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

Q1 2012 Earnings Conference Call

June 8, 2012 11:00 AM ET

Executives

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

Analysts

Sheila McGrath – KBW

Paul Adornato - BMO Capital Markets

Wes Golladay - RBC Capital Markets

Operator

Welcome to the Forest City Enterprises’ first quarter 2012 earnings conference call. The Company would like to remind you that today's remarks include forward-looking comments that are covered under the Federal Safe Harbor provision. 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 discussion of factors that could cause results to differ. This call is being recorded and a replay will be available until 2.00 pm Eastern Time today, both the telephone replay and the webcast will be available until July 07, 2012, at 11.59 pm Eastern Time.

The company would like to remind listeners that it will be using non-GAAP terminology, such as FFO, EBDT, comparable property net operation income or comp NOI and prorate share in its discussion today. Please refer to the company'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 the call today are available on the Investor Relations webpage at www.forestcity.net. At this time, all participants are in a listen-only mode. Participants on the call will have an 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. Good morning, everyone and thank you for joining us today. With me today is Bob O'Brien, our Chief Financial Officer; Matt Messinger, EVP of Investment Management at our New York office is also on the call and available to answer questions during the Q&A. Our first quarter 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 financial and operating results. After that, I’ll give an update of our pipeline, and offer some closing thoughts, then we’ll get to your questions.

Let me begin with some overall comments about the quarter. As you saw in our press release, we’ve initiated reporting of FFO, Funds From Operations as a key performance metric. We’ll also continue to report EBDT for the balance of 2012 and then transition to reporting only FFO beginning in 2013. This change is part of our commitment to transparency and to bringing our reporting more in line with common practices among publicly traded real estate companies.

The goal is to make it easier for investors to understand our performance, value creation model, and compare our results with peers. Another part of this commitment which we announced in late March is the change in calendar year end and transition we will make during 2013.

Our results for the first quarter reflect very solid performance from our rental properties portfolio. Once again our residential multifamily business led the way with the third consecutive quarter of double-digit growth in comparable net operating income. Our office and retail properties also showed good growth in comp NOI. Occupancies continued the positive trend with apartments and office hedging up while retail has slid compared to the first quarter of last year. Our comparable mall showed good growth in sales per square foot on a rolling 12-month basis and quarter-over-quarter. As expected, our year-over-year comparisons in FFO, EBDT and net earnings were impacted by a number of non-recurring and non-operating factors including lower income from the sales tax credits, our land and air rights sale to the Cleveland casino developer as well as by our strategic program of selected asset sales and joint ventures. All-in-all, however, we're very pleased with the performance of the business in the first quarter. We continue the process of transitioning properties from under construction pipeline to our operating portfolio, including our large New York project; 8 Spruce Street in Manhattan, Westchester's Ridge Hill and Yonkers, and the Barclays Center arena in Brooklyn. 8 Spruce and Ridge Hill are open and operating and the Barclays Center will open in late September.

The transition of these three projects into the portfolio will not only significantly reduce the size of our under-construction pipeline and improve our risk profile, but as they stabilize would benefit from the NOI of these great assets will generate going forward. During the quarter we opened the first of two new multifamily projects at Stapleton and Denver and we also delivered our (inaudible) developed Las Vegas City Hall project. I have more to say about that later in the call. Another noteworthy transition will take place this next week at our annual shareholder meeting.

As you know, earlier this year we announced that two of our Board members who -- our Board will reduce in size and that two non-independent directors would not be re-nominated at the Annual Meeting. Those two directors James Ratner and Joan Shafran will complete their Board service at next Wednesday's meeting after 28 and 15 years respectively.

On behalf of the entire Company, I want to express our deep appreciation for everything they have done and will continue to do for Forest City. Jimmy will continue to lead the Commercial Group, our largest strategic business unit where his insights, expertise and leadership skills are tremendous asset to us. I also want to thank him personally for the guidance, mentoring and friendship he has given me during my career and will continue to give me going forward. Along with the reduction in number of directors, we are in the process of identifying an independent director for seats on the Board.

We’ve engaged Heidrick & Struggles to advice on the search and selection process and we've received many excellent recommendations including from some of you who are on the call today, all of which we appreciate. We have a strong list of well qualified candidates to work from. Once we bring on the new director, our Board will be composed of a majority of independent directors, a key goal in our ongoing commitment to good governance. Before I turn the call over to Bob, I want to give you an update on a previously announced decision to reposition portions of our land business through sale or other disposition. This decision is part of our focus on our rental properties in strong core markets, which is a key component of our 2012 to 2015 strategic plan. As you may have seen in the MD&A section of the Form 10-Q filed yesterday, after the end of the first quarter we completed -- the first significant disposition of one of our land projects since the announcement.

This 2,000 acre project in Prosper, Texas where we were a 51% equity owner, the sale would generate approximately $17 million in cash proceeds to Forest City modestly higher than the property’s current value in our book. This project represents approximately 14% of the land held for divestiture on our balance sheet. Certainly, the volatile economic environment gives us caution and a single still can't predict results across the 30-plus projects in different regions of the country.

The results of our marketing efforts to-date have shown good results. As we've stated before, our goal is that we will complete the disposition of all or substantially all of these properties by year end. I'll be back later on the call to discuss our pipeline in offering and offer closing comments.

Now, I'll turn the call over to Bob to review our financial and operating results. Bob?

Robert O'Brien

Thanks David. Good morning everybody. On today's call, I’ll be referring to our results in our earnings release and supplemental package and if you don't have access to them you can contact us for copy or visit our website for reference during the call.

As Dave mentioned we have initiated reporting FFO this quarter so I will also refer to our new FFO bridge, which depicts the positive and negative factors impacting our results along with the EBTD bridge that many of you are familiar with the FFO bridge is in our supplemental package, it is also available on the Investors page of our website.

FFO in the first quarter totaled $89.2 million compared with $97.6 million in the first quarter of 2011. On a fully diluted per share basis, first quarter 2012 FFO was $0.42 compared with $0.48 in 2011. First quarter EBDT was $102.4 million compared with the 2011 first quarter EBTD of $127.4 million. Fully diluted per share EBDT was $0.48 compared with $0.63 last year.

On Page 26 of our first quarter supplemental package you'll find a schedule showing a side-by-side comparison of FFO and EBDT for the quarter. In the first quarter of 2012, the primary differences were that EBDT includes an adjustment for straight line rent, deferred income tax expense, and amortization of mortgage procurement costs. In addition to further assist investors in modeling our performance as we transition to FFO.

Our first quarter supplemental package also included historical FFO results for all four quarters of 2011. I'll refer now to the FFO bridge on Page 24 of the supplemental package and on the Investor Relations page of our website, for details on the factors impacting our FFO results for the first quarter.

The bridge begins on the left hand side of the 2011 first quarter FFO of $97.6 million and then shows the various factors, both positive and negative that contributed to our first quarter 2012 FFO of $89.2 million.

The first section of eight blocks represents our rental properties portfolio. Our combined commercial and residential segments, as you can see results in the portfolio benefitted from increase in net operating income on matured portfolio of $6.9 million decreased interest expense on that portfolio of $3.6 million, increased FFO from the change in share market value of derivatives between the comparable periods, which were market-to-market interest expense of $3.6 million and increased FFO of $2.6 million related to adjustments to recognize rental revenues and rental expenses using the straight line method. In the next four blocks you can see that these increases were offset primarily by reduced FFO from properties sold or joint ventured of $5.6 million.

Decreased FFO on the sale of land for the Cleveland Casino developer in 2012 compared to 2011 of $6.1 million and decreased income recognized from state and federal historic preservation in new market tax benefits of $6.3 million. Continuing to the right, the next block shows that FFO from the Company's land segment increased $1.4 million compared with the first quarter of 2011 primarily due to the impairment charges on land group projects in the last year's first quarter.

Next is the net segment where FFO decreased $6.7 million compared with the first quarter of last year due to the increase in the Company's share of allocated losses. Corporate pre-tax FFO increased $2.2 million in the first quarter of 2012 primarily due to decreased fees associated with strategic planning and process improvement initiatives and other general and corporate expenses. Finally, you can see FFO was favorably impacted by a smaller tax expense of $526,000 compared with the prior year's first quarter.

We can certainly provide additional color on any of these FFO variants during the Q&A, and we'd also be happy to speak the EBDT results. As Dave mentioned our operating results for the quarter were strong and it's certainly in line with our expectations. Overall comp comparable property NOI increased 4.8% during the first quarter compared with the same period in 2011 with increases of 11% in apartment, 3.2% in office and 3% in retail. Comp office occupancies increased to 91.5% in the first quarter compared with 91% last year. At the end of the first quarter comparable retail occupancies were flat compared with the same quarter last year at 91.1%.

Regional mall sales averaged $456 per square foot on a rolling 12-month basis, up from $411 per square foot for the 12 months ended April 30, 2011. Sales in the comp base comparable regional malls increased 7.5% compared with the first quarter of 2011. In the residential portfolio comparable average occupancies for the three months ended April 30, 2012 were 94.9%, up from 94.6% last year. In order to bring our reporting in line with best practice in the industry starting this quarter we've added some additional disclosure in the supplemental package on our residential portfolio, including reporting comparable average monthly rents. So, for our comparable apartments average rents rose to $1,179 in the first quarter, a 5% increase compared with the $1,123 in the first quarter of last year. Including non-core market, comp average rents in our core markets were $1,529, a 5.6% increase from $1,448 last year.

Turning to spreads, our new versus expiring rents in retail and office, rents in our regional malls and specialty centers combined increased approximately 10% from the 12 months ended April 30,.2012.

In office, the increase was approximately 2% for the same 12 months period. As I mentioned on our year end conference call at the end of the March, I want to again remind that was two items that impact our reported results or some changes we expect to see in these elements going forward. The first is capitalize interest with 8 Spruce, Ridge Hill and soon the Barclay Center opened and operating, the size of our under construction pipeline will decrease significantly. As that happens, we expect to report increased interest expense on our income statement. The reason is that of the GAAP we required to capitalized interest on the equity, we have invested in active development project along with the interest incurred on the constructional loans for those projects, and those assets move out of construction and its operations. We will no longer capitalize interest on that equity investment.

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 with that impact expected to come primarily in the second half of the year. I should point out that this change does not impact our actual cash (inaudible) interest and for investors who evaluate us on a NAV basis, this change obviously does not impact NAV. Second area I want to touch on the taxes. Our team has historically done a great job of effectively utilizing our net operating loss carry-forwards to minimize our tax exposure. However, based on our lower projected use of net operating losses in 2012, we expect the tax benefit in our EBDT results to be $0.11 to $0.13 lower this year than in 2011. Notably, because of the definition of FFO, this change in taxes will have a negligible impact on FFO results.

Before I turn it back to David, I want to mention our upcoming Investor Day at Westchester's Ridge Hill on June 28th. We are finalizing our plans for that day, but we expect begin mid morning, with presentation followed by tours and a lunch. I hope that many of you received our recent save-the-date email, and if not, please, and who would like to attend, just contact us, we would be glad to get you an invitation. We are also planning on another Investor Day at the Barclays Center in the fall and are excited to give investors a closer look at the arena in operations following the grand opening.

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

David LaRue

Thanks Bob. Before I go to the pipeline, Bob mentioned some of our upcoming investor events. I know a number of you on the call will be attending NAREIT's REITWeek next in New York next week. Forest City will be there, but the timing coincides with our board meeting and annual shareholders' million meeting, so I will not be able to attend this year. Bob, Mike Lonsway, and Matt Messinger will attend, and are looking forward to meeting with investors.

Because of our historic reporting cycle, we often face scheduling challenges with this type of industry event. Eliminating most of these conflicts will be one of the benefits to switching to the calendar year-end and we are looking forward to that.

Now, let me update you on our newly opened and under-construction projects. We will be happy to add comments further on any of them during the Q&A. During the quarter, we opened Aster Town Center, an apartment community at our Stapleton and Denver projects. We have lease commitments for approximately 42% of the 85-unit first phase. Aster is designed for a total of 220 units upon completion of the future phases. Stapleton is a market-leading, mixed-use project, is an example of a project that has substantial future entitlement and the ability to quickly activate that entitlement to take advantage of new opportunities and demand for new products.

We have already been involved with Stapleton for over 10 years and we believe we have many more years of active development opportunity remaining. During the quarter, we also delivered the new Las Vegas City Hall, which we completed as feed development project to our Real Estate Services group. While this is not a portfolio of property, it is a terrific state-of-the-art building and an example of adaptability and leveraging our development expertise in new and profitable ways. The New City Hall will serve as a catalytic anchor for future development of the adjacent land we own and plan to develop into a dynamic civic district for the city.

Turning to our New York portfolio, lease up continues at 8 Spruce and Lower Manhattan. Currently, 79% of the 899 units at completion have been leased. A total of 871 units have been brought to market and we expect to release remaining upper-floors and penthouse units soon.

I am sure most of you saw our announcement that we and our partner at 8 Spruce have retained CBRE to explore the possibility of bringing a potential 49% minority partner into the building. Given the strength of the market, the level of interest in multi-family and the premier nature of the stats that in particular, we thought that was a good time to explore this possibility. The transaction, should one take place, would be an opportunity to officially raise equity and further mitigate risk, while still retaining a stake in this trophy asset. If pricing meets our expectations, it's possible that we could execute this transaction before year-end. However, let me stress that we are early in the process and no transaction can be guaranteed.

Westchester's Ridge Hill, Lord & Taylor opened its new 80,000 square foot store in April. I had the opportunity to be there at the grand opening and see this beautiful store. I can tell you that Lord & Taylor has added even more excitement and has boosted traffic and sales volumes for the entire center. Lord & Taylor has told us that they are pleased with their results to date. Overall, the center is currently 60% leased. As many of you who are familiar with the project's layout, the site includes a standalone parcel of the south end for future retail tenants. Excluding that parcel, the remaining retail, now anchored by Lord & Taylor, together with the office space is 68% leased. This represents approximately 800,000 square feet of great tenants and a strong market creating the required critical mass needed to finish the leasing and improve the value. Since the end of the first quarter, plans for 34,000 square foot Legoland Discovery Center were announced, with construction expected to begin in July. If you are not familiar with Legoland, it's a real destination tenant that has been very successful in other markets and we believe it's a great addition to Ridge Hill.

Construction is nearing completion at the Barclays Center arena in Atlantic Yards in Brooklyn and preparations for the grand opening in September are underway. As you saw in our pipeline documents, approximately 70% of the forecasted contractually obligated revenues for the arena are under contract. Recently, individual tickets have gone on sale for a number of early events that have been booked into the arena and the response has been enthusiastic. The caliber of the acts being booked including Barbra Streisand, Justin Bieber, and Andrea Bocelli also demonstrate that Barclays Center is already being recognized as a premier venue for the entire New York Metropolitan area.

While we are on the subject of Atlantic Yards, I want to confirm that we expect to break grounds on our first residential apartment building at this site by year-end. As we have previously announced, we are looking at very closely at a modular construction technique for the residential component, both from a cost and speed of execution standpoint and we are continuing to make that evaluation.

Shifting to Washington D.C., we are in the process of completing our second vertical property at the Yards, our mixed-use project on the Anacostia River in Southeast D.C. The first was foundry loss, a 170-unit apartment building that was one of the fastest lease-ups in the company's history and is now fully stabilized and 97% leased.

In addition, because we have been able to achieve rents above our pro forma, we secured a spread above our class to financing that exceeds our original forecast. Our second property at the Yards, the Boilermaker Shops, will include 40,000 square feet of ground-level retail and mezzanine office space. The Boilermaker will include a number of restaurant tenants and is expected to open in the third quarter, it's currently 74% leased. Like Stapleton in Atlantic Yard, the yards in D.C. is a very strong market, and has substantial future entitlements. (inaudible) response to this new neighborhood has been great as shown by the lease-up of foundry loss, and we anticipate starting a second multi-family projects, as well as an additional small office and retail project before the end of the year. As I said, we will be happy to answer questions on these or any other pipeline projects during the Q&A.

In closing, the strong performance of our portfolio continues. Along with that, we continue to ramp up and stabilize new properties from our under construction pipeline and selectively activate new development to meet the market demand and fuel growth. These three elements, the mature portfolio, new properties from the pipeline and activation of development create a virtuous cycle of value creation that we believe will lead to enhance value for our shareholders and all of our stakeholders.

We are aware of the external factors that could impact the economic conditions and understand the need to be flexible in our outlook. Nonetheless, we are focused on executing our strategies and are confident in our ability to create value today and in the future.

With that, let's open to your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And your first question is from the line of Sheila McGrath with KBW. Please proceed.

Sheila McGrath – KBW

Yes, good morning. We are getting so much closer to Barclays opening, I am wondering if you could give us a sense on how you view progress versus your original expectations, and if there is any derivative impact on your neighboring retail like Atlantic Center?

David LaRue

Sheila, thank you for question. The progress as we noted in our comments, is very positive. I think on our prior call, we mentioned that we have fallen behind a bit in our pro forma progress because of the dispute in the MBA regarding the labor contract, but we have seen and as you can see from the numbers, progress has re-accelerated. The interest within around the project in the neighborhood as a result of Barclays Center opening in September has definitely increased. We have adjacent retail assets, which have been well leased and continue to be well leased, but the opportunity to have quality assets and that additional traffic in the area has sparked additional interest, so it's a spill-over benefit that we look forward to.

Sheila McGrath – KBW

Okay. From a modeling standpoint on Barclays Arena, would you, do we have to expense all of the interest upon opening or is that phased in some? How should we view that part of it?

Robert O'Brian

Sheila, this is Bob. We will have to, as soon as the Arena opens, we will have to begin expensing interest on the loans there. In addition, included and we disclosed this in our MD&A, we are already expensing obviously a bunch of the kind of pre-marketing expenses there as well, which is obviously a bit of a drag, anticipated within the overall scope of the budget, but a drag against current earnings because you can't capitalize those costs.

Sheila McGrath – KBW

Okay. Is there a rule of thumb in terms of stabilization? So, in terms of the arena on the NOI standpoint, it opens in September, is it a 12-month stabilization or how do you think?

Robert O'Brian

Yes, I guess I would ask Matt to comment as well. Our sense, Sheila, is that certainly '12 or late '12 and all of '13, we are going to be working the things out, honestly. We have got a lot of events planned and the revenue side looks very good, but it's going to take at least a year. So, we think 2014 probably represents the first year of fully-stabilized operations. Matt, do you have any comments?

Matthew Messinger

Yes, I agree. We are obviously, we are really excited and pleased with where we are in all of our contractually obligated income components and the limited events that have gone on sale have been great, but like any operating business, like a hotel or any operating real estate asset, it takes time to stabilize. It's I think two years plus or minus is how we look at it. We may do better in certain areas, we are likely to do better, but I think that's a good way to look at it about two years, plus or minus.

Sheila McGrath – KBW

Okay. Since you are on that, could you give us a little bit insight on the higher price units at 8 Spruce, how are they leasing versus kind of your expectation on pace and price?

Matthew Messinger

Right, they are leasing well, but it's early in the process. You know, the top of the building is even today not completely delivered, and in inventory, we just delivered a CFO [ph] for about the final 100 or so units in the last month or so. But there is still a couple of floors of units including those penthouses that are not completed. But there are a number of three bedrooms that have gone online so far at the top of the building and they leased pretty well, but again part of our caution and our initial, which is proving to be somewhat conservative, but our initial two-year lease of that we talked about being in our internal projections, sort of took into account that the upper four units and the more expensive unit take more time to lease, to deliver, their bigger financial decisions for individual renters.

And there was a seasonality as well, of course, which we now have leased through a full year, but we saw strongest the leasing has been, it was subject to the same trends that faced that, that everybody faces leasing apartments and there are better months and worse months.

So overall, with the limited supply that has hit the market, we are pretty pleased and meeting or exceeding expectations thus far, but we have got ways to go still.

Sheila McGrath – KBW

Okay. Last question, Bob, on FFO versus EBDT, can you just run through the deferred tax impacts? So in other words, FFO you are not really paying cash taxes but it seems like it has negatively impacted because you are not adding those back. Or just talk about that nuance there because if we compare you to REITs on FFO, I think your AFFO will be adjusted higher on that number.

Robert O’Brien

That’s exactly right, Sheila. So there is a comparison, I think it’s on page 26 of our supplemental that compares EBDT and FFO. You see a fairly sizeable adjustment to EBDT and add that back to deferred tax and that does not, you don’t see that same add back in FFO. We’re filing the definition of FFO to the letter so that we are in compliance. Certainly, deferred tax is exactly what it says. It hit their income statement but they are not cash, so it’s not a cash charge. So things like that, like capital expenditures, or like straight line rents will all obviously be or can be added back for AFFO. So I think that addresses your issue.

Sheila McGrath – KBW

Yes. Okay, thank you.

Operator

Your next question is from the line of Paul Adornato with BMO Capital Markets.

Paul Adornato - BMO Capital Markets

Hi, good morning.

Robert O’Brien

Good morning, Paul.

Paul Adornato - BMO Capital Markets

We appreciate all of the added disclosure surrounding FFO. I was wondering if you were planning to issue FFO guidance at any point in the future or at least talk about specific assumptions underlying FFO?

Robert O’Brien

Paul, this is Bob. As you know we’ve not provided guidance in the past. We’ve tried to talk about where our portfolio is headed. That being said in my prepared remarks today I tried to give at least some indication of the impact to interest because of our capitalized interest expense and how that’s going to impact our results, as well as taxes where we had a decent benefit, tax benefit, last year in large part driven by NOLs also driven by asset sales. In our current projection we are not projecting huge amount of gains in our performance, although we continue to market some of the non-core assets that will have the swing on current deferred taxes and therefore with those impact.

Paul Adornato - BMO Capital Markets

Okay, fair enough. With respect to 8 Spruce Street, David, I was wondering if you could give us some sense of where you see cap rates for similar trophy multifamily out there?

David LaRue

Well again I think Paul as you look across the spectrum core assets in core markets and very strong markets like New York have been very aggressive. I think that’s just a reflection of quality, both from a standpoint that the existing asset and the future growth opportunity but it’s also a reflection of capital available in the marketplace to invest as opposed to where 10-year treasuries are and other investment alternatives. I don’t want to ponder what the cap rates could be on our projects. I think that the interest that we’ve seen to date through the signing of confidentiality agreements in the property tours has been very strong. We will see how that plays out. As I mentioned during my comments, we are excited to own this asset. We’re going to remain in this asset. We’re looking for a minority investor in order to again capitalize on the value that I think has been demonstrated and continues to be demonstrated by this quality of product.

Paul Adornato - BMO Capital Markets

Okay. Just to clarify, ultimately what type of ownership or equity interest do you expect to maintain in that asset? What kind of fee streams would come to Forest City?

David LaRue

Well, the existing ownership, us and our current partner, will continue to own at least 51% of that building. From that we will get our normal from a fee basis, which is an important part of any real estate companies operation. We’ll get our normal fees that we would get and negotiating with the new partner we will again look at market driven factors and have that discussion with them if we get to that point.

Paul Adornato - BMO Capital Markets

Okay. With respect to the lease turnovers at 8 Spruce, now that you have been open over a year, what kind of increases are you putting through?

David LaRue

We’ve had is -- that’s a very good question. As we’ve talked about we are now into that lease-up and lease-rollover period that we had great acceptance during last summer and spring. We are generating in our lease-rollovers between 3% and 4% increases and again have continued to have good interest on the tenant from the units that have vacated the building. The interesting thing is, again it’s early in the cycle, I mean less than 10% of the available units have rolled over, that will obviously accelerate. As you recall, last year we had a very successful lease-up during the summer month, but right now less than 10% of those units have rolled over. We are pleased with the tenants that are renewing, but we are also pleased with how quickly some of the campus spaces that have vacated have been spoken for.

Paul Adornato - BMO Capital Markets

Okay. And finally, at Barclays Center, are you planning any investor outings to see either Barbra Streisand or Justin Bieber?

David LaRue

If you go on web you could probably buy a ticket for one, but what I think Bob was referring to was maybe after the opening having at that point we’ve worked out some of those things in the operation etc. So not specifically to Barbra Streisand or Justin Bieber but I am sure you are a big Justin Bieber fan, maybe we could work something out.

Paul Adornato - BMO Capital Markets

Count me in, count me in. Thank you.

Operator

Your next question is from the line of Wes Golladay with RBC Capital Markets. Please go ahead.

Wes Golladay - RBC Capital Markets

Hi, everyone. Going back to 8 Spruce, how much incremental NOI do you expect to capture this year for the balance of the year as the asset stabilizes and concessions burn off and the additional units are delivered?

Robert O’Brien

Again, as Matt eluded too, our pro forma shows a two-year lease, we are obviously ahead of that case. We are going to be pretty conservative and estimating how those upper units get, the pace of what those upper units get, how they get leased and occupied. As Matt indicated, some of those units are just getting turned over now. I think as we have said, the project is not going to stabilize until the early part of 2014 really, actually 2015 and the first full stabilized year for 8 Spruce will be 2014. Again, those are the most expensive units for all the obvious reasons for both size and views, and they are going to contribute more than their percentage share of the space, they are going to contribute more than that as a percentage of the NOI and revenue. We are hopeful it will be a relatively steady continued lease up there, but Matt alluded to the cyclicality that occurs in residential projects.

Wes Golladay - RBC Capital Markets

I guess from the modeling perspective you guys might recap the assets if we put at disposition, a partial disposition on a pro rata basis. I just want to make sure we don’t remove too much NOI. So probably call it a low yield right now, I guess we would sell it, what’s flowing through the actual NOI right now?

David LaRue

Well, this is Dave. I think in the past we stated that we are looking for a return once stabilized in the mid single-digits. And that first full year, as Bob mentioned, will be 2014, will be our first full year stabilized and we will achieve that stabilization in early 2013.

Robert O’Brien

Yes, and I think to the extent that we are successful in identifying an investor that will likely occur, as Dave said, sometime sort of the latter part of this year in terms of closing. It’s going to have a fairly nominal impact from an operational standpoint on certainly in the big picture of ‘14, the NOI picture our share of that. And then just to clarify or pick up on what Dave commented on, we are marketing a minority interest, 49% interest in the building. We are doing that together with our partner, NEBF, the electrical union. We would, together with the electric union, anticipate staying as together as majority partners, so we are roughly 51% and probably be equal, roughly the same as we are today, at 51-49 or 50-50 in that remaining ownership.

Wes Golladay - RBC Capital Markets

Going to the Ridge Hill development, since you guys opened Lord & Taylor and coming off of ICSC have you noticed much progress on converting the commitments assigned?

David LaRue

As I mentioned, we announced the Legoland deal. We had – let me comment first about ICSC overall. We had, from a retailer perspective, I think more optimistic meetings with retailers since the last two years, you could -- I guess anticipate that but very good meetings with a number of retailers across the portfolio, who are looking to expand, translating that directly to Ridge Hill. We have had good conversations they are now looking at the opening of Lord & Taylor and some other tenants are going to open in the short term as very positive because we can start sharing with them specific performance, they can go and see how the asset is operating. And Kathryn Welch, who is leading this effort for us in our New York office is optimistic based upon the progress and discussions that she had at ICSC.

Wes Golladay - RBC Capital Markets

Okay and you guys have the loan coming due later this year, has this progress helped in your discussions with the bank where you could possibly get a multi-year expansion on this project?

Robert O’Brien

Yeah Wes, this is Bob. Clearly that’s our goal, certainly every time it kind of lease[ph] setups and I think when certainly we’ve had most of the participating lenders out to the sites, I think they are encouraged by the progress that they see in the traffic, that they are seeing out there. That said, they have been in the project a relatively long time and they have pressures on their balance sheets to get loans like this resolved in a better position. So, it is like as I have said on prior calls, it is likely to take a pay down to reduction of the commitments and perhaps the pay down to extend it, that is our goal. We think we’re reasonably confident we can do that, the loan comes to due late summer or early fall. We’ve been in discussions with the lead and based on our history and our track record I think we’re pretty confident that we can continue to do so, but that’s not done yet. Obviously, progress at the center and continued good performances only make that discussion a little bit easier.

Wes Golladay - RBC Capital Markets

Yeah, it looks like you guys have plenty of cash on hand to handle that. Lastly, on the Gulfstream Park loan, what is the debt yield on that currently?

Robert O’Brien

We don’t give debt yield by property, and so we continue to work in partnership, Forest City and its partner, that partnership continues to work with lender group there. Similar to Ridge Hill, that loan comes due at the end of the summer or early fall. Like Ridge Hill, we’re in discussions with them on a resolution and further extension of that loan and hope to have that resolved, hopefully in the next 60 to 90 days.

Wes Golladay - RBC Capital Markets

Okay so that, -- an extension is part of your primary focus right now, that’s what you guys would favor?

Robert O’Brien

We’re working on resolving issues with the bank group there as well.

Wes Golladay - RBC Capital Markets

Okay, thanks a lot guys. I will see you next week.

Robert O’Brien

Thanks Wes.

Operator

And we have a follow up from the line of Sheila McGrath with KBW. Please go ahead.

Sheila McGrath – KBW

Yes, just quickly on the temporary casino opening, I see that it opened in the quarter. I was wondering if you could give us your thoughts on what that means for your adjacent retail and also did you receive any rent in office NOI in the quarter from the temporary casino?

David LaRue

Hi, Sheila thanks for the question. The casino opened on May 14th. So, that was the date that they have started paying rent, so that was just after the quarter. We have seen a tremendous increase in traffic in the shopping center. One of the is a, -- I think I have mentioned on previous calls, we are evaluating who that customer is, who that casino customer is and the best way to take advantage of the disposable income that that kind of shopper and that customer bring to our shopping center. We still don’t have a strong hand on that. The one thing I can tell you though is that, as well look – as you know, we also have over 3,000 parking spaces there and an adjacent to Tower City as well, and we’ve had very robust increase in parking counts as the casino customers come down and park, so we are getting very good traction in that area.

Robert O’Brien

Yeah, Sheila, you mentioned that the temporary casino, I just need to be clear here, when the legislation was originally passed it was expected that the casino in Higbee Building would be temporary. Subsequent to that there was a negotiation that took place where basically the Higbee Casino can’t be, -- what they are calling an LA Phase 1 casino, so it (inaudible) be permanent and then when they build the new casino on the land that they bought from us that will be the Phase 2 casino, but it’s likely that they will keep both of those open. And as Dave said, they did open on May 14th, and started paying cash rents, but perhaps[ph] since they have been occupying the building and to control the space, we have actually been recording rental revenue on the Higbee Building from them since that time. So, I think they took that 18, -- not even 18 months ago, 12 months ago.

Sheila McGrath – KBW

Okay, thank you.

Robert O’Brien

Thanks Sheila.

Operator

And you have a follow-up form the line of Paul Adornato with BMO Capital Markets. Please go ahead.

Paul Adornato - BMO Capital Markets

Yes, you mentioned the Las Vegas fee business, I was wondering, how we should think about fee business going forward and perhaps you can also mention the infrastructure required to do that business, how much of that will be retained going forward?

David LaRue

Paul, this is Dave. The fee business again is going to be a small part of our overall operations as we go forward. But, the talent that we have, it’s just a company for real estate developments, in this example of Las Vegas. We were able to use the existing people to – existing staff to execute for the City project below their budget and generate fees for us. The real benefit to that is that it activates, it gives us a chance to activate the existing land holdings that we have, that this project sits right in the middle of. As we go forward, I would not model any significant amount of income as part of this operation. So, what it can do is continue to expose us to opportunity to serve and use those skill sets and cover costs, which is important, engage talent and keep them engaged here, and potentially find future development opportunity that we ourselves want to invest in on an equity basis.

Paul Adornato - BMO Capital Markets

Okay, thank you.

Operator

Ladies and gentlemen, we have no other questions at this time. So, I’ll turn the call back over to Mr. LaRue.

David LaRue

Thank you, operator. Thank you all for participating today and thank you for your support to the company. As you can see from the operating results of the portfolio, the transition continues and the positive momentum continues. We look forward to discussing this and additional details and going over our strategies or results next week when Bob, Mike and Matt will meet with you in NAREIT. Have a good day and a nice weekend. Again, thank you for your time.

Operator

Ladies and gentlemen, that will conclude today’s conference. Thank you very much for joining us and you may now disconnect. Everyone, have a great weekend.

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