Forest City Enterprise, Inc. (NYSE:FCE.A) F2Q08 Earnings Call September 9, 2008 11:00 AM ET
Charles Ratner - President and Chief Executive Officer
Robert O’Brien - Executive Vice-President and Chief Financial Officer
Ronald Ratner - President and Chief Executive Officer of the Residential Group
David LaRue - President and Chief Operating Officer of the Commercial Group
Joanne Minieri - President and Chief Operating Officer of Forest City Ratner Companies in New York
Mark Biffert - Oppenheimer
Jahan Mahmoud - Goldman Sachs
Chris Haley - Wachovia
Sheila Mcgrath - KBW
Rich Moore - RBC Capital Markets
Welcome to Forest City’s Enterprises fiscal 2008 semiannual earnings conference call. (Operator Instructions) The company would like to remind you that today’s remarks include forward-looking comments that are covered under Federal Safe Harbor provision. Please refer to the risk factors outlined in Forest City’s corporate filings with the SEC and in its earning releases.
I will now like to turn the call over to Forest City’s President and CEO Charles Ratner, please go ahead Mr. Ratner.
Good morning everybody and thank you for joining us on the phone, I apologize for the mix-up or by way of the internet as we review of our fiscal results for the second quarter and the six months ended July 31, 2008. By now you should have received a copy of our earnings release, our 10Q and supplemental package which all became available on September 4. If you need a copy please visit our website or call our corporate headquarters.
During the call we’ll be using non-GAAP terminology such has EBDT, comp NOI and por-rata share, all of which are defined and reconciled to the corresponding GAAP numbers in the supplemental package. As you know we use EBDT as a key indicator of our performance.
Joining me on the call today is Bob O’Brien, Executive Vice-President and Chief Financial Officer. Also joining us for the questions-and-answer period are Ron Ratner, President and CEO of our residential group; David LaRue, President and COO of our commercial group and Joanne Minieri, President and COO of Forest City Ratner Companies in New York.
After my opening remarks, Bob will provide an overview of our financial results and highlights for the quarter and the six months along with the discussion of our capital and financing activities. I’ll then discuss our new property openings and current pipeline, review our investment posture and approach as it relates to our future pipeline and then after some brief closing remarks we hope to address the questions.
I encourage you to join in a dialogue when the time for questions and comments come. Ron, Dave and Joanne along with Bob and myself look forward to addressing your questions and listening to your comments. So let me start with an overview of our results and activities during the quarter and year-to-date.
We are pleased with our second quarter results and with the performance of both our mature portfolio and our new property openings. The progress in the quarter has brought our year-to-date results in line with last year in spite of a large risk quarter project write-off. Our core rental property portfolio continues to provide a solid foundation for our business. In particular our military housing business now a part of our core portfolio contributed solidly to our results both in the second quarter and for the six months.
We continue to have a strong pipeline of opportunities for future growth and value creation. $2.3 billion of construction projects with great products in good markets and a large shadow pipeline that promises real opportunity when the time is right and the economy picks back up.
Having said that we are acutely aware of the economic and financial market conditions and we know that the investing community has real concerns about real estate development and the use of leverage. We understand these concerns though we believe they can be managed, but let me assure you that we are being very realistic about what is possible under current conditions.
We will stay with our core strengths, but there is no question that we are taking a more cautious approach to managing our business and in our outlook. We have made and continue to make adjustments in response to changing conditions and will have more to say on that later in the call. Now I’d like to turn it over to Bob O’Brien to provide some color on our results; Bob.
As you know our key finance results EBDT, net earnings and revenues are all disclosed in our earnings release, which I trust you all have seen by now. We’ll cover EBDT and NOI throughout the call.
I will note that we had a net loss for the first six months of this year compared with net earnings last year and this is primarily due to significant gains recognized in the first half of ‘07 from the sale of our supported-living portfolio with no comparable asset sales yet in 2008. So let me try to provide some prospective on our results as we pass the midpoint of the year. I will also make some comments about our financing activity and our prospective on today’s debt and capital markets.
As Chuck mentioned we feel pretty good about the first half results from our core operating businesses. With the obvious exception of the land business our residential, retail and office portfolios added nicely to our results compared with the prior year. Military housing was a significant contributor reflecting an increased level of development and construction activity compared with the first half of last year. We expect approximately the same level of development and construction activity in the second half of this year as we had in the first half.
Overall comparable property NOI increased 1.3% during the second quarter compared with the same period a year ago. Our retail portfolio is up 4.5% while the office portfolio is down modestly 1.5%. In residential, comparable property NOI and our traditional multifamily apartment communities increased 3%, but was offset by softness in the supported-living portion of the business resulting in a comparable NOI increase for the full residential portfolio of 0.6% compared with the second quarter of 2007.
At July 31 ‘08 comparable occupancies were relatively stable compared with a year ago. Comparable retail occupancies were 92.5% in ‘08 compared with 92.9% in ’07. Sales at our regional centers averaged a healthy $451.00 pre square foot, but we have continued to see moderate declines and comparable sales levels from last year. Our sense is that this trend is not likely to turn around in the near term and will ultimately impact our comp NOI growth in this segment.
Comparable office occupancies increased to 92.7% compared with 89.9% last year. The increased occupancy levels seems to contradict the comparable NOI decrease in this segment of the business, although the comp NOI drop was driven by previous vacancies which we have since filled but the new tenants are currently in a free rent period. In the residential business, comparable average occupancies were 92.5% compared with 93.9% last year. Comparable residential net rental income, NRI was 90% compared to 91.5% in the same period in ’07.
Our supported-living business has been impacted by the difficulties in the housing markets, as residence who move into our supported-living facilities often are selling homes to make the move, results for this segment a total of three buildings in joint venture with [Hiatt] representing less than 450 units of our share and had a negative impact on our operating specifics for our total residential portfolio, but our traditional apartment portfolio continues to perform well.
Our new property additions have also added significantly to our year-to-date results, recently opened to acquire the stabilized properties including the New York Times Building in Manhattan, Sky 55 Apartment project in Chicago, our 411 unit round property at Central Station and our Richman Office Property which we acquired in 2007.
Results from our land business are comparable to last year, but first half contributions for both this year and last year are very small. We continue to believe we have the opportunity to sell land profitably in the second half of this year, but clearly there has continued to be very little activity in the home building business and we have been and will continue to be impacted by this broad industry downturn. Despite this ongoing softness our inventory of land and quality markets means we are well positioned to capitalize when a broader recovery occurs just as we have during past real-estate cycles.
As we said before we believe this may be an opportune time to acquire additional inventory at attractive prices. To enhance our ability to do this, we expect to enter into a joint venture with a financial partner to acquire distress land and despite looking at multiple opportunities over the past few months, we are yet to close in anything substantial and the bid aspect remains too wide.
The six month results were negatively impacted by increased project write-offs, primarily due to the first quarter write-off of Summit at Lehigh Valley. Our commercial development projects which included a housing component was located in downtown Pennsylvania. This is obviously a disappointment as we continue to believe the location is an attractive retail site, but there’s a delay in the timing for the development and that meets the land owner’s expectations and the land owner chose to sell the site to the adjacent local hospital.
We are also reported a higher share of loss from the New Jersey Net compared to the first half of last year. The overall operating loss for the Net as a standalone business is essentially the same as last year. Forest City’s reported share of the loss is higher because we advanced capital to fund our share of the teams operating loss as well as for certain non-funding partners. You should know that these advances received preferential capital treatment but require us to report losses in excess of our legal ownership of approximately 23%.
Let me turn to the capital markets. I want to highlight the significant achievements our finance teams have made during the first six months of this year and our approach to the current market place, but in order to put what we’ve accomplished in context let me see on my prospective on today’s debt and capital markets. I’ve been financing real estate for more than 25 years and I think the only time comparable to today would be the early 90s. The difference is that lenders had a much stronger and perhaps more easily arrived at conviction about what to do then; they stopped lending, it isn’t as clear today.
On the permanent loan side we have seen the CMBS market disappear taking more than $150 billion of capacity with it. Wise companies and pension funds have stepped up and increased their lending volumes at noticeably higher spreads and much more conservative underwriting criteria. I applaud them as the loans they are underwriting today are both safer and more profitable than most loans originated in ‘06 and ‘07 but they cannot make up for the loss of the CMBS markets. Ultimately the CMBS market in some form needs to return for a truly healthy real estate market.
The challenges facing the commercial banks are well documented; the good news is many of the most troubled banks have raised equity and are maintaining solid tier I capital levels; the challenge is that liquidity remains a concern. Funding costs for most banks have risen by 100 basis points or more. Counter parties don’t trust anyone’s balance sheet requiring an increased premium for the perceived risk.
In this environment we are talking to three to five times the number of financial institutions in each transaction to ensure we can get it financed; even then the ability of a loan officer to predict with confidence what his or here credit committee will approve is near an all time low. Until confidence is restored and funding costs fall we will continue to see a restricted supply and increased spreads for real estate loans.
We do yesterday’s Finnie and Freddy takeover announcement as good news. We believe it should help stabilize the residential mortgage market and begin to restore some confidence in the capital markets. Given the stress in the capital markets we placed an even greater emphasis on monitoring and managing upcoming maturities and our teams have done an incredible job. As we reported in our January 31 financial statements we started the year with $903 million of loans maturing in 2008 at our share.
As of 07/31/08 we only have $253 million of loan materials remaining for the year and more than 70% of what remains has been addressed either through loan extensions or new loan commitments. Looking ahead to 2009, of the 901 million scheduled materials that our share has of 07/31/08 more than 50% of it’s been addressed to date, either through closed loans, scheduled amortization or available extensions.
We saw a significant drop in our weighted average cost of mortgage debt decreasing the 5.45% from 6.05% a year ago at our pro-rata of share. This is primarily due to a decrease in variable interest rates. We continue to limit our exposure to variable interest rate fluctuations as fixed rate mortgage debt represented 75% of our total net request mortgage debt.
During the first six months of ’08, we’ve closed down transactions totaling $1.7 billion in non request mortgage financing. This included $562 million in refinancing, $949 million in development projects and acquisitions and $250 million in loan extensions and additional funding.
We are gratified by our ongoing success in accessing our recourse financing. We know that our success is the result of not just the hard work of our finance team and not just because of our track record of delivering high quality well structured real estate transaction. We have built this business by developing long term relationships and it has been the support of those relationships with many financial institutions that has allowed us to manage our balance sheet and maintain out strong position; we are grateful for their support.
Now I would like to turn the call back over to Chuck.
Bob gave a lot of credit appropriately so to our finance teams, but his leadership, credibility and experience have been very vital to our success in this area and I thank Bob for all of us. What I would like to do now is provide some context for the results and hit some of the second quarter and first half highlights.
Through the first half of 2008, we opened five projects and acquired one representing $553 million of cost at the company’s pro-rata share. During the first half we opened two commercial projects the Orchard Town Center, 980,000 square-foot open-air lifestyle center in Westminster, Colorado and the 855 North Wolfe Street building of 278,000-square-foot office building, the first vertical development at the Science and Technology Park at Johns Hopkins in Baltimore.
This is a great project aligned with a great institution where I believe we will be able to create the same center place overtime that has made our university park at MIT project in Boston so successful. We also opened three residential properties with more than eleven hundred and fifty rental units in total. The Lucky Strike building apartment community in Richmond Virginia, continuation of our Tobacco Row adaptive reuse project. The Mercantile Place on Main, the redevelopment of a landmark mercantile bank building at Downtown Dallas and the first phases of the LEED certified Uptown Apartments in Center city Oakland California.
Lease up on all these properties is certainly slower then we initially projected. Rents are general, we are holding however and we expect all of these openings to be solid contributors to our results going forward.
Two large retail projects are scheduled to open in the third quarter of this year. White Oak Village, an 800,000- square-foot lifestyle/power center near Richmond Virginia will open on October 13. The center is currently 89% pre-leased and features anchors JCPenney, Lowe's, Target and Sam's Club.
The shops at Wiregrass in Tampa Florida a 646,000-square-foot open-air lifestyle center opens on October 30. Its 78% pre-leased with Dillard's and Macy's joining previously opened JCPenney as anchors.
I hope some or all of you can join us for one or the other of these grand openings, both are great products in good markets with solid pre-leasing and excellent tenant mix. We believe they will create significant share holder value.
Continuing the momentum at Mesa del Sol in Albuquerque, New Mexico we expect to open nearly 300,000 square feet of additional buildings, a 210,000 square foot operation center for a unit of Fidelity Investments, and a 74,000-square-foot town center. Both will open during the second half of the year. We will have more to say about Mesa in just a few minutes.
With the projects already opened in 2008, plus the two retail centers opening in October and the two additions at Mesa del Sol, will end the year having added nearly $800 million of projects to our portfolio.
Now let’s shift to what’s under construction in the near term future. At the end of a second quarter we had thirteen projects under construction representing a total of $2.3 billion of the company pro-rata share of which approximately $240 million are the projects I mentioned above that will open by the end of the year.
Of the approximately $2 billion remaining under construction the largest portion is in our New York market with four large projects. Two of these are retail, the 1.2-million -square-foot Ridge Hill in Yonkers, New York and the 517,000-square-foot East River Plaza in Highland in Manhattan.
Westchester County where Ridge Hill is located is a great market with terrific demographics. It’s a kind of market where the opportunity to develop a million plus square feet of retail is truly extraordinary. We’ve worked for approximately five years with the community and our public sector partners to make this a reality. It won’t open for another eighteen months and while retail leasing remains challenging in today’s environment we feel good about the product, the market and the opportunity.
Our other project is East River Plaza in Highland also a very attractive submarket where we’ve seen strong tenant interest in this type of urban retail. The project is expected to open in the second half of 2009. This is our second major project in Highland which is a vibrant and changing community as was covered this past Sunday in a story in the New York Times.
The other two New York projects are large residential properties, the 365-unit DeKalb Avenue apartment community, the company’s first residential tower in Brooklyn. We recently announced the closing and a $167 million in construction financing for this project.
In Manhattan the 904 unit Beekman tower designed by Frank Gehry where the first units will be available for leasing in the second half of 2010. Beekman will feature all market rental units above a K-8 public school.
Both of these are in the very strong New York City rental market where average vacancies are roughly 3.5% in Brooklyn and 2.5% in Manhattan, with vacancies even in the luxury rental segment where Beekman will operate in Manhattan at less than 2%.
As with the three residential properties we opened earlier this year, both Beekman and DeKalb will be some form of tax advantage financing that improved the ability of these properties to compete in the market place and helps drive attractive equity returns.
In Washington DC, we are under construction with our first two buildings totaling 628,000 square feet at the Water Front station redevelopment. Overall the project is 98% pre-leased with approximately 543,000 square feet representing the full office components pre-leased to the District of Columbia.
This is the first phase of this mixed used project that will feature a total of approximately 1.4 million square feet of office, residential and a small amount of retail space. Just down the street at the yards the former southeast federal center in Washington, we’ve begun construction on a 170 unit Pattern Shop Lofts apartment community and expect to begin later this year on a 44,000-square-foot Boilermaker retail project.
Both of these projects are adaptive reuse of historic buildings at the site. They are the first vertical components of this $1.7 billion development that will include significant residential, office and retail components all in the neighborhood of a new Washington National’s baseball park.
In both these major DC projects Waterfront station and The Yards, we’ve been involved in the entitlement and planning efforts for over five years. The urban development business particularly for a large multi phased public private opportunities such as these takes time, investment, commitment and vision.
Washington is a strong market and we believe it will remain strong. We are excited to see the beginning of these two major long term projects which will create real share holder value overtime.
In addition to these significant efforts in New York and Washington, we continue to move forward on the 466,000 square foot Village at Gulfstream in Hallandale Florida and North of Boston progress continues on our 305 unit Haverhill adaptive reuse apartment project that’s expected to open early next year.
So those are the projects under construction. Together with our recent openings these are visible additions to our portfolio with tangible value creation potential and while we may not line the current economic conditions or the retail leasing environment, we know that these are solid projects for the long term.
Let’s turn to what will continue to drive future value creation, our shadow pipeline or development pipeline including our land development business. Let me preface this section by saying that as a company, we’ve always respected the market. We’ve always shared with you as shareholders and analysts, and interested parties that Forest City is a company that has learned over sixty years to respect the market place.
A number of our analysts and investors including some in the call, have observed that in today’s market development is a four letter word, we understand and respect the sentiment. In fact we are focusing considerable time and effort on balancing the realities of current conditions with our commitment to continue to grow.
We believe that development is still the best way to create long term shareholder value. We know and we’ve learned well that you can’t time the market but you must respect the market. We demonstrated that in the early 90s. We didn’t force development simply because we had an organization or an opportunity. We responded to the market just as we are doing today.
To a great degree, our pipeline gives us the ability to pull back on slow projects if markets weaken or if the outlook improves to move projects at a faster phase. Cleary, from everything that seeing this is a time to pull back and that’s exactly what we’ve done. So let me tell you about the steps we are taking and why these actions gives us comfort that with the adjustments we’ve made and we’ll continue to make we’re on the right course.
Let me begin with an update on Atlantic Yards in Brooklyn, our largest pipeline project. Overall, the project continues to move forward. During the first half we received a favorable legal ruling when the US Supreme Court decided not to hear an eminent domain appeal brought by project components. There are only two material law suits remaining; one concerning the project’s environmental impact statement which will be heard and expected to be decided in the third quarter and a state court action challenging eminent domain which we expect to be resolved within the same timeframe.
We are working very closely with the city, the state and the MTA. We continue to make progress on financing for the Barclay’s arena including ongoing discussions with the rating agencies concerning the box. Our team is working very hard to achieve a closing on the transaction by the end of the year.
There are many moving pieces on this project as you can well imagine and lots to do, but it is a major focus of our New York team and we are confident that we’ll be able to make it happen. Joanne Minieri, the President of our New York operation is on the call and will be available to offer additional thoughts on the project during the Q-and-A.
Now I’d like to make some comments about our land business. As Rob indicated land development remains under stress, but we’ve been in this business for nearly 60 years, so we know that this part of the business in particular moves in cycles and we are in a great position to take advantage when recovery occurs.
Think about the three big projects; the Central Station in Chicago where we’ve been involve for 15 years, we still see both opportunity and demand. We sold 3700 plus units in this project over this time with a 1115 under construction and the best news is we have potential to develop more than 3700 additional housing units in the very strong downtown Chicago market. Lets talk for a minute about Stapleton in Denver, a project that’s now roughly seven years in the making and has been a remarkable success thus for.
There is an estimated 10,000 people living in the community today and nearly 3500 homes that have been sold to date with over 2 million square feet of retail development. Even though the pace has certainly slowed, we still expect to sell 200 plots plus lots this year to the builders, we sold about 300 last year and we expect the builders to sell almost 300 homes to the consumers as supposed to about 400 that they sold last year.
We’ve acquired 1400 acres of land for development but we still have another 1500 acres, more than half the project available for future additional development. Foreclosures are low, home values are holding strong and this community is well out pacing the competition. At Mesa del Sol in Albuquerque we’ve already had a total of approximately a million square feet of space built and occupied under construction or under contract. Waiting for the first residential neighborhoods has begun with lot sales expected to begin in the summer of ’09.
To date the company has purchased 3100 acres of land for the project which will eventually include up to 9000 acres, so there is tremendous future opportunity. In each of these markets we have created a great sense of place and these projects will continue to contribute; each one is out performing its respective local market, because of the sense of place.
In our traditional land business even though it remains down substantially from the extraordinary highs of the past few years we are still in a strong position and the markets remain attractive over the long term; markets are just North Carolina, Texas, Arizona and Florida and we have the opportunity to selectively and strategically add to that position of strength given the ongoing dislocation and distress in the market has demonstrated and embarks reference to our plans to enter into a joint venture to pursue potential distressed acquisitions.
In our development business, we have said previously we have pulled back in a number of projects, slowing some and eliminating others. As you can see from the numbers we shared in our press release, even though our overall development pipeline includes 15 projects representing more than 900 million of cost we are committed to begin construction in the next twelve months on just four projects representing approximately $215 million at cost of the company’s pro-rata share. We believe that’s a very prudent and doable number with strong individual projects.
Just think about where we are with these major projects and the position it puts us in and that is the reason we are so optimistic. We have a tremendous reservoir for opportunities that we have been creating for the better part of the past five to seven years; The Yards in Washington, Waterfront Station, Mesa del Sol, John Hopkins, Stapleton and soon Atlantic Yards. These are all places where we are really just starting to build a great future. To a significant degree the pacing of that future and those opportunities is within our control.
If we look back for example at University Park at MIT, our MetroTech Center in Brooklyn, there was certainly challenging times for those projects as well; today we count them among our most valuable assets. Now as many on the call are accustomed to saying “past performance is no guarantee of future results,” but I hope that you can see why we remain optimistic and why we believe we are in a very strong position for the future.
So in conclusion, to date 2008 we have a good reason to be pleased with the performance of our portfolio, including the new property openings and longer term committed to the development business as the primary engine for future additional value creation. Clearly, however, these are times that demand a more cautious approach to our business. The economy in general and the real estate market in particular remain highly stressed. Credit while available remains tight and more challenging and expensive to obtain and at present there are few if any signs of a turnaround in the foreseeable future.
So clearly, we need to respect the market and the economic conditions, but having said that we don’t see development as a dirty word. We certainly believe that our core portfolio alone is worth more than the current market cap of the company and that our development pipeline has tremendous value beyond that.
We are confident that by selectively bringing additional opportunities through the pipeline and affectively managing our mature portfolio to maximize its contribution, we will continue to create long term shareholder value and ensure the future growth in spite of the challenges of the current market place.
I thank you for listening and now we’d like to open the lines for your questions and comments.
(Operator instructions) Your first question comes from Mark Biffert - Oppenheimer.
Mark Biffert - Oppenheimer
First question, I guess partly for Chuck and Bob with the recent move by the government to take Fanny and Freddy, I guess I’m wondering how that impacts your ability to access capital with the GSEs from the multi family side or the senior housing side and then also on a more of a strategy question from me to you Chuck, if you can talk about how that impacts you think the land development business in determining the amount of demand that might be there for single family housing over the next year?
I think Bob indicated in his remarks that we’ve viewed that in the short term this move with Fanny and Freddy is positive for us. I mean I’ll let Ron Ratner answer the question; obviously it’s our residential business where we’re the big users of Fanny and Freddy product; Ronny.
Clearly the short term is very good for us. Obviously the concentration of the market, the lack of knowledge of what was happening at Fanny and Freddy were causing not only issues that was actually dealing directly with the two agencies, but with anybody else related to the business, so clearly short term is very, very positive, it settles the market in a lot of ways.
Their articles, all of the papers today about the question of where this goes in the long term; two or three years from now how are we going to -- as a country we established both the single family to some extent, the multi family residential market place. We don’t have any particular reason to offer on that.
I’m confident that the post news is a very good one and that there is obviously a recognition that there needs to be a significant role for sort of a readily accessed credit market for the residential market place and I think that’s got to be the hopeful direction in the long term for Fanny and Freddy. Again, short term is very good for us, long term we just have to see whether those answers are there.
Mark Biffert - Oppenheimer
Just how do you think that affects your land development business in terms of spring demand? I mean there is talk that mortgage rates could potentially be coming down as a result of that in the near term and with that spur you think people are putting out orders for new buildings or new housing?
Yes let me try, this might inappropriate, let me try to give a 60 year answer to that okay. The land business is cyclical. I mean this is as rough a time as we’ve seen here at Forest City. In that business even the early 90s I think were not as severe as this; probably since the end of the war, the depression. So, it’s a very tough goal and until there is some settlement, some bottom to the housing market this is in Forest City wise, this is the wisdom that we hear all the time.
Until that stabilizes there is not going to be any significant recovery Mark, but I think once that does stabilize and it will as this country continues to grow, there is going to be a demand for housing and if there is a demand for housing there is demand for land and we like our position. You make money in the land business when you buy it not when you sell it.
You’ve seen we’ve made some recent acquisitions. We’ve looked very stringently and carefully at our portfolio. We believe very strongly that the land has a significant value in it. Unlike some others, you’ve seen no major write downs, a very small one this quarter, a few hundred thousand dollars, but our portfolio is very good and very strong.
When that starts to rebound we’re going to be able to participate in it and people will be able to finance houses. The Freddy, Fanny whatever the vehicle is, there is going to be mortgage money available to finance housing and the housing consumer in this country. This country is going to grow by 30 million people over the next twenty years and that’s the way it’s been growing and it’s going to grow in those markets where we have the opportunity, so we are optimistic about it.
Mark Biffert - Oppenheimer
Okay and then just changing gears here a little bit, jumping to the military housing you had a positive core there and I was just wondering how much of that NOI was recurring versus one time in nature and what your growth expectations are over the next twelve months for that business?
Yes as I tried to indicate obvious the increase in incoming was directly dealt to the development and construction activity and so of these related to that development and construction was one of the primary drivers. The significant revenue stream coming from the military and housing business in the early period is what’s called with the military the initial development period, the IDP is development and construction; that’s the major piece of the transaction.
Then there is an ongoing piece of asset management, property management, ultimately a participation in the cash flow. It’s just our very first phase in Hawaii and it’s mandatory to talk about that, it’s just getting out of its initial development period now.
So as you see the pipeline of opportunity that we have in front of us; while the construction levels will ultimately level off, we have a significant amount of opportunity ahead of us and we believe as I indicated in my comments that the activity in the second half will approximate the activity in the first half. Ronnie, want to add anything?
Bob’s given a pretty clear description. There’s a roll out of these developments and we will complete the initial development periods on the projects where we already have agreements on until I think it’s well into 2011 and then if there are in fact no new developments we’ll go back to more of what Bob described as the steady state from fee income and from the participation of cash flow.
There are a couple of other military housing opportunities that are down in the market place we were pursuing. Obviously those will be bid situations, so we don’t know yet whether we’ll be successful in obtaining any additional contracts. So we are optimistic about a strong future in that business. We think we built a very good business and a very good position in the business and we are very pleased with that portfolio and the way it’s been performing.
And Mark the inner supplemental I think is on page 16. The list of the various military housing projects we have. Total costs are at 100%, $2 billion, the first base of Hawaii was about $300 million and the timing is in there as well, so obviously at some point you know you’ll finish with the development and construction of these projects and you can see the timeline taking it out, the latest on this schedule at the moment is out to 2014, so you can’t rebuild again so that piece is not recurring but there is a network there for it to be recurring for the foreseeable future.
Mark Biffert - Oppenheimer
Okay, and then my last question was related to the least termination that you had during the quarter for about $8 million, was that related to the Bear Stearns taken over by JP Morgan and do you expect to see anymore lease terminations as a result of that?
The short answer to your question about Bear Stearns is, no; it’s not Bear Stearns. It is actually in our New York portfolio, we prefer not to tell you who it was and that occupies a lot of space and they did downsize. They continue to occupy a lot of space and we are not aware of any upcoming least terminations that I’m aware of; Dave.
Nothing significant in the retail or office portfolio.
Mark Biffert - Oppenheimer
And is there any upside there in terms of the rent that they were paying versus what you think you can rent at the market?
Joanne, I don’t know if you know that off the top of your head. I believe there is, but…
Yes, we have been fortune enough to release and we’ve seen the releasing dollars come up in excess of the space that has been kicked back.
Your next question comes from Jay Haferman - Goldman Sachs.
Jahan Mahmoud – Goldman Sachs
Hi, good morning, this is Jahan Mahamoud here with Jay as well. The first question, looking at same store NOI and the retail portfolio and the 4.5% growth in the quarter, this seems to sort of run counter to your view that retail has been challenging; I‘m just wondering what your thoughts are here.
I’m going to let Dave answer the question.
The 4.5% comp increase that we reported is a combination of increasing rents that are face value in the portfolio. We have seen and as Bob mentioned a mild decrease in comp sales in the same portfolio, but again our increases have more than offset that percentage rent decline that we have experienced year-to-date.
I think the comp portfolio, we had a modest increase in occupancy at certain properties, certain comp properties that added significantly; I think North Field is an example and is added as well, so.
I think it’s what you’re seeing if I may in the industry. I mean retail comps are still pretty strong even though the retailers are starting to suffer a bit in the retail business. Consumer’s confidence is very low. We are simply saying we think it’s going to ultimately work it’s way through the system, but the advantage to being the landlord instead of the retailer is you have the least and they pay the rest unless it gets much, much worse than that. So we are optimistic but generally we see the consumer segment getting weaker.
Additionally just to add to that a little bit is that as we have renewed leases we’ve continued to have increases in our rent spreads and so that’s adding into that comp increase as well.
Jahan Mahmoud – Goldman Sachs
Okay and then just similar to the last question, can you comment on your outlook for both office as well as apartments in your portfolio and then whether you’re seeing any significant regional differences?
Sure I think we commented on retail. In the office building business; as you see in our portfolio our office is very heavily concentrated in New York and particularly in Brooklyn and Manhattan and in Cleveland and then of course there is the whole biotech portfolio largely concentrated in Cambridge in Boston.
So for us I think the outlook is pretty good. Brooklyn is strong, Cambridge is strong, so we are optimistic that our office portfolio will maintain its occupancy and modest increases as the rents roll over. As you heard from Joanne we get a vacancy, we are able to lease it. So for offices for us I think it’s a pretty good outlook and we have some good opportunities in biotech. We mentioned Hopkins, we have others and we are optimistic.
In the residential business, I’ll let Ronnie fill in somewhat. He’s closer to it than I am. The outlook we have for the rental part of the business Ronnie.
Again we have been surprised by the strength in the business and yet we are still seeing some summer occasions of softness. Obviously if in fact you get a significant increase in unemployment and a decrease in job promotion it’s going to impact the rental housing business and to-date we’ve had comp growth, but as with everybody else in the industry we are assuming and projecting that the last half of the year should be softer and to the immediate future beyond that, the ‘09 and again it just depends how severe the drop off is in unemployment and in job growth; those two things that are really drivers of rental apartment occupancy.
Again we think we are in great markets, we have got strong assets and in the long term we are very confident that those markets will hold up very well for us. As Chuck mentioned the lease up of our new properties has been slightly behind where we anticipated but its still been very strong. In this last month the three properties we leased close to 60 apartments, so we are overall guidedly optimistic I think.
Yes I think, as longer the recession goes, the tougher it will be. There was a period of time where comp NOIs and residential business three years in a row were down comps. So obviously has the fore sale market weakens that should help the rental market and it has I think for most residential owners of rental property. New York as I mentioned earlier is still very strong, so I think we are optimistic but it’s certainly getting tougher and tougher, that’s for sure.
Jahan Mahmoud – Goldman Sachs
Okay and then just lastly, you mentioned that you’ve largely address refinancing for 2008 and 2009 as well. I was wondering if you could just provide specifics on maybe loan to values and interest rate commitments versus previous terms.
Obviously as I try to allude to it, it’s getting more and more difficult. Much of what we took care of in the first quarter of the year, some of those were actually commitments where we achieved in 2007. Loan to values, I think the big challenge today is the loan is 70% to 75% still, the question is what’s value and there are obviously not very many transactions to get indications and price certainly as to where values are.
So incrementally I think compared to where it had been in the last 36 months values at least as valuated by lenders are down and therefore the amount of proceeds we can grab is a little bit less and the spreads continue to widen. Spreads on permanent loans would have been done in the 100 to 150 basis points; it as little as 24 months ago, are certainly north of 200 today and I would suggest to you, it’s continuing to rise. That’s offset some what by obviously a drop in treasuries so the all-in rates still remain relatively attractive.
On the construction side, we’ve been able to successfully secured financing for our developments. I’m glad most to those are behind us truthfully; it’s become much more difficult and as I indicated in my comments lenders are much more skittish about how they approach financing real estate today, particularly development and construction projects and spreads there, where even in good times there were in the 150 to 200 basis points range, they are probably 200 to 300 basis points today depending upon the risk of the transactions. Again I’m pleased that most of that’s behind us and we don’t have a lot to finance looking ahead of us.
Your next question comes from Chris Haley – Wachovia.
Chris Haley - Wachovia
If I could follow up on a couple of questions; you mentioned that your development activity will come down which is not a surprise and I seem to recall that your business units carry certain overhead loads as supposed to other public companies that report and I look at your corporate expense line items year-to-date in the mid $20 million range. From other development based companies we have seen cut backs in overheads and development staff; what you can offer us in our assessment of how responsible you’re being with shareholder capital to pull back development expenditures including personnel?
Don’t other people have overhead Chris; yes of course that’s a very, very important and profound question. We believe we are acting appropriately. We run our development business, you’ve heard say often that we won’t do projects just to cover the overhead, so obviously when you cut back and we have indicated we have that as consequences to your development and we’ll continue to take the appropriate steps.
We have had any number of staff reductions. We closed a leasing office in one market, a development office in another market. There have been about 70 people who have either left or been retired from the business, so we are going to make sure that our development overhead Chris appropriately aligns with the amount of development we do, do which adds a certain percentage of that overhead to each project. If we have projects that can absorb it we spend it and if we don’t we don’t spend it.
I think we proved in the early 90s that that’s how we run the business and we are in the process of doing that today. The same is true for our corporate expense. We are taking significant steps to reduce our corporate overhead.
Just to make sure we are clearly, to the $20 million that you Chris is corporate overhead, the development overhead is checked and indicated and as long as the volume of activity is there its capitalized to those jobs; if we don’t have a job to capitalize to the expense, that expense shows up in the business unit operating expense line item and I would also mention that I‘m not surprised that there is going to be a lag.
We can certainly stop or curtail and slow down development much quicker than and you can immediately get rid of that overhead burden, so that will be a modest lag, but our goal and our job is really to manage the expense and the overhead to the appropriate level of activity, within the business.
So, just likewise corporate needs to take a higher look at it’s expense load, but that the dramatic impact or the dramatic significant reduction in expense is going to be at the business unit level, the reduction of overhead which is reflected in our lack of ability to capitalize cost of projects because we are doing less.
I do want to say also in comment that we do have $2.3 billion under construction and another 250 to start and that takes a tremendous amount of talent to get done. So, obviously in the near term we are in good shape and we have to look to what the future will hold. If it’s dramatically reduced we will have to dramatically reduce the overhead that’s clear.
Chris Haley - Wachovia
Thank you for the color and in terms of what changes have occurred? Are there any specific product types or regions where you’ve made more significant reductions?
You know Chris, that’s an interesting question. As I reflect upon what we’ve done I think we’re explicit and we canceled the delay, almost $1 billion worth of work and there were several second phases of residential projects as an example in Oakland and Dallas where we aren’t perceiving; there were several of the biotech buildings that we were going to begin, that we aren’t going to begin, the spec buildings.
There were several of this major retail opportunity Bob talked about, but several others where we’ve either backed-off or delayed, so I think it’s pretty well across the product spectrum and pretty much across the geography as well. We have slowed the pace on some of these major projects and some of these very good markets and I think it’s pretty obvious what we have done.
Chris Haley - Wachovia
You mentioned obviously the land venture; could you offer a size either in terms of equity whether or not you’ve actually received a financing commitment, any other color on this?
Yes, it will be in the 100 plus million dollar range. We will be roughly, 15% to 20% of that fund and we will obviously manage it and look for the opportunity and get a promoted interest not similar to what many people do in that. So it’s a relatively typical financial joint venture, but somebody who believes strongly and obviously our track record and the history and our ability to identify land add attractive prices that we can ultimately turn into good value and good profit.
Chris Haley - Wachovia
If you had to list the number one, two or three prospective sellers that you can I guess the poor word would be take advantage off, but you can get product from, what would those entities be?
I think we’ve been public with one transaction we closed on it was 2500 last in San Antonio.
Chris Haley - Wachovia
Yes, we’ve got that from a home builder and I obviously think that there is going to be continued stress in that business and the less well capitalized homebuilders are going to need to raise capital and they’ll do what they need to do to do that and that provides an opportunity.
We obviously think the banks lend to a number of those homebuilders and landowners and anticipation for the continued good times in the homebuilding and land sales business and that what’s causing much of the stress in the banking business and clearly there’s likely to be opportunity there.
None of this goes unnoticed by others and obviously we just think that we can play in that arena as we do in other places as well. So, I don’t think we see something that others don’t Chris, I just think that we have a talent that we can leverage with some financial capital to take advantage of the stress in the marketplace.
Chris Haley - Wachovia
And have you offered a rate of return hurdle for that capital?
I mean obviously that’s a negotiation between us and our financial partner, but we typically don’t disclose individual transactions to our investors.
Chris Haley - Wachovia
And in terms of that capital there it’s a $100 million put to work, would you be trying to target a teens or a 20 plus rate of return?
Well, it’s got to be competitive with where the risk adjusted returns for that investment. I think it’s pretty clear what we see in the marketplace, there is plenty of public data points as to where our yields are and we’re not going to be able to get 20 plus percent in my opinion nor should we do things that are sub 10 in that level of business. I think when you look at it, it’s going to be our historic returns and margins with an added premium for the risk in today’s marketplace, so what does that mean? That means in the 15% to 20% range.
Chris Haley - Wachovia
My last question has to do with the consolidation or the acquisition related to Bruce’s interests in the two projects, New York Times and Twelve MetroTech Center. Those are I think two of the seven development projects that were originally agreed upon and I think it was late ’06 and obviously there is a -- for a lack the better term, there’s a promoted interest that Bruce’s entities received of this; could you give us a little color in terms of how the values were arrived at and maybe a little bit of color in terms of either yields or cap rates are IRR’s for those assets?
Chris, I’m going to let Bob answer the question about the transaction, but I just want to make everybody comfortable that just like with the original transaction where we restructured the partnership interest with Bruce, who’s been our partner in this business and helped build this business for a 20 plus years. Just like the original transaction, this was all done within the document, within the framework of the documents that were filed.
In that original deal we made back almost two years ago now, we have these future development projects and there was a formulation, structure, procedure in there for how these would be priced and paid for as they came to market and we follow that document scrupulously. Bob, do you want add anything to that?
Yes, Chris you are familiar, we don’t typically give individual yields at individual assets, so I’m not going to provide you with insight into a specific cap rate, but I think there is plenty of disclosure that you can kind of make an estimate for yourself.
As you see in our Q the price was $121 million for the two assets and that’s paid overtime, 15 years and as you put that on your balance sheet it’s at present valued at about $105 million. Bruce’s had in those two transactions roughly of 30% interest, so you gross that up, the equity value of those two assets that we agreed upon was roughly $350 million, that’s how we got to the value and obviously that’s the equity valuation above the debt and between the office building in Brooklyn and the New York Times building and that’s how we calculated and that’s quite frankly how the future transactions will work as well.
Chris Haley - Wachovia
Yes, Chris what the document says is that, just like with the original transaction, once a product stabilizes and there is a definition for what that is and these two products obviously did, the times in 330 Jay; once that stabilization is reached we negotiate a value between the parties, that value is informed by independent appraisal, we have three independent appraisals and if we can agree on a valuation which we did on the entire portfolio which we’ve now done on these, we agree to that value, if we can’t there’s an arbitration provision, which we have not had use. So, that’s how we’ve done it, it’s documented and that’s how we’ll do it in the future.
Your next question comes from Sheila Mcgrath - KBW.
Sheila Mcgrath – KBW
You mentioned in the press release the importance of maintaining liquidity in the current market. I was wondering if you could give us a sense of the additional funding needs for the near-term development pipeline and the sources of that capital.
Kind of anticipate that question; one of the things that investors have asked, you have asked and others have asked that question in the past and included in some of the past quarterly but in this one as well is a balance sheet and again we kind of look at it on a pro-rata basis.
We try to highlight that costs incurred to-date on those projects under construction and under development and the debt related to those, those are shown on page 30 of our supplemental package and when you add that up basically the $2.3 billion of projects under construction sitting on our balance sheet is roughly a little over $1 billion of cost related to those and there is about $700 million worth of debt, implying correctly so that there is roughly over $0.5 billion of equity invested in those projects under construction.
With that said, in public statements before, we have the vast majority of our equity for those construction projects in. If you look at a $2.3 billion construction pipeline cost and you recognize that we need 20% to 25% cash equity invested in there, most of it’s in. So, a very modest need there for the projects under construction.
Chuck talked about the curtailment of our development pipeline; you see those numbers also in the supplemental in terms of how much cost we’ve incurred on the development pipeline, how much debt, quite frankly very little, less than $200 million against thoughts of almost $800 million of projects under development.
So, the vast amount of our equity goes into that future development pipeline and that’s really how we control the timing of that. Obviously there is a carry cost on that equity, but we can add to that and supplement that and as we get tenants the opportunities become appropriate to move forward with and as we put financing in place for those future development opportunities.
So, as we sit here today, we have just under $600 million of cash in credits, we have an on going operating cash flow, the refinancing we’ve done this year, we continue to pull money up. Modestly less that perhaps what we’ve done in the past because of a more conservative underwriting, but we have a strong balance sheet from which we can continue to generate cash to fund that pipeline and again the vast majority of the equity in the construction pipeline is already in.
Sheila Mcgrath – KBW
Another question I had was, when you look at allocating capital to new development, how do you look at it versus potentially buying back the exchangeable notes? I’ve looked at them occasionally where they’re trading and they’re at a pretty good discount to par and I was just wondering, how you view that?
Sheila, as we have said often and as we continue to repeat, we believe that today there is a very strong focus in any company and certainly in any real estate business and more so in a development real estate business on liquidity. We’ve been asked the question about our own stock which we obviously believe is at a very great value today and about our bonds and as Bob has indicated and we have indicated, we are preserving liquidity and the liquidity we have we’re investing in our real estate.
We do understand that there is a value proposition to be played here, but that is not capital that we can recycle through the project, through the process, as we’ve so successfully done for so long in our real estate business. So, at least our current outlook is that we are a, preserving liquidity and preserving capital for opportunity and frankly for safety and that we’re being very, very circumspect about where we allocate that capital and we have some good opportunities to allocate it.
But, I would make a comment Sheila, based upon that comment that it certainly doesn’t go unnoticed by us of what those yields on those bonds are, what yields on the converts are, the discounts that our equity is trading at, so it obviously implies that for us to move forward with the new real estate development, that’s the arena within which we have to be competitive, those real estate returns have to be competitive.
Now some are short-term, those convertible notes mature in 2011 and so that’s a short-term profit potentially and you have reinvestment risk there, but again we look at that and that obviously is why total rates push so dramatically upwards and that’s why we’re committed to do so little of our shadow pipeline until we can see clarity, risk adjusted clarity for the returns on that development pipeline.
Sheila Mcgrath – KBW
One last question; on retail, I’m personally a little surprised sitting in New York and being familiar with the location that the pre-leasing level at Ridge Hill isn’t higher. I was just wondering are there some leases in progress that haven’t been signed yet or what exactly is the update there?
Yes, as you suspect Sheila there is approximately about 100,000 square feet of leases that are out right now. Some of them are about to be signed, others are just finaling some business terms, that’s another 10%, so the project will up with about 25% lease. Again as Chuck mentioned, we’re 18 months out from opening. Even we still believe and this is a very strong location, there is tenant demand and interest. They are moving a little slower than we would like. We would have liked that 100,000 square feet to be executed, but deals are still being made and there is still a strong demand for the project.
Our past experience with say San Francisco center was not this similar. Retailers today especially try to take as much time as they can in order to execute leases. It does not mean they are not interested in being in the property and again we successfully had that opening and believe we’ll be able to execute the leasing task in front of us here as well.
Your final question comes from Rich Moore - RBC Capital Markets.
Rich Moore - RBC Capital Markets
Just to be clear on the joint venture on the land, Bob is that something that’s already in place or you’re still out looking for a partner?
No, we have a partner identify, we just haven’t add [Inaudible]. It hasn’t been officially announced, but it should be shortly.
Rich Moore - RBC Capital Markets
I’m curious on the homebuilder side of things, on the one hand you guys are buying land from homebuilders like down in San Antonio, you’re looking for other distressed land, on the other hand your kind of saying by the end of the year we hope to have some more activity on the homebuilding front, what are the conversations like with homebuilders; are they not as distressed as they appear to be in the paper or are there individual opportunities among them or what you guys hear from them exactly?
Let me be very clear Rich; I did not say, at least I hope I did not say we expect this to be better by the end of the year, we do not. I’m just speaking for our company, but we see this distress continuing well beyond the end of this year and perhaps into at the earliest late ’09, early ’10 probably, not till ’10, that’s our perspective on this. We see nothing from the builder community and good markets and weaker markets that would indicate to us any sense of renewed confidence or optimism.
At a place to like Stapleton or a place like Central Station, we are still selling, but we’re obviously selling at a lower rate. We sold 200 lots this year, we sold 300 lots last year, we sold 500 lots the year before, we sold as high as seven or 800 lots. So, it’s obviously the activity is down and while in some of these places we’ve been able to generate a real sense of community and place and value, we don’t have the stress of these 30% and 50% and 70% drops, but in our traditional land business in the Carolina’s and the Texas’s and the Florida’s there is no activity and likely to be not in the near future. So, I don’t want to give any sense of false optimism.
The builders are telling us -- this is 60 years now, the builders are telling us, even the national builders no different than what they are telling you and you are writing about, Rich and writing about it. Well this is a business that right now has no level of activity to speak of anywhere. The optimism we have which I did try to reflect is that in the markets I just mentioned we believe in the long run there’s going to be growth, there’s going to be housing demand to supply that growth and we will have the land inventory available to sell.
Rich Moore - RBC Capital Markets
Okay Chuck, thank you and then on the tenant front, what are you guys seeing in terms of concessions whether it’s from the retail community, the office community, the apartment community; is there anything in there, are they greater than they used to be in order to get tenants in?
I will ask Dave to comment on that and Ronnie in residential, but before I do you did ask a question about the land joint-venture. I think we should comment, we are very close to signing this, but there is no shortage of capital in that business. What’s the figure Bob? There’s billions of dollars that have been raised in these blind land funds to go out seeking exactly the same kind of opportunity.
It’s not about whether you can find the joint-venture partner in money, that anybody can do; what we think as Bob indicated is special is this is a very reliable partner with a good track record who knows the business, but obviously we are hopping to bring the table as not the knowledge of the capital and where the capital is, but the knowledge of ability to assess the land opportunity and properly value that opportunity and you noticed that while there’s all this capital that’s been raised, there’s been very little transaction value because as we said the bid they ask is still so far apart.
Rich’s follow-up question Dave was about concessions.
Hi Rich; in the retail operating portfolio again we continue to have very strong retail sales, again they are declining, but in regards to renewals in that portfolio we have seen very little need to give concessions higher than we had in the past.
Our development portfolio again based upon the retailers business and the environment that they are living in and the capital constraints they are living in, we have started to see additional requests for capital allowances to help with the tenants build out. We are holding our rents pretty much inline with what we had put in our pro forma’s, so we are not seeing it so much on the rental side, but we are seeing it on the capital side task.
The office portfolio, again I’ll speak to the Boston market and the Cleveland market. Those haven’t changed significant, we’re pretty well leased in those markets and haven’t had a lot of activity. Currently that says I need more concession or less because of what’s happening in the economy.
I believe Joanne, the same would be true as the turnover we’ve had in New York office portfolio?
Yes, generally. I mean we maybe seeing just a little bit more of financing and improvements, but that’s the same.
Rich Moore - RBC Capital Markets
Okay, good thank you and then residential, Ronnie any pick up in concessions?
Yes, clearly one of the things that’s happened is that we’ve probably dropped about a point, a point and a half in net rental income and that’s directly a result of a combination of really concessions and a little bit of vacancy, but clearly I was just reading a figure. Two years ago I think we had concessions at about 20% of our properties, today we probably have concessions at about 40% of our properties. So that clearly is part of the picture of the softening market.
We think we’ve managed them very well to where we’re really protecting the basic integrity, the way we’re responding, but not -- we don’t believe we can chase a market down, we believe in quality off sets and people who want to live there, will choose to live there. We provide them with right package and the right rents.
With that being said clearly now as the market softens concessions are one of the things we use to try to bring back that. The nice thing about it is that when it’s a one-year lease, the concession is there immediately and the next year can get better and you can recover from it. So that’s really been the history of the business as what we would think going forward.
Okay and that 3% comp NOI in our traditional residential portfolio is allowing for those concessions?
Rich Moore - RBC Capital Markets
Sure, yes and then Ronnie, specifically in LA you guys have the write-off in the merger project, I mean what’s the LA market like for residential?
In the condominium market, we actually did completed the sales of our 1100 project and well clearly the for sale market in Los Angeles as it is throughout the country is still very, very compromised. There are some sales people who at some point just decide that they’re life is such that they want to make the move.
Our rental portfolio is doing well. There clearly is some additional supply downtown, but we always anticipated that we’ll live through that fairly well. In general, it’s softer than we’d like to see it. In the markets we are in, we’re pretty well secured downtown San Francisco, we’re doing extremely well, at San Jose we’re doing well. San Diego is a little more challenged, but not significantly. So we’re overall pretty pleased with California rental portfolio. I’m kind of glad we don’t have a lot more in the way condominium to sell.
Yes, I think the condominium market in L.A is terrible and the rental market is good.
Rich Moore - RBC Capital Markets
And if I could Bob, was there a write-off in the military housing group and impairment charge in the military housing segment?
Yes, what you saw there in our Q Rich is part of our Navy Midwest transaction. The Navy threw in some land that they owned in Puerto Rico. The reason they threw it in is as you know, we tried to identify the sources -- a big piece of the source is the rental income coming from the housing units, but in order to balance resource for the rebuilding and rehabbing of these units they threw that in, in anticipation that we could sell it, in the venture raise capital roughly $30 million to be used to rebuild housing units in our Navy Midwest project.
Ronnie may know more details, but there were some findings that won’t allow that piece of property to be used for the sale use we anticipated so it had to be written down. Obliviously 99% of that falls on the military side of the balance sheet and income statement. I mean it doesn’t hit us at all, but obviously its going to roughly $30 million out of the sources that we’re going to pay for redevelopment that we have to with the military beside either cut back on what we do or find the incremental source to do as much as we had originally intended to do. So, that’s what that’s really is.
Rich Moore - RBC Capital Markets
And the last thing guys is kind of a broader picture thing; what are cities -- I mean you guys have such closer relationships with the cities and you work most to your projects with larger municipal organization; what is their view in all of this economic distress. I mean are they tougher on you guys, are they easier on you guys, do they tend to want to work closer, are they pulling back or how do you view that whole city relationship?
That’s a very, very important question. We don’t know enough yet, I don’t think because we too have pulled back to give any real concrete answer, but I can tell you that in the places where we have these large public private partnerships; Washington, Denver, New York elsewhere, we believe we still have very strong and very good relationships and the partnership is very strong, and every commitment that’s been made has been lived up to on both our side and the side of public.
We still find opportunity to response to new RFP’s, we’re being very cautious about that, but nonetheless there is still is a tremendous drive in this country and I think there will be for urban development, for these cities to rebuild, but the kind of stuff we’ve done Chris really helps. When you open these projects at Tobacco Row and Richmond you’re brining projects back on to the pipeline, back on to the tax rolls that have been dead for decades.
When you’re doing the Haverhill or when you’re doing the deal that Ronnie is doing in the Presidio you bring back on to the tax rolls proprieties that weren’t producing anything for the public, so this stuff works well when it works and I think there is still a tremendous appetite on the part of the public for this kind of thing to continue and the tax revenue is down, so their ability to fund is down , but they’ll find other sources of revenue that they need in order make this stuff work. It might slow if the interim but in long run its certainly going to be the way the country develops.
So on behalf of my colleagues here at Forest City and our company, we certainly thank all of you for your interest and your patients and most importantly for your support and we look forward to being able to continue to earn that support through these very challenging times. Thank you and please feel free to follow up with any of us on any other call questions you have. Again, thank you and have a good day.
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