charming Charlie, Sur La Tablet and Desigual. They join National Amusements Cinema de Lux, Dick’s Sporting Goods and REI, which opened earlier this year, as well as WESTMED Medical Group, the project’s anchor office tenant. Additionally, Guitar Center is expected to open this month in time for the holiday shopping.

Going to the New York ICSC, we announced additional signed leases with LA Fitness, T.J.Maxx, Pandora, Francesca’s Collection, with anticipated openings in 2012. Anchor tenant Lord & Taylor is expected to open its 80,000-square-foot full-line store in March of 2012.

The center is currently 56% leased, representing total commitments for approximately 750,000 square feet of space. In fact, if we were to back out what we call Parcela (ph), the 160,000 square foot standalone pad on the southern end of the shopping center, the GLA leasing percentage is 64%. Parcela (ph) is extremely valuable for our future anchor tenant and we will keep our options opened in that regard.

Work continues at Barclays Center and Atlantic Yards and the arrangements are on scheduled opening for September 2012. More than 90% of the steel erection has been completed and installation of the roof deck has begun. Interior build-out is underway on all levels and the structure is expected to be fully enclosed and water tight in the first quarter of 2012.

Approximately 56% of forecasted contractually obligated revenues for the arena is currently under contract. This is flat with what we reported at the end of the second quarter, but we expect activity to regain momentum once the NBA season starts. While I am discussing Atlantic Yards, I want to reiterate our goal to move forward with the construction of our first residential tower in 2012. This is a very important project for Forest City and clearly meets demands reflected in the marketplace.

Let me take a few minutes to talk about the Yards in Washington D.C., our mixed-use development along the Anacostia River, which is becoming known as the Capitol Riverfront district, and adjacent to the Nationals Ballpark. We currently have two initial projects, the recently opened Foundry Lofts, a 170-unit adaptive reuse apartment property that is nearly complete and the Boilermaker Shops, a 41,000 square foot building with ground-level retail and mezzanine office space.

Both properties have been exceptionally well-received, pre-leasing at Foundry Lofts began in August and at the end of November there were commitments for more than half of the units and the first tenant move-ins have already taken place. Boiler Shops, which is expected to open in the third quarter of next year is already over 70% leased, with six restaurant signs, leases and the mezzanine office space fully committed.

The rapid lease-up in market acceptance to-date of these two projects demonstrate the overall quality and superior location of the yards, as well as the strength of the D.C. market. It also makes us feel good about the future opportunity represented by the additional entitlement we have there. Beyond these two current projects, there's an additional 1.4 million square feet entitled in phase one of the project alone, half of which will be rental residential and two future phases including a total of 3.7 million square feet of additional space.

We believe the yard is a great example of the opportunity presented by large, mixed used projects of this type and by managing effective public-private partnerships that make transformational development on this scale possible. With the assistance of our public sector partners, we are building a neighborhood and creating a sense of place where one did not previously exist. The yard is a great example of our focusing our investment in primary core markets and core product types and activating existing entitlement.

We're doing the same thing in our Denver core market at Stapleton, where we have begun construction on two new apartment projects; the Aster Town Center formally known as Novella and Botanica Eastbridge. Notably, as it relates to Aster Town Center, the flexible zoning at Stapleton will allow us to deliver an 85-unit first phase of the project on concept to first move in within 18 months in order to meet demand for rental housing.

As we indicated in our press release, an important development at Stapleton occurred during the quarter, which was the opening of the new interchange off of Interstate 70. The interchange will substantially enhance access to our existing retail at Stapleton, but just as important, it will open hundreds of acres of land north of I70 to potential new commercial and office development, as well as additional future residential neighborhoods.

The interchange was made possible through a public/private partnership led by the City of Denver and funding which included federal stimulus dollars and the City of Denver bonds, as well as contributions from Forest City and the Park Creek Metropolitan District. On top of this new potential, the existing operation at the Stapleton residential community continues to thrive.

Finally, in Texas, one of our newer growth markets, we've begun the redevelopment of the continental building in downtown Dallas. The building will be converted into 203 rental apartments, and would join our three other apartment properties, The Merc, The Element, and The Wilson, as part of the larger Mercantile place on Main development, which some of you on the call had the opportunity to tour prior to NAREIT, REITWorld. We expect to complete the continental in the first quarter of 2013.

Before we get to your questions, just let me say again that we are pleased with where we stand. Our portfolio continues to show considerable strength, particularly in multi-family component, and we intend to grow the portfolio's contribution as an engine of our business. We remain committed to further derisking the business, both by delivering our large under construction projects and adding them as contributors to the operating portfolio, as well as by continuing to work on improving our balance sheet and overall debt metrics.

We are focused on core products in primary core markets where we can activate existing entitlement to further enhance the growth of our new development projects and opportunities.

With that, let's turn it to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Paul Adornato from BMO Capital Markets. Please proceed.

Paul Adornato - BMO Capital Markets

Hi, good morning. I was wondering if I could ask a big picture question. I don't mean to jump the gun on the strategic review process, but if we were to look forward in terms of the development pipeline, what level of projects under development would be a comfortable level over the next let's say two or three years?

David LaRue

Paul hi, thanks for the question. What we'll be comfortable, again without getting into the specific dollars will be the projects that are meeting demand in the marketplace. Clearly we look at the opportunities and the entitlements we have, we are delivering buildings and looking at delivering or starting construction on multi-family product that are smaller than 8 Spruce for example, where we had over $800 million invested.

So these buildings in these core markets are going to be in the $150 million range, you know 350 units or so and once we open the Barclays Center, finish opening Ridge Hill and complete the projects that are already under development, I think as we looked forward, as we roll through our pipeline, we will be down to approximately $500 million of projects under construction.

It isn't so much what we look for to target going forward. It's actually developing where we think we can create value in terms of the market opportunity, and again as Bob said many times and as we've taken under serious operational control, we are going to have a limit on how much that’s going to be. We’ve stated in the past it’s going to be no more than 15% of our balance sheet and again, I think we believe our portfolio based upon it’s make up, the development opportunities will allow us to develop in that range, but no more than 15%.

Paul Adornato - BMO Capital Markets

Okay, thanks, that’s helpful. And turning to 250 Huron, I was wondering if you could just help me understand that situation. Is that in the same structure as the Ritz?

Bob O’Brien

Yes, so physically floors one through five are office space. If you've been here, the Ritz-Carlton lobby is actually on six. They have separate ground floor lobbies that take up each piece of the building. So the Ritz occupies floors six through 14 and there is an office space originally occupied by Chase as regular office space.

We had a mortgage on that as we said in the disclosure. Chase decided to leave. They paid a lease termination fee. They left in 2008. We've attempted to release that space, but in a market that’s about 85% occupancy, very difficult to do so obviously. We had discussions with the lender. Ultimately, the lender decided to sell their mortgage in the marketplace. Rock Caesars bought that mortgage at a discount, and we took an impairment today because we knew we weren’t going to hold that asset long-term.

And as Dave alluded to in his comments, we reached an agreement to transfer that asset to Rock in full satisfaction of the mortgage. We expect that transaction to close hopefully yet this month.

Paul Adornato - BMO Capital Markets

Okay. So what’s the future hold for that space? Will it be kind of integrated into the casino operations?

David LaRue

Paul, this is Dave. That is the intent of the discussions we had with Rock, that will be for casino uses and again the office space, office uses. So back of the house, and again with them purchasing the Ritz, it opens up other opportunities, but it will be related to those uses.

Paul Adornato - BMO Capital Markets

Okay, thanks. And just with respect to the Barclays arena and the nets, can you comment on how the strike will affect the losses that we might expect in the coming quarters?

David LaRue

Yes. Paul, look, I think maybe the agreement’s been signed, maybe it hasn't as part-owner of the team, they wondered if there’s any disclosure. Quite frankly, the details of the collective bargaining agreement are not fully understood at this stage, because they are literally you know, the ink is not even dry on it.

So I think as we said in the past, we do not anticipate any major change from what we talked about in the past, which is when you go back to the period of time in which we were responsible for the losses, we had a certain level of loss, we see no reason to expect anything different there than that going forward.

Obviously we'll analyze that as we better understand the season, but for the most part it's really too early to give you any better guidance than we expect the losses to be comparable to the past.

Paul Adornato - BMO Capital Markets

Okay, I appreciate it. And just one more, on the East River Plaza, who is the tenant that left and what are the economics of the space?

David LaRue

Well, the tenant that left was Kidstown. The economics were they – again we leased them originally. They paid a very market competitive rent. They had left at the end of last year and so we are looking our third quarter obviously up against a space that had been previously occupied. And as I said, we expect that we will be able to lease again at very market competitive rates to a replacement tenant and have an announcement in the very near term.

Paul Adornato - BMO Capital Markets

Great. And what's the size of that space?

David LaRue

Matt, do you know that?

Matthew Messinger

It’s about 20,000 square feet.

Paul Adornato - BMO Capital Markets

Okay, great. Thank you.

David LaRue

Right. Thanks Paul.

Operator

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

Sheila McGrath - KBW

Yes, good morning. I was wondering if you could discuss Ridge Hill in a little bit more detail. How the feedback has been from tenants that are already open and how the interest level is? Do you see any pick up in kind of interest level from tenants at this point?

David LaRue

Sheila, thanks for the question. Without having received full leasing reports and these tenants just opening, the feedback that we get through our General Manager and our management team there is that the tenants are doing well and they are satisfied with the activity and they realize that they've opened prior to the Lord & Taylor opening, which again is in March, but they are again pleased with the activity.

We have invested money to our promotional drives and advertising to make sure that the market is aware that we are open and we believe that the opening has allowed the momentum that I think reflected in this quarter to continue into our discussions with new tenants and additional tenants to help us fill the space.

Again, we have 750,000 square feet committed. That net is a lot of retail space. We have almost 400,000 feet opened and operating, and again, the market acceptance from what we can tell at this early stage is very good.

One thing that we plan on doing is part of I guess the introduction to the investor community of a opened shopping center once Lord & Taylor is having an Investor Day sometime in March of this coming year. Therefore, we'll be able to show everybody the property, and with Lord & Taylor opened and other additions between now and then, the momentum in positive impression will continue.

Sheila McGrath - KBW

Okay, and I was wondering if you could give us a little bit more specific on the plan of action for your largest shareholder's 13D filing. Have you engaged on anymore specifics in terms of addressing the issues in the 13D?

David LaRue

Well, again the 13D which was filed in early October, we had a number of questions about that in NAREIT. The major issues that were their divesting non-core business and non-core assets. I think as we have done in the past we have reflected our willingness to do that. I think the Ritz-Carlton transaction today that we are announcing is an example of that.

We have I think again increased our disclosure and made a commitment and have a commitment to increasing disclosures and go forward to help the reader of our financial statements to deal with or understand our business.

The major issue regarding the AB stock, again, we had a board discussion about that, the 13D when it was filed and as we go forward through time, if we get to all the other things we have to do, which is continued deleveraging and strengthening the financial statements, we as a management team will be very pleased with the issues, the other issues that were outlined in the 13D and again we made progress. That issue regarding the stockholder of AB stock is a stockholder issue, and again, as a management team, it's not a priority for us now.

Sheila McGrath - KBW

Okay and in the release you mentioned that G&A picked up a bit on strategic planning costs. I was just wondering if you could give us a little bit more detail on what those costs were and should we expect those costs to be elevated in the near term?

Bob O’Brien

Yes, thanks Sheila, its Bob, good question. Really, there are two pieces of that. One is, for the last 12 plus months we were working on a strategic plan. As Dave alluded to, we got help to help us think through that.

Quite frankly we think through some of the issues that were raised in that 13D about what pieces of our business are strategic and which are not. We'll be cautious about how we proceed with that, but clearly, our strategic plan as Dave laid out and they are kind of the four bullets. You know it is really going to be driving us and driving our strategy going forward, so there's some outside consultant costs related to that.

I will reference another project we have going on as we looked hard at the cost structure of our business. We've brought in a procurement executive under an initiative we call Project Momentum, and just an interesting piece of information that they focused initially, the team focused in a collaborative way across the business units in looking at MRO, maintenance, repairs and operations.

An addressable spend, that is a spend that we thought we could have an impact on, that totaled about just under $60 million and over the course of that process identified and sourced and are in the process of signing or executing contract that will take place over the next year or so as other contracts expire, that will reduce that cost by just under $12 million, about a 20% reduction in overall costs.

That's obviously great news and validates both the hiring of the procurement executive. We hired some external resources to assist us in that project. I do want to make sure it's clear that, that 20% is a benefit on the expense side. Some of that flows to tenants, that's a good thing, if we can reduce our expenses for tenants, that's obviously positive.

Some of it flows directly to the bottom line, which most of it will, some of it will hit us, some of it will be benefited by partners, so that's $57 million, $60 million spend across the whole portfolio, whether we own a 100% of those assets or less. So, a positive impact and that's just the first wave. So we're going to see a decent return on the investment we've made.

So back to your operating expense question; it's elevated. We have some more work to do, so my guess is there will be a modest amount of that expense on a go forward basis, but it should taper off and ultimately drop to our bottom line.

Sheila McGrath - KBW

Okay, and last question; on the hotel sale, could you just discuss the pricing? How was that determined? Was it based on replacement costs or is there a lot of cash flow that NOI affiliated with that asset that the sale would be dilutive, just some detail on the pricing there?

David LaRue

Sheila, this is Dave. Just like every negotiation you sit down and come up with what is determined to be a fair price. If you would look at the, I guess the price of the hotel on a per room basis, it could be argued that would be very low on a per room basis, but for an operating hotel here in Cleveland where the market has historically been extremely soft, we actually believe that the math will show that this will be far more accretive based upon how the hotel operated. So, that will be clearly an accretive transaction for us.

Sheila McGrath - KBW

Okay, thank you.

David LaRue

All right, thank you Sheila.

Operator

Your next question comes from the line of Rich Moore from RBC Capital Markets. Please proceed.

Richard Moore - RBC Capital Markets

Yes, hello. Good morning guys. You had a little softness in retail at Hallandale and in office in Brooklyn this quarter, so as you look out maybe into 2012, what do you think happens to same store NOI growth? Does this begin to reverse or was this just an anomaly this quarter or how do you guys think about that?

David LaRue

Regarding the same store NOI growth, Hallandale Beach again is a challenge that we are dealing with. We mentioned during the comments that we are going to have to invest and re-merchandize that single project again, because the concessions that we gave to keep the tenants there did have a large impact, I guess a disproportional impact in our overall retail portfolio. But going forward, if we can achieve the re-merchandising, obviously that will cycle back through like any other vacancy and end up being a good asset for us in the long-term.

The balance of the portfolio, they are just some active and proactive steps we took to take space back and re-merchandize, and the tenants moved out and we’ve already replaced them with larger tenants and tenants are going to be more dynamic for each of those shopping centers.

Tower City, again as I said, that as leases are expiring here at Tower City, we are consciously not addressing those on a long-term basis. We’re looking to the long-term based upon the investment of the casino which is going to be extremely beneficial to the assets that we have here. I think parking, and the parking for sure immediately and the retail ones would understand the customer demographic of who we want to re-merchandize to. So we do expect that that softness that we saw in this quarter will reverse as these remerchandisings and occupancies rebound.

Bob O’Brien

Hey and this is Bob. Rich, thanks for the question. On the office side, certainly a part of it is how quickly does that vacancy get leased up and how quickly they become rent payers. That's obviously a hard thing to call. The good news as we alluded to is, particularly the two spaces in Brooklyn that were vacant in Two MetroTech, most of that space has been released and so it should take occupancy and begin paying rent shortly. In the Pierrepont Building, about half of what’s rolling over I think has been addressed, so part of it is timing.

The good news is that I would tell you that from a planning standpoint there have been better demand than I think we would have guessed as little as 12 or 18 months ago, so that's a good thing. So we see it temporary, but clearly there is large spaces that we are going to have to fill in the office piece that may make the NOI somewhat bumpy on the way, but it shouldn't reflect this quarters' kind of downturn.

Richard Moore - RBC Capital Markets

Okay. So on the office Bob, if I could, the maturities you have next year, is there anything of substantial note that the NOL could keep us, you know that they could see a negative releasing spread that keeps NOI down a bit in the office portfolio?

Bob O’Brien

I think overall, my guess is it will be roughly flat. It's a little bit of a tail of two different markets. The substantial portion of what rolls over is either in Brooklyn, MetroTech or in Cambridge.

In Cambridge, I wish we had more honestly. The rollover, the rents that are rolling over are substantially low markets, so we'll see a nice upturn there as we release or extend terms or renew terms with the tenants that are in that marketplace.

In Brooklyn, we've been actually pleasantly surprised with the rent we've been able to achieve and recent leases. We hope and expect that that will continue. There will be a slight loss as we reset the base here on our expenses in MetroTech. So net-net our target for our team in Brooklyn is obviously to stay flat on an NOI basis and I think the space rent side will be fine. You know the question is where those expense steps come out.

Richard Moore - RBC Capital Markets

Okay, good, thank you. And then back to the retail for a second is, what is that looking like from a re-leasing standpoint 2012; how much of the 2012 leasing I guess have you done? I'm guessing quite a bit and what are those, even with those spreads I’m thinking broadly not so much for Hallandale and for Tower City.

David LaRue

Rich, this is Dave again. So in 2012, we have about 970,000 square feet of space and we are pleased with the momentum we have in addressing those rollovers. The strength in the comp retail sales that I mentioned earlier, we've had now 21 straight months of comparable mall improvement there. There is very little expiration in our New York retail portfolio that we are dealing with next year, so that's net mostly our regional mall.

We have current example where we just are going through the 10 year renewal period in our shopping center at Pittsburgh and our leasing team did a great job and exceeded our expectations in terms of how much they were able to get in terms of rent and the rate at which they were able to get tenants to renew.

So I think what's happening is as our portfolio strengthens and we get tenants who are themselves as a business feeling better and generating more profits and the consumer has continued to support their business again reflected in our 7% plus comparable gross year-to-date, our leasing team is taking advantage of that and getting as much of that space renewed now as we can.

Richard Moore - RBC Capital Markets

Okay and I am guessing pretty positive spreads like most of your competitors are seeing?

David LaRue

Yes, we are getting very good spreads from the renewals we've done year-to-date, and again, anticipate that that would go forward.

Richard Moore - RBC Capital Markets

Okay, good, thank you. And then Bob, on the disposition front, do you have any thoughts on how active you'll be in 2012? I obviously don't know for sure, but the target or the approach that you are taking, how much you might be looking to do in terms of disposition?

Bob O’Brien

Sure Rich. I mean, I think as we've often said, everything's for sale, so it's really a question of price. It's interesting that over the course of last quarter so you've seen a couple, not many, but a few data points of sales kind of outside of the key core markets, the top five markets in the U.S. I think things were beginning to strengthen in the secondary markets through the first half of the year, and certainly took a step back in August and September with kind of some of the macro concerns that are out there.

I referenced in my comment that lenders are primarily focused on those top five or seven markets, but I think there is generally good supply of capital, debt capital as well as equity capital, which would make pricing reasonable.

We've said in the past that most of the heavy lifting in terms selling core liquidity out of our better market is done, and clearly the focus is referenced in evidence today by the sale of the Ritz-Carlton Hotel, and we are going to be focused on some of those critical, non-core assets in those secondary markets. That’s going to be a more volatile marketplace quite frankly than selling core products in the New York, Boston or Washington markets.

So, it's hard obviously to project. We've been pretty clear about both from a market perspective where we want to focus our efforts, as well as a product standpoint. So we only have two hotels left, both in Pittsburg.. Those are assets that have done reasonably well. We'll look to market some of those assets and again, the other factor that we have to consider as a C-Corp is just managing our tax liability.

Much of those assets that are in those secondary markets are things that have been within Forest City's portfolio for some time, so their tax basis is low. There will be a decent amount of gains. We just have to balance that against our NOLs in our tax position.

Richard Moore - RBC Capital Markets

Okay great. Thank you guys.

Bob O’Brien

Thank you Rich.

Operator

Your next question is a follow-up question from Paul Adornato. Please proceed.

Paul Adornato - BMO Capital Markets

Yes, hi. Here on the local New York press, there's been a lot of talk about new universities coming to the city, including a discussion about MetroTech and NYU-Poly. I was wondering if you had any comments there on potential opportunities?

Bob O’Brien

Hey Matt, why don't you address Paul's question.

Matthew Messinger

Sure. Hi Paul. As most of you know, varsity has a longstanding relationship with Poly, long-term partner at MetroTech. We had a long-term relationship with NYU now, effectively one and the same. Poly is now a tenant of ours as well at Two MetroTech.

We maintained good relationships with most of the academic institutions in New York. But Poly-NYU did submit to a specific RFP for a new center for urban science and progress. Some of the space that they are pursuing is very close to MetroTech and I think that there is nothing specific to talk about right now. It's a good question that's on our radar screen. If NYU does specifically on that deal proceed, there could be one of several different roles that Forest City could logically play based upon its track record and relationship.

Paul Adornato - BMO Capital Markets

Any sense on timing of decisions?

Matthew Messinger

No, not at this point.

Paul Adornato - BMO Capital Markets

Okay, thank you.

Operator

There are no further questions at this time. I will now turn the call back over to Mr. David LaRue, CEO for closing remarks.

David LaRue

Thank you operator. I'd like to thank all of you for your time and ongoing support for Forest City Enterprises during this period of like worldwide economic upheaval. We recognize the challenges that we face. We are focused on meeting those challenges as we've outlined during our discussion and that's throughout our entire management team and company and we expect high results from ourselves and we are working to better evidence the value that we believe truly does exist in our company through all of these efforts.

With that, I'd like to wish everybody a Happy Holiday and Happy New Year, and again, thank you for your support.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great weekend.

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