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

Q4 2011 Earnings Call

March 30, 2012 11:00 am ET

Executive

David J. LaRue – President and Chief Executive Officer

Robert G. O'Brien – Chief Financial Officer

Matthew L. Messinger – Executive Vice President of Investment Management – New York

Analyst

Sheila K. McGrath – Keefe, Bruyette & Woods, Inc.

Wes Golladay – RBC Capital Markets

Operator

Welcome to the Forest City Enterprises, fourth quarter and year-end 2011 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 the 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 April 30, 2012, at 11.59 pm Eastern Time.

The company would like to remind listeners that it will be using non-GAAP terminology, such as EBDT, comparable property net operation income or comp NOI and prorate 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 General Accepted Accounting Principles.

Also please note that exhibits referred to during today’s call are available on the Investor Relations page on the company’s website, www.forestcity.net. At this time, all participants are in a 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 J. LaRue

Thank you, operator. Good morning, everyone and thank you for joining us today. With me today is Bob O'Brien, our Chief Financial Officer; Matt Messinger, Executive Vice President of Investment Management at our New York office is also on the call and available to answer questions during the Q&A. Our fourth quarter and year-end results went out yesterday after the close of the market. By now I hope all of you had a chance to review them.

In a few minutes, I’ll ask Bob to review our specific financial and operating results. After that, I’ll provide an update on our pipeline, give a brief overview of our full year strategic plan, and offer some closing thoughts, then we’ll get to your questions.

Let me begin with some overall comments about the year. As we indicated in our press release, we’re pleased with our results for fiscal 2011, which included record total EBDT, and reflect a solid performance of our rental property portfolio. Our residential multifamily business had an outstanding year with strong results in comp NOI and consistently high occupancies throughout the year.

In addition, our comp retail portfolio also performed at or above peer averages for the year. Our office results were impacted by the timing of anticipated vacancies mainly at our MetroTech campus in Brooklyn, but we also saw significant strength in the total office portfolio as demonstrated by leasing spreads that were up 8% during 2011.

Our EBDT results also included non-recurring items, most notably our land and air rights sale to Rock Ohio Caesars to the Cleveland Casinos Development. In addition to our strong operating results, 2011 was noteworthy for four city for a number of other reasons.

During 2011, we opened two of our large pipeline properties, 8 Spruce Street in Manhattan and Westchester’s Ridge Hill in Yonkers with leasing progressing on both. Barclays Center arena in Brooklyn opens this coming September. The transition of these three properties, which together represent $1.6 billion of cost of our pro rata share into the portfolio, while significantly improve our risk profile. And we will also bring up our under construction pipeline to less than $500 million in our pro rata share. This is down from its peak of 2.2 billion at our share just a few years ago. As we said previously, our goal going forward is to have our total development and under construction pipeline represent no more than 15% of our balance sheet. A level we believe balances continuing growth through future development, equity requirements and risk.

As 8 Spruce, Ridge Hill, and the Arena continually leaps up and stabilize the impact of these major assets in the New York market will drive increased value creations through future NOI growth. During 2011 and in early 2012, we’ve been able to take advantage of growing demand for rental apartments to activate existing entitlement for new multi-family projects in Washington D.C., Denver and Dallas.

As a company, we continue to be very focused on creating long-term shareholder value and proving our balance sheet is a major component of that focus. During 2011, we reduced total debt by $1.4 billion at full consolidation. We’ve placed a high priority on making further improvements in our debt metrics and capital structure and this will remain one of our primary objectives of our strategic plan for the next four years. I have more to say about this strategic plan later in the call.

Other 2011 accomplishments include execution of a major efficiency and process improvement and cost containment initiative that is already showing meaningful results. We underwent a seamless leadership transition with Chuck becoming Chairman of the Board and me moving to President and CEO. We announced changes to our board structure and our intent to move to majority of independent directors. We made enhancements in our disclosure to investors, but the most significant being a schedule of net asset value components found in our supplemental package.

Finally, we announced our strategic decision to reposition portions of our land business, sale or other disposition, a change that reflects our sharpened focus going forward on rental properties and our strong core markets.

These actions have prepared Forest City to take advantage of future opportunities, demonstrate our commitment to ongoing good governance and reflect increased transparency to the company and its operations. The NAV supplement clearly outlines our business focused on our rental portfolios and their value components.

I’ll be back later in the call to discuss our pipeline, our strategic plan for the next four years and offer some closing comments. At this time now I’d to ask Bob to review our financial and operating results. Bob?

Robert G. O'Brien

Thanks Dave. Good morning everybody. On today’s call, I’ll be referring to our results in our earnings release and 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 also available directly through a link on the Investors page of our website.

Let me start by addressing the timing of filing of our 10-K. Those of you who followed us in the past know that our usual practices to file our 10-K simultaneous with our press release and supplemental package. We filed the supplemental at the end of day yesterday and we expect to file our 10-K this coming Monday, April 2 after close of business.

As part of its regular annual review process, the Securities and Exchange Commission Division of Corporation Finance requested additional information regarding an allowance for projects under development on our income statements. Based on discussions and correspondence with the SEC, we concluded, and it was appropriate to revise the accounting treatment of this item in future period reports. Effectively, we will be eliminating the allowance for projects under development and revising the prior periods presented in future periodic reports as if the allowance never existed. As we indicated in our press release, the impact for the revision was not material to any annual or interim periods.

Turning to our financial results, I’ll focus mainly on the full year. Results for the quarter are included in our press release and supplemental package. And of course, we’ll be happy to answer questions on the quarter during the Q&A.

Full year 2011 consolidated revenues were $1.09 billion compared with $1.12 billion in 2010. For the full year of 2011, the net loss attributable to Forest City Enterprises was $86.5 million, or $0.52 per share, compared with net earnings of $58.0 million, or $0.34 per share, in 2010. After preferred dividends, net loss attributable to Forest City common shareholders was $101.9 million, or $0.61 per share, compared with net earnings of $46.2 million or $0.30 per share in 2010.

As most of you on the call know, our reported earnings can vary considerably based on the level and timing of transactions such as asset sales and joint ventures or due to non-cash impacts such as GAAP impairment of assets. The year-over-year variance in net earnings was primarily driven by decreased gains on property sales and joint ventures in 2011 compared with 2010, and by higher 2011 impairments, primarily related to our decision to strategically reposition the company’s land business through sale or other dispositions.

We had impairment charges totaling $155 million in the fourth quarter, approximately $115 million of the impairment charge related to various fully consolidated land development projects, with the decision to divest these land projects, we have classified them as held for sale and record them after estimated fair value less cost for sale.

The remaining $40 million of the impairment charge relates to investments and equity method land projects, the majority of which is our investment in Mesa del Sol in Albuquerque.

During the quarter, we revised our assumptions used in calculating the estimated fair value of our equity method land projects resulting in the additional fourth quarter 2011 impairments.

Turning to our EBDT results, as Dave mentioned at the time of the call, we had record total EBDT in 2011 of $334.4 million, compared with $309.9 million for the prior year. On a fully diluted per share basis EBDT was $1.61, compared with $1.59 per share last year.

I’ll refer now to the EBDT Bridge on Page 29 of the supplemental package, and on the investor relations page of our website, for detail on the factors impacting our EBDT results for 2011.

The bridge takes you from our final 2010 EBDT of $309.9 million to the $334.4 million of EBDT we generated in 2011. Our rental properties portfolio we shown on the first eight blocks and you can see that in total pretax EBDT from the portfolio increased $26.3 million in 2011.

Positive variances that contributed to that increase included our Cleveland casino land and air rights transaction, which is shown in the first green block as a $42.6 million positive impact.

Continuing to the right we can see the other positive impacts, including a gain on early extinguishment of debt of $11.5 million. Lower interest on the mature portfolio of $8.6 million and increased NOI from mature portfolio of $8 million.

The increases in the portfolio were partially offset by lower EBDT from subsidizing your housing. EBDT from new property openings were slightly lower, compared with the prior year primarily due to lease up losses at Ridge Hill and 8 Spruce. The largest negative variance was to reduce the EBDT of $27.1 million from property sold to joint venture, compared with the prior year.

Continued to the right you see that the company’s land segment was up $6.7 million for the year due to increased sales in early extinguishment of debt. And that said, our pretax EBDT decrease of $46.2 million in 2011, compared to 2010 due primarily to 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. Forest City’s share of allocated losses was also higher than in 2010 as we’ve indicated in prior quarterly call.

For the year, our Corporate Segment had a pre-tax EBDT increase $14.3 million compared with the prior year. Recall that last year, we incurred $12.7 million of early extinguishment of debt charges related to the exchanges of portions of our senior note.

Finally, we had a larger tax benefit of $23.4 in 2011, compared with the prior year, which brings us to our total 2011 EBDT of $334.4 million. We can provide additional color on any these EBDT variances during the Q&A.

As Dave mentioned, our operating results for the year were solid and inline with our expectations. For full year 2011, overall comparable property net operating income increased 1.4% with increases of 7.3% in apartments and 2.6% in retail, and a decrease of 2.6% percent in office. Particularly impressive is the performance of our apartment portfolio in the fourth quarter with an 11.9% comp NOI increase, a great performance by our residential team.

At January 31, 2012, comparable occupancies in the office portfolio increased to 91% from 89.5% for the prior year. In retail our comparable occupancies were 90.9%, down marginally from 91.2% the year ago.

In the residential portfolio, comparable average occupancies were 94.7%, up from 93.8% for the prior year, and comparable property net rental income defined as total potential rent, less vacancies and concessions ended the year at 92.2%, compared with 90.0% at 1/31/11.

For the year, our leasing spreads increased 9% at our comparable regional malls and 8% in our office portfolio. Regional mall sales averaged $443 per square foot on a rolling 12 month basis, while comparable regional mall sales increased 6.5%, compared with results

for the prior year.

Before I turn it back to Dave, let me address two items that impact our reported EBTD results and some changes we expect to see in these elements going forward. The first is capitalized interest. As Dave mentioned, our three large development projects are moving from under construction to operations beginning in 2011 and through 2012. We expected decrease in our under construction pipeline to increase the interest expense reported on our income statement. Under GAAP, we’re require to capitalized interest on the equity that we have invested in active development projects along with the interest incurred on the construction loans for those projects.

As these assets move out of construction and into operations, we will no longer capitalize interest on our equity investments. These new projects will generate income to more than offset the last capitalized interest as they leased up and ultimately reached stabilization. Although we estimate that the reduction in capitalized interest will increase our reported GAAP interest expense by $0.08 to $0.11 per share in 2012. Well, this change will impact EBTD as (inaudible) this does not impact the actual cash outlay for interest.

The second thing area I want to touch on is taxes. Our team did a great job in 2011 of maximizing the tax benefit by utilizing net operating loss carry forwards. We do not expect to achieve the same level of tax benefit in 2012. Based on our lower projected use of NOLs, we expect our tax benefit to be a $0.11 to $0.13 lower in 2012. For those investors, who valued us on an NAV basis, these changes in interest expense and tax benefit do not impact the underlying NAV of the company.

In our continuous effort to improve our disclosure and as you can see, we’ve added to our supplemental package, leasing spreads for office and retail, trend detail on regional mall sales, as well as debt covenant information. Additionally beginning with our first quarter 2012 results, it is our intent to begin reporting funds from operations along with EBTD. We expect to report both EBTD and FFO for a number of quarters, so investors can become comfortable with the differences in the measures.

EBDT like FFO is a measure of cash flow. We have used EBDT as a performance measure for most of our history. It predates the matter of read era. But we believe that the time is right to transition from EBDT to the more widely used FFO metric.

Finally, this morning, we issued an 8-K in which we announced that we will be changing our year end to December 31 from our current January 31 year end. We’ve had a January 31 year end since we went on public primarily as a retailer in 1960. We have made a decision to switch to account year end so that our fiscal year end will align with the REIT industry.

We are currently in the midst of a major system upgrade, so we anticipate we will make this change effective in 2013. Obviously, again, happy to answer any questions about any of this during the Q&A.

With that, let met turn over to David LaRue for some closing thoughts.

David J. LaRue

Thanks, Bob. Let me update you on our newly opened and under construction projects. We’d be happy to comment further on any of them during the Q&A.

First, 8 Spruce Street. Lease-up continues in a very strong manner. As of mid-March, we had 655 executed leases or 73% of the total units at completion. More than 590 units are already occupied, and now we’re bringing the penthouse units to market. This is unique and iconic building, and it is very gratifying to see the continuing market acceptance it is receiving.

In our supplemental package, you’ll notice that we’re now reporting 8 Spruce Street is having 899 units versus 903 units that we reported in prior periods. We combined some of the units on the upper floors due to interest in larger units with additional bedrooms.

At Westchester’s Ridge Hill in Yonkers, we signed a number of new tenants in the fourth quarter including Victoria’s Secret, The Limited, White House Black Market, Bath & Body Works, and Vera Bradley. We will continue to announce other significant tenants as leases are finalized.

Lord & Taylor has set a mid-April opening for its 80,000 square foot full-line anchor store. Overall, the centre is currently 59% leased. As we mentioned in our third quarter call, if you would backout [The Plaza] a 160,000 square foot standalone pad on the southern end of the shopping center, the remaining GLA is approximately 67% leased today. [Plaza] is still very much part of the overall project and it is extremely valuable for future anchor tenant.

We are reporting a cost increase of approximately $26 million for the Ridge Hill, which is reflected in our pipeline reports. The largest items in the cost increase are additional tenant allowances and base building improvements for our tenants. We continue to aggressively work to secure the right tenant mix for this center.

Construction of Barclays Center arena at Atlantic Yards is on schedule for opening in coming this September. More than 95% of the steel is up, interior build-out is actively underway, and we expected to be fully enclosed and water tight by the end of the first quarter. Approximately 64% of the forecast is contractually obligated revenues for the arena, are currently under contract.

Turning to Washington D.C., activity continues to pickup at the Yards, our mixed-used project along the Anacostia River. Some of you on the call attended our Investor Day in Washington D.C. back in November of 2010 and towards the Yards following the dedication of the beautiful riverside public park. It’s remarkable to see the transformation of the area since then in the neighborhood that is being created. That transformation includes Foundry Lofts, our 170 unit apartment property at The Yards which is almost complete. This is an adaptive reuse of a former Navy Yards building and has 20% affordable component. Leasing began in the third quarter of 2011. As of mid-March it was 79% leased. A recently signed updated report on leasing activity there and we are currently at 85% leased.

The first of the two street-level restaurants is already opened and the second is expected to open this summer. Also at The Yards and D.C. work continues on the Boilermaker Shops and other adaptive reuse properties, 40,000 feet of ground-level retail and mezzanine office space. It’s currently 74% leased overall and we expect it to open in the third quarter of this year.

As I mentioned earlier, we’ve taken the advantage of demand for rental apartments to activate existing entitlement in a number of our core markets. One of those projects is the Continental Building, a 203-unit apartment community in downtown Dallas and our Mercantile Place on Main development. We expect the Continental to come on line in the first quarter of 2013.

At Stapleton in Denver, we are under construction on a total of 203-units in two separate apartment projects. The Aster Town Center and Botanica Eastbridge, which are expected to open in the first and second quarters of this year respectively.

While we’re on the subject to Stapleton, I should take a moment to review the solid performance of this great asset in 2011. When we announced in early February our intention to strategically reposition portions of the land business, we specifically excluded Stapleton from that move for a number of reasons.

First, Stapleton is a true mixed-use project with substantial future entitlement, which includes apartments, retail and office as well as single family neighborhoods where we sell residential lots to builders. And second, it continues to be a solid performer for us, and a great example of a sustainable urban redevelopment focused on walkable neighborhoods, abundant amenities and open space and truly remarkable place.

During 2011, Stapleton continued to outperform the market in terms of home sales. Through the year, we sold 338 lots to builders, a 42% increase over the previous year. And the builders sold 408 homes to home buyers, a 57% increase over 2010. As we mentioned on the call last quarter, the new interchange at Stapleton has opened, which greatly enhances access, particularly north of Interstate 70, and opens that area to further developments and creation of additional neighborhoods.

Before I make some closing comments, let me give you a brief overview of our new strategic plan, which will be the roadmap for our company, and will drive increased value creation for the next four years.

I never review on the call, [before] Bob and I talk about this plan on recent investment and industry conferences. The plan is three primary objectives, the first is to sharpen our focus on core markets and our core rental property types, apartments, retail and office. We’ve already put this strategy to work with our decision to reposition land business. We’ve also announced our considered disposition options for specialty retail and other assets in non-core markets.

The second objective is building a strong sustainable capital structure that will both continue to improve our balance sheet and allow us to invest in new developments and growth. We’ve made meaningful progress with reduction of debt totalling $1.4 billion during 2011. We know we have considerable work to do here, but we are focused on the task of making progress.

The third objective is driving additional future growth both by improving the performance of our operating assets and through new development. As you have seen, we are focused on our core markets in terms of activating existing entitlement. We will also drive operational excellence throughout our organization to achieve optimum results from all of our assets and operations. Obviously, there is considerable detail and a range of specific goals and tactics supporting these objectives. Everything we do comes back to increasing shareholder value.

In closing, we feel very good about our rental property portfolio and the fundamentals in our markets. We are focused on a set of strategies that will continue to strengthen our company, build our franchise, drive growth and value creation for all of our stakeholders.

With that, let’s turn it over to your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Sheila McGrath of KBW. Please proceed.

Sheila K. McGrath – Keefe, Bruyette & Woods, Inc.

All right. Yes, good morning. David, on Ridge Hill, I was just wondering if you could talk about level of activity with kind of conversations, is that picking up at all since Lord & Taylor is opening next month?

David J. LaRue

Sheila thank you for the question. As I’ve described I guess in the last two calls, and I think evidenced by the increase we’ve had. We continue to have steady progress at Ridge Hill. I think the actual opening of Lord & Taylor, which is in mid-April is going to be that major change agent for the balance of the space. We have had active discussions, but I think at this point, it’s so close, having somebody – tenants actually see, feel the excitement of the property with the actual operation of the Lord & Taylor, 80,000 square foot stores going to be transformative in our efforts.

Sheila K. McGrath – Keefe, Bruyette & Woods, Inc.

Okay. And then on Spruce Street, you do have the most expensive units, yet to lease, I’m just wondering how the level of activity is on those higher priced units, and if you expect that these might take a little bit longer to lease, given the price points?

David J. LaRue

Well, yes, I think there is two ways to answer that, we have had significant interest in demand as I stated during the call, we’ve actually combined some units to actually make them bigger, therefore we have a smaller number of units to say rental area, obviously stays the same.

So that came from anticipated and stated interest in having those larger units which are obviously going to be the higher priced units. So we’re anticipating that the demand for these units will continue. With regard to the timing, as we’ve said in the past, we had originally performed a two year lease up of this project, one, because of the size and two, because we’re actually starting to re-lease some of that spaces that we leased last March when we had opened the building. So we are still on schedule, are on track for that pro forma, and anticipate continued market acceptance of the building.

Sheila K. McGrath – Keefe, Bruyette & Woods, Inc.

And how are the rents decking up against pro forma?

David J. LaRue

Again, at this point and to this point we as we’ve said, we are on pro forma. You point out the obvious risk. The higher price force that we have to hit the market, I think the balance of the units we will agree, see if our temporary certificate occupancy late in April or May. So by time we can actually be able to occupancy those during the prime leases season. We will be able to measure that better by the next call and give you an update at that point, but at this point, we are optimistic that we’re still on track.

Sheila K. McGrath – Keefe, Bruyette & Woods, Inc.

Okay and then Bob, a couple of quick questions for you. You did mention in 2012, the interest expense going up because of not being able to capitalize anymore. I’m just wondering right now, the developments 8 Spruce and Ridge Hill are a drag on EBDT, when do you think the kind of crossover quarter for those projects would be to stabilize that, there will be more meaningful contributors.

Robert G. O'Brien

Well, I don’t know where looking at that quarter.

Sheila K. McGrath – Keefe, Bruyette & Woods, Inc.

Okay.

Robert G. O'Brien

I don’t know where good if you look that.

Sheila K. McGrath – Keefe, Bruyette & Woods, Inc.

Okay.

Robert G. O'Brien

It’s a question of demand and how quickly, we’re pleased with the acceptance certainly 8 Spruce is ahead of schedule on that two year leasing schedule. We’re hoping we can do better, but as you correctly point out the higher leased units. Our expectation at 8 Spruce is that’s going to stabilize in ‘13, is that early or mid probably I guess we would tell you mid and hope we do better, but that’s kind of a timeline for 8 Spruce. Ridge Hill, as well quite frankly of the arena, we expect to hit a full stabilization sometime in 2014, so the first full year of stabilized income will actually be 2015.

Again, I think, we will see how momentum occurs at Ridge Hill, as we get Lord & Taylor and couple other key tenants open in the near-term here. And we had to deactivate our board meeting in New York a week ago and had the opportunity to see the Arena. It’s a pretty amazing thing and we’re pleased with the progress and contractually obligated income, the signing there. And I think that’s going to be a solid contributor, but we’ll stabilize in mid 2014.

Sheila K. McGrath – Keefe, Bruyette & Woods, Inc.

Okay. And last question, EBDT versus FFO, I know EBDT strips out straight lining. What are the other major buckets that you see variation between the two?

Robert G. O'Brien

The other enlarge item is amortization of mortgage procurement costs. We add that back and FFO does not. So from a headline number that will reduce FFO that’s probably the most significant thing and then taxes have an interplay in there as well. We’ll lay that out and schedule in at the end of the first quarter kind of showing the reconciliation between EBDT and FFO.

Sheila K. McGrath – Keefe, Bruyette & Woods, Inc.

Okay. All right, thank you.

Robert G. O'Brien

Sure.

Operator

Our next question comes from the line of Wes Golladay of RBC Capital Markets. Please proceed.

Wes Golladay – RBC Capital Markets

Good morning everyone. It looks like the residential units are tracking really good on the same store basis that was two back to back quarters of roughly 12%. Can you walk us through what’s causing the strength there and what do you see, I guess, going over the next few quarters?

David J. LaRue

Well, clearly anything in the 11% range we agree with is outstanding. The interesting thing, Wes, when we took a look at the portfolio to see where the particular driver of that increase was, we were surprised to see it across every market segment. We have talked a lot about our core markets and where we are going to look to invest and activate new development, while we have some legacy markets that contain, again if you look at our disclosure and supplement, about 25% of our total NOI. In the residential portions of those markets, the assets are performing at very high levels as well.

As we look forward, I think you have to always be cautious in terms of what the dynamics are going to be. Right now we feel just like I think most of the owners of residential multifamily properties are very bullish, based upon fundamentals going on in the marketplace, job creation, 3% reported GDP growth in the last quarter; and continuing questions in the housing market regarding owned versus rent. Looking forward over the next quarters, we see those fundamentals on a national basis being very supportive of our portfolio on our rental strategy in each of our assets.

Wes Golladay – RBC Capital Markets

Okay. I had one more question, what you guys expect with all the strategic developments going on with the company, what are your thoughts to going to one class of stock?

David J. LaRue

Well, that has been a recent discussion. At this point Wes, we are going to continue to have the two classes of stock. We have addressed some major issues that we’re brought up at the same time with regard to our board composition and structure. We as the management of the company are focused on getting the – making the operations perform at the highest level, dealing with the strategic initiatives and objectives as I’ve outlined and that particular issue is one that the stockholders, if we’ll deal with in the future.

At this point, as we look at the dual-classes the A stock and the B stock, we believe that there is clear alignment between the owners of those different classes of stock with regard to the benefit and the benefit that can be received, via the improved performance of our stock based upon the value that we create in the business.

Wes Golladay – RBC Capital Markets

Okay. Thank you guys.

David J. LaRue

Thank you, Wes.

Operator

Next we have a follow-up question coming from the line of Sheila McGrath of KBW. Please proceed.

Sheila K. McGrath – Keefe, Bruyette & Woods, Inc.

Yes, could you just talk about the residential entitlements at Atlantic Yards kind of the timing and if you have any thoughts about bringing in partner there, so you could accelerate starts?

David J. LaRue

Matt, you want to take that question?

Matthew L. Messinger

Sure. Hi, Sheila, how are you doing?

Sheila Mcgrath – Keefe, Bruyette & Woods

Hi, Matt.

Matthew L. Messinger

So, we are focused doing our efforts at the moment on the towers or immediately around the arena the first three residential towers. And we’ve had some discussion on these calls in the past about T2 or B2, approximately 350,000 square foot building that’s planned as a 50, 30, 20 and our hope is to break ground on that building in the later part of this year.

And then we are actively in predevelopment on those other towers as well. And that’s where our focus is at the moment. I think as far as possibility of a partner, we’ve taken on partners on some of our, other projects certainly including 80 Dekalb, the similarly sized building a few blocks away. And I don’t know if Bob wants to comment, but we continually look at our cost of capital and taking on partners as appropriate.

Robert G. O'Brien

Yeah, Sheila my only comment is that, that’s an obvious way to both mitigate risk and kind of leverage our capital. We obviously have a significant amount already invested there. So that we can identify an appropriate investor to do whether it is at Atlantic Yards or other opportunities, we’re exploring those options pre actively, there is no – we’re prepared and want to move forward with the first tower at Atlantic Yards before the end of the year, and we are committed to do so. It’s not contingent upon obtaining a partner, but we are looking at that as a way to enhance and expand kind of the capital sources we can utilize to activate the entitlements that we have. You know and Matt talked about the first three buildings, I think that map represents about, 1.4 million square feet.

Matthew L. Messinger

Approximately, yeah.

Robert G. O'Brien

Yeah, and there is obviously beyond that another 4 to 5 million square feet of entitlement, not all of which is obviously yet ready to go. But we think long-term we’re well positioned in the New York marketplace to bring out multifamily product over a many number of years. And it is a product type that obviously from a performance standpoint has done well and there continues to be significant demand. So, we feel like our pipeline matches it well with future marketing.

Sheila Mcgrath – Keefe, Bruyette & Woods

Okay, thank you.

Operator

With no further questions, we would like to turn the call back over to Mr. David LaRue.

David J. LaRue

Thank you, Operator. And thank you all for listening and participating in our call. I hope you all – hear the message that we were putting out there today that, this has been a very positive transition, not only as a business relating to our specific operations, but our development pipeline, but also positive transition company as a whole.

We anticipate and expect that this progress will continue into 2012 and beyond. The increased transparency sees us through to our NAV schedule, our NAV supplement that breaks down and defines each of our business segments and allows investors to determine the net asset value components. It is just the first part of that transparency, again along with additional disclosures even this period.

So thank you again for your time today and have a good weekend.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may disconnect at this time. Have a great day.

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