Forest City Enterprises' CEO Discusses Q2 2012 Results - Earnings Call Transcript

| About: Forest City (FCE.A)

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

Q2 2012 Earnings Results Conference

September 5, 2012 11:00 AM ET


David J. LaRue - President and CEO

Robert G. O’Brien - CFO

Matthew L. Messinger - EVP, Investment Management

MaryAnne Gilmartin - EVP, Commercial and Residential Development

Michael Lonsway - SVP, Capital Markets


Richard Moore - RBC Capital Markets


Welcome to the Forest City Enterprises’ Second 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 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 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 October 05, 2012, at 11.59 pm Eastern Time.

The Company would like to remind listeners that it will be using non-GAAP terminology, such as operating FFO, FFO, comparable property net operation income and pro rata share in its discussions today. Please refer to Forest City 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 at the Company’s website 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’d 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. We are originating our call today from Chicago where we’re attending the BMO Capital Markets North American Real Estate Conference.

With me today is Bob O’Brien, our Chief Financial Officer; MaryAnne Gilmartin, Executive Vice President of Commercial and Residential Development; and Matt Messinger, Executive Vice President of Investment Management at our New York office are also on the line from Brooklyn and will be available to answer questions during the Q&A. Michael Lonsway, our Senior Vice President of Capital Markets is also here with us in Chicago.

Our second quarter results went out yesterday after the close of the market. By now I hope all of you’ve had a chance to review them. As part of our continued efforts to improve our investor outreach, we’re taking somewhat of a different approach beginning with today’s call. We will spend less time talking through the numbers for the quarter and six months, all of which can be found in our press release and filings and more time on our strategic initiatives, our portfolio and how we feel about the business today and going forward.

In a few minutes I will turn the call over to Bob for his comments and our results, after that I will give an update on our pipeline and after some closing thoughts then we will get to your questions.

I will begin with some overall comments on the quarter. As you saw in our press release, we’re pleased with our operating portfolio performed during the second quarter. We had comp NOI increased across all of our major products, apartments, retail and office and our multi-family portfolio registered a fourth consecutive quarter of double-digit growth in comp NOI.

We also had strong occupancy – comp occupancy in each of these major product types. Our headline FFO as well as our earning results were down compared with the same period last year, primarily as a result of additional land impairment, which I will discuss in a moment and write-offs of abandoned development projects. Operating FFO, which is a new non-GAAP measure we’re introducing this quarter, was up marginally in the second quarter. For the six months its up 5.8% compared to the first half of last year.

I will have more to say about operating FFO in a moment and Bob will provide more color on the second quarter and year-to-date results in a few minutes.

Let me update you on the strategic decision we’ve announced beginning – at the beginning of the year regarding repositioning of our land business. We’ve already completed the number of sales including a 2000 acre project, in Prosper, Texas. At the end of the second quarter we had 48.8 million of land at cost on our pro rata balance sheet. We now have contracts or letters of intent on more than 80% of that land and we expect to close these deals by the end of the year.

Marketing efforts are continuing on the remaining projects. Overall, we’re very pleased with this progress and I want to thank our team that is working hard to execute the strategy. As you know when we announced our decision at year-end, we took a significant impairment on our land holdings. During the second quarter we took an additional impairment which needs to be addressed.

With the year-end impairment, we made assumptions about the current value of approximately 30 projects we intended to sell. As we’ve gone to market in most cases our assumptions have proven to be quite good and price in – price in generally as a matter of expectations. That being said, the overall housing market continues to be weak and as we move first this strategy, there were two primary areas where pricing has not met our initial expectations due to this changing market.

Our first is our Midwest properties mostly in Ohio and the second is our land at Mesa del Sol in Albuquerque. Those have seen lower level of interest from potential buyers and lower pricing than we initially anticipated. As a result, we took additional impairment of approximately $35 million on these projects in the second quarter.

Also during the second quarter, we received an unsolicited offer on the land – parts of land we have at the Central Station project, in Chicago. That land was not on the original list of projects for disposition. We had initially intended to retain it for possible sale to a condo developer or for development as apartments. However, having received the offer we took an opportunistic look at our options and decided to sell. Now we have the letter of intent on the land and as a result we recognize an impairment of approximately $17 million.

I should point out that after this impairment, over the course of our involvement in Central Station; Forest City realized approximately $45 million in pre-tax profits from the project. As we’ve said before, a key element of our strategy is to focus the Company on our core apartment, office, retail products, and stronger than markets. The land disposition is one part of that strategy. In retail we’re focused on our regional and closed malls, and anchored lifestyle centers and on specially retail in the New York metropolitan market.

As part of that focus we recently completed the sale of two specialty retail centers, the village of Gulf Stream Park, in Florida and White Oak Village, in Virginia. In addition to these sales, we also sold an interest – our interest in South Field, an apartment community in suburb of Baltimore.

Since the beginning of the year, we’ve completed eight dispositions generating total proceeds of approximately $55 million. Before I turn the call over to Bob, let me comment on our quarterly reporting and our new metric we’ve introduced this quarter.

As you know at the beginning of the year, we introduced our schedule of NAV components as the new toll to help investors assess the Company’s overall value proposition. Last quarter we initiated reporting of FFO bringing our disclosure more in line with the REIT industry standards. This quarter we’re introducing operating FFO, a non-GAAP measure that we think offers a new way of looking at the performance of our core operations.

Operating FFO is our attempt to give visibility to the underlying performance of our core operations by stripping out one-time, non-cash, non-recurring and transaction related items. Bob will have more to say about operating FFO in a few minutes and our press release and filings have a full definition of this new measure.

Let me add, we consider the way we present operating FFO to be a work in progress and as we strive through greater transparency in our disclosure. It’s a new addition to our reporting and we look forward to investor feedback as we evolve this measure going forward. I will be back later in the call to discuss our recent openings and projects under construction.

Now let me turn the call over to Bob.

Robert G. O’Brien

Thanks, Dave. Good morning everybody. On today’s call I will 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 this call.

As Dave mentioned, we’re taking a somewhat different approach beginning with this call in an effort to focus more on our key business drivers and operating results and spend less time reading through revenues, earnings and et cetera. That information is important to be sure, and all of it is in our press release and filings. We’re happy to address any questions during the Q&A.

I will focus my comments on FFO and our new measure operating FFO. Our FFO bridges, which depicts the positive and negative factors impacting our results for the quarter and six months can be found on Pages 30 and 31 of the supplemental package. They are also available on the main Investors page of our website. I don’t intend to walk through all the variances, but when you look at the two bridges, it’s easier to see that by far the largest impact on a reported result is the net loss on land held for disposition activity, which includes the impairments Dave mentioned.

We frequently get the comments that our results have a lot of noise in them and that it can be challenging for investors to see pass that to get a sense of the core operating performance. Our FFO bridges for the second quarter and first half certainly illustrate that point.

So, to help make it easier to see the ongoing performance of our core operations, we’re adding operating FFO to the measures we report to investors. Page 29 in our second quarter supplemental package describes operating FFO and presents a table reconciling it to FFO. I’d like to focus some additional comments on that table, so you may want to refer to it now.

Clearly, our headline FFO results are down dramatically from the comparable period last year. This is driven primarily by the strategic decision to exit our land business and the related impairment we took in the second quarter. However, there are numerous other factors that impact our results, all of which overshadow the continued strong performance of our core operating business.

What we intend is that operating FFO will provide the reader with a picture of how the core operations are performing and reconcile that for the overall performance of the business. The schedule on Page 29 takes out those transactional items that are either one-time or other results that don’t occur regularly and tend to distort total FFO in any given quarter.

So we start with the performance of our Commercial, Residential and Land groups. We adjust for the impairment charges related to the divestment of the land assets as well as our project write-offs. From there we take out the tax credit income, any one-time land sales like the casino land sale, and the straight line rent adjustment to arrive at how the portfolio is performing.

From that we take out of our corporate group charges, less any early extinguishment of debt on our corporate debt to arrive at operating FFO. There are two additional items that impact FFO that aren’t included above, the operating loss of the nets and the impact of taxes.

So although our FFO is down 65% and 30% for the quarter and six months, respectively, when we look at operating FFO, it’s basically flat when compared to the second quarter of last year and up 5.8% for the six months ended 7/31/2012. We believe these metrics more clearly reflect the performance of our core operations.

Let met touch on some of the key operating results for the quarter and six months. The operating statistics that I want to highlight reflect the strength of our portfolio performance, particularly, our comp properties. Overall, comparable property NOI increased 5% during the second quarter compared with the same period in 2011, with increases of 5.4% in office, 1.3% in retail and 10.3% in apartments.

The results in apartments are particularly remarkable and as Dave mentioned earlier, they mark the fourth consecutive quarter of double-digit comp NOI increases in our multi-family portfolio. We had budgeted for a strong year, but the performance year-to-date has exceeded our expectations.

Comparable occupancies were also strong in all of our major products, with office at 91.4%, retail at 91.6%, and comp average occupancies in apartments at 94.8%. Rent rollovers were also positive across the products. New office leases on a rolling 12-month basis increased 2.2% over expiring leases, retail same space leases in our regional malls increased 9% for the quarter, and year-to-date average rents in our conventional apartment portfolio increased 4.9% overall and 5.6% in our core markets.

In addition, rolling 12-month sales per square foot in our regional malls increased to $461 compared with $417 for the same period last year and $456 from the first quarter. And our year-to-date comp sales in the regional malls were up 5.9% over the same period last year.

Let me take a minute to review the progress we made during the quarter related to our strategy of managing debt maturities and improving our balance sheet and debt metrics. During the second quarter we issued an additional $125 million of our 2034 senior notes and used the proceeds to retire that same amount of our 2015 senior notes, effectively extending that maturity 19 years at approximately the same interest rate while maintaining the flexibility to call the debt at any time. In addition, since the beginning of the year we’ve reduced our net to total debt at pro rata by approximately $110 million while maintaining a healthy weighted average maturity of just over six years.

Last, I want to mention that we are finalizing plans for an Investor Day at The Barclays Center in Brooklyn on Monday, October 22nd. It will be an afternoon event with optional evening activities including a concert at the arena. We look forward to introducing new investors to Forest City Enterprises and to updating everyone on progress and our strategic initiatives. We’re also excited to give investors a closer look at the arena and an overview of Atlantic Yards. A save-the-date notice will be going out within the next week. If you don’t receive one please let us know we’ll make sure you do, and we’ll also follow-up with details as we get closer to the event.

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

David J. LaRue

Thanks, Bob. Here is where we stand on our recently opened and under construction projects. We’ll be happy to comment further on any of them during the Q&A.

Bob just mentioned Barclays Center in Brooklyn and our upcoming Investor Day there. There is a tremendous amount of excitement building in anticipation of the arena opening. I’m sure many of you on the call have seen the media coverage in the New York area on the arena itself and the great events that are being announced almost daily. We’re very excited about the arena and what it will mean for Brooklyn. There will be a formal ribbon-cutting event on September 21. We have approximately 200 events already committed for the first year of operations and ticket sales to-date are meeting expectations. We are also seeing growing interest in suite sales and sponsorship opportunities and forecast the contractually obligated revenue is now at 75%.

The Barclays Center opening will also be a milestone event for us as a company. As those of you who have followed us over the past several years have known the arena is the last of the big three New York development projects we had underway when the recession hit. The other two, 8 Spruce and Ridge Hill have already opened and are on the way to stabilization.

With each of those openings, we reduced the size of our under-construction pipeline and improved our risk profile as a Company. With the opening of the arena, the pipeline will be reduced further and our development risk will be reduced along with it.

One year ago we had a total projects under construction of $1.7 billion at our pro rata share. At the end of this year’s second quarter that number was $627.1 million at our share. When Barclays Center opens another $318 million at our share will move out of projects under construction and into the operating portfolio. Even with that reduction we continue to have substantial entitlement and opportunity in our core markets that will fuel future growth through a prudent balance of operating assets and new development activity.

At 8 Spruce, our apartment tower in lower Manhattan, the final penthouse units were brought onto market in early August. Currently, the building is 86% leased. We have been experiencing first rounds of expiring leases on the lower floors and the results are meeting our expectations with increased rents overall for both lease renewals and renting of vacated units. We continue to see strong interest in the building even during the traditionally slow summer season.

As we confirmed earlier this year, given strong market acceptance for this iconic asset, together with the strength of the Manhattan market and investor interest in apartments, we and our partner retained CBRE to mark a minority stake in the property. We don't have anything to report today and can’t give any assurance that this transaction will take place.

I can tell you, however, that interest from investors has been strong, initial offers have been received and we’re very pleased with the process to-date. When and if this transaction is finalized, we will make an appropriate announcement.

Our Westchester’s Ridge Hill mixed-use retail center in Yonkers, New York, we now have 611,000 total square feet opened, with 527,000 square foot of that being retail, which includes both Lord & Taylor and Apple with another 68,000 square feet opening later this year. Sales figures from reporting tenants are trending up each month and we’ve seen significantly increased traffic throughout the summer. The project remained 68% leased excluding the standalone parcel on the south end of the site, and 60% leased overall.

We are encouraged by the level of ongoing interest from prospective tenants and we expect to be able to convert that interest into additional lease commitments as the Center continues to gain traction. The fact that we haven’t made more progress is a concern; however, with almost 800,000 square feet of retail and office space leased and the tenants which are open for business generating good sales we remain steadfast in our commitment to completing the leasing at this Center and remain confident in the long-term prospect of this asset.

At Stapleton in Denver, we opened Aster Town Center an apartment community in the first quarter and its 85-unit first phase is already 95% leased. At Botanica Eastbridge, our other new apartment project at Stapleton, leasing activity is underway and we’ve recently received our first certificates of occupancy on the 118-unit property. We expect market acceptance for Botanica to mere that of Aster Town Center.

At the Yards in Washington DC we’re nearing completion of Boilermaker, an adaptive reuse project with ground-level retail and mezzanine office space. We expect Boilermaker, which is currently 74% leased to open in the third quarter.

We also began construction during the second quarter on two new projects at the Yard. The first is the Lumber Shed, a 32,000 square foot mixed-use office building with street-level retail. Like Boilermaker this is also an adaptive reuse of a former Navy industrial building and we expect it to be completed in the third quarter of 2013.

The second new start during the quarter is Twelve12, a mixed-use project with 218 rental apartment units above street-level retail including 50,000 square foot Harris Teeter grocery store and a 28,000 square-foot fitness center. We expect this to be completed in the first quarter of 2014.

In Dallas, construction is continuing on Continental Building, a 203-unit apartment community our Mercantile Place on Main development. We expect that to be completed in the first quarter of 2013.

In Boston, together with our local partner, we started construction on 120 Kingston, a 242-apartment unit building on the Rose Kennedy Greenway near the border of the City's financial district and Chinatown neighborhood. We expect 120 Kingston to be completed in the second quarter of 2014. Additionally, as we have stated on prior calls, we are planning on and expect to start construction of our first residential building at the Atlantic Yards site by year end. As always, we’ll be happy to answer questions on any of these or any of our other projects during the Q&A.

As you heard on today’s call, we continue to execute on our key strategies; a stronger capital structure and improved balance sheet; a focus on core markets and products; and growth from our mature portfolio and from recently opened projects; and from new development by activating existing entitlement. We are also committed to improving transparency in disclosure and to insure that investors have visibility to our value creation model.

The core operations of our business continue to perform very well with the results exceeding our expectations year-to-date. We attribute this in part to market conditions in our core markets and products, particularly multifamily, but also to our focus as a Company on operational excellence and to the hard work, creativity and professionalism of our associates.

As always, we are cautious about the macroeconomic environment and macroeconomic factors that impact our business and we remain adaptable in executing our strategies.

As we look ahead, however we do so with confidence in our portfolio and our associates and our collective ability to deliver enhanced value for our shareholders and other stakeholders.

With that, let’s get to your questions. Operator?

Question-and-Answer Session


Thank you. (Operator Instructions) And our first question comes from the line of Rich Moore from RBCCM. Please go ahead.

Richard Moore - RBC Capital Markets

Hi, good morning guys. First question from me is, on Ridge Hill you guys have delivered that essentially. What would you say the yield on Ridge Hill is, currently I mean?

David J. LaRue

Hi, Rich good morning. As you know we do not disclose yields on our development projects, but with that said, as you can imagine from the time we started the project to where we stand today, that market had changed dramatically in terms of the recession and the impact the recession had on overall tenant demand, et cetera, but as I think evidence towards the progress we have made in 800,000 feet of leases that we’ve signed, the site itself continues to gain traction and make progress. We currently have projected a return that gives us an opportunity to make a spread and a return on our equity and create value for the shareholders, but again, we don’t have a specific yield [ride].

Richard Moore - RBC Capital Markets

Okay, thank you. I mean, the reason I was asking is – I’m trying to ascertain on this – I think you have $500 million construction loan on the project that you extended for two months and I’m curious what the status of that is, I guess and what you think is going to happen there given that you got your short-term extension and it’s hard to tell from our end how to value that assets, so it’s hard to tell what’s going to happen to this construction and maybe you have some thoughts on that construction loan?

David J. LaRue

Yeah, I have. Bob can address that Rich.

Robert G. O’Brien

Hi, Rich, great question. Yeah, the regional construction mini-perm loan matured in early August. We got a short-term extension from the bank group as we work out a longer term extension with them, so the short-term extension was really to give us the time to allow, there’s I think 12 or 13 lenders in the bank group on this transaction to both understand and get through their credit committees on the longer term extension.

So we are basically in agreement with the agent and we have to get that through the balance of the banks and while it’s not done and obviously we can’t give complete assurance that it’s going to get done.

We remain confident that the bank group is supportive, that will require as we talked about on prior calls lowering of their commitments and their obligations and commitment of additional capital from Forest City, all of which is in our plans, so well within our liquidity requirements as we continue to finalize and stabilize Ridge Hill.

Richard Moore - RBC Capital Markets

Okay, no thoughts here Bob on the rough sides of that loan when you guys are done?

Robert G. O’Brien

Well, I don’t want to give an indication yet until it’s approved by all the lenders, so I think it’s within the scope of what we anticipated. I think it’s an indication of our continued commitment to the project as well as to give the lenders confidence that we are there to make sure that this thing leases up and stabilizes in the near-term.

Richard Moore - RBC Capital Markets

Okay, good, thank you. Then on Spruce, sort of the same thing I realized you’re not disclosing the yield, but why that one in particular the interest in JVing that particular asset and how – I guess how is it performing versus your yield expectations? You don’t have to disclose your yield obviously, but I mean, how is that versus what you had anticipated?

David J. LaRue

Yeah. Rich, I’ll deal with some of this, we can let Matt chime in as well. We looked at 8 Spruce, again as I mentioned it’s an iconic asset, but we also look at the fact that, as we’ve mentioned we are hitting pro forma from a lease up standpoint, and when you look at values being attributed to multifamily properties in markets such as New York.

We believe that it was very appropriate to take advantage of the market’s interest in assets of this quality and explore an additional recapitalization and therefore, freeing up some of the equity value that we have invested in the building and allowing us to take that capital and continue to execute on our other strategies and come out on a positive basis from a overall cost to capital standpoint. Matt, if you have any additional comments.

Matthew L. Messinger

No, I think that’s right. I think in the past we have been clear when we talked about the possibility of transaction here that, this is just a continued part of our – of the strategic plan to looking at where we have capital invested, the cost of that capital, other uses for that capital and cost of capital overall for the Company and obviously multifamily is hot, New York continues to be an extremely, extremely, extremely strong market. And on top of those two factors this is a very, very special building and the only Frank Gehry Tower in the world. So, I think that was sort of the basis of us testing the market to see if those two or three elements provided a scenario where we could perhaps redeploy a chunk of our – of the cash in the building at a economically advantageous number.

Richard Moore - RBC Capital Markets

Okay, good, thank you. And then if I could guys, on the land business you’re obviously making very good progress there and when you have – I realize you don’t have to mark anything to market until you reach a point where you decide to sell something, but it’s sort of a bit of a surprise that there is another piece of land that comes in to the picture that you have to take a write-down on – I mean is there more sort of unexplored land sales that will, you think generate write-offs as we go forward or is that kind of done?

David J. LaRue

Rich, you’re referring to Central Station?

Richard Moore - RBC Capital Markets

Yeah, exactly – exactly David.

David J. LaRue

Yeah, well again as I said, Central Station we had planned when we made our original announcement that we would hold that parcel of land, and again based upon our past sales prices and expected value – our calculated value, we felt that the cost to carry was appropriate. What came out of, I guess, the proverbial that field was an offer that we considered and we decided to accept because it allowed us to again continue to focus on our core operating portfolio which is one of the things we said we want to do, it allowed us to take the amount of money that has been offered and we will use that to again further raise liquidity and provide the ability to continue to delever and those are the main reasons we looked at that and decided to change what our initial thought was and take advantage of the opportunity as it was presented.

Richard Moore - RBC Capital Markets

Okay, good, got you and then last thing guys if I could, the write-offs of the abandoned projects, what were those in particular, things we knew about before or I guess what’s in there?

Robert G. O’Brien

Rich, I think, as we look at our development pipeline and our investment in development opportunities and we put that up against our strategy and monitor obviously the macro-environment; I think we were just being as critical as we can about what projects are going to make sense.

So, in evaluating that, we decided to not continue to pursue a number of transactions that we had pursued over the last few years, that for one reason or another it either yields or not fitting the strategy, we decided the prudent course was to let those opportunities go and just focus on the key ones in our key markets.

So, that’s something we do each and every quarter and continue to scrutinize those investments to make sure that they’re both viable and fit our strategy.

Richard Moore - RBC Capital Markets

Okay, all right, good. Thank you, guys.


There are no more questions at this time.

David J. LaRue

All right. Thank you. I would like to thank all of you who have taken the time to listen to our second quarter investor call. We appreciate the interest in our Company and our Enterprise. As I said during my prior comments, we are extremely pleased with the strength and performance of our core operations. The numbers I think speak for themselves, but we are also pleased with the execution, the divestiture of our land group assets.

As we said in our year-end conference call, our objective was to get those assets repositioned by the end of this year and as evidenced, we’ve made great progress in executing on that strategy. We are staying focused on our strategies and more importantly we’re executing on them.

So, with that, I thank you all and have a good day.


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

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