Forest City Enterprises Class A Earnings Call Insights: Asset Sales and Openings Momentum

Forest City Enterprises (NYSE:FCEA) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Asset Sales

Sheila McGrath – Evercore Partners: You’ve mentioned asset sales of $200 million to $250 million. I’m just wondering your rationale for ramping up the sales and if that gets you to a leverage level that you’re targeting by year end?

David J. LaRue – President and CEO: Bob, do you want to first take that?

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Robert G. O’Brien – EVP and CFO: Sure. Thanks Sheila. Yes, so net proceeds out of sales in that range $200 million to $250 million. At our historical leverage ratio against market, that’s – its 60% leverage, that’s north of $0.5 billion worth of real estate that we – at our share that we would hope to sell. Sheila, I think that our debt metrics as we’ve talked about are a work in progress. I don’t think that’s going to get us all the way to where we ultimately want to be, but it’s going to give us a substantial amount of capital to continue to delever and continue to improve our debt metrics. I think we believe and the market seems to be bearing it out. You saw we sold an apartment building just outside Detroit just a week or two ago at a very attractive cap rate that – the market is now given where interest rates are and given where capital is, amenable to looking at and buyers purchasing in secondary markets. So we’re going to divest in those non-core markets to try to raise capital to improve our balance sheet and invest in our balance sheet. As I tried to indicate in my prepared remarks, clearly that’s going to have a – that’s going to dilute our FFO because we’re not going to – we don’t believe even with the capital and the interest rates where they are that the lost FFO from property sales will probably not be fully offset by the investment of those proceeds in the balance sheet, at least in the near-term. But we’re moving our NOI from where it is today in some of these non-core markets into the core markets and thereby increasing the quality of that NOI long-term

Sheila McGrath – Evercore Partners: And then, Bob or David, could you be a little bit more specific on – are these asset sales joint ventures in some of your larger assets or they’re 100% focused in non-core markets?

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Robert G. O’Brien – EVP and CFO: I think our primary focus is then we certainly brought investors into some of our higher profile assets like the retail portfolio in New York like our MIT transaction. So, the focus, given the improvement in the economy and then more greater availability of capital is to focus on those non-core markets. So it’s not as critical. That being said, I often say that everything is ultimately for sale at a price, and if we can get full value in some of our core markets or products, that’s something that we would consider. But for the most part, at least in our plan, is that’s been of our interest in some non-core products and non-core markets.

Sheila McGrath – Evercore Partners: Two more quick questions. I was just wondering if you could talk about your thoughts. I know you amended your line of credit to allow more stock buybacks. So just wonder, if you could talk about your thoughts on stock buyback, eventually a dividend, and all in context of deleveraging, is this something that we shouldn’t expect this year; just give us your thoughts on balancing those initiatives?

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Robert G. O’Brien – EVP and CFO: Dave, I’ll try and I’ll ask you to kind of follow-up. So, we wanted the flexibility for a variety of reasons. Obviously, our stock has, as many, have been quite volatile and it falls – while we have often said, and analysts indicate that we sell at a fairly steep discount to our NAV. But at times it gets dramatically lower, and it’s at times like that we might want to be opportunistic. But I think the use of capital to buy back stock is probably lower – (not probably), is lower on the priority list than deleveraging our balance sheet. We think that is one of the key components of our strategy to help allay some investors’ concerns about the level of leverage, the level of our fixed charge coverages. We made a lot of progress over the last few years. We expect to continue to do that. So we would not at least as we look at it today, given our liquidity anticipate a significant use of our capital to buy back stock. But we have to obviously want to be opportunistic to the extent that there is a dislocation in the marketplace. Dave?

David J. LaRue – President and CEO: I would add that you asked a question from a priority standpoint. Again balance sheet and deleveraging is number one. The other two whether it’s the stock buyback or dividend is a way to return capital to our investors and at the appropriate time in that – in our execution of our strategy and based upon the portfolio generating substantially more recurring cash flow because of that deleveraging. Those other opportunities for investment to return capital to stockholders, does come into the discussion. But that as Bob indicated would be after we have continued to focus on that first priority.

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Sheila McGrath – Evercore Partners: Last quick question. The next line item just for modeling purposes and I know you don’t give guidance, but it was a bug swing in the quarter. I am just wondering, how should we think about that into 2013?

David J. LaRue – President and CEO: Yes. I think the quarter was just a recognition and true up of capital that had been returned based upon prior losses that we incurred during the development of Barclays Center. As I think we stated or you could recall, we had an obligation to fund operating losses above $60 million until we had opened the Barclays Center. We did that and fulfilled that obligation and then after the arena opened and the true-up occurred, that recognition of capital in this quarter resulted in that change. As we look forward, again, we I think effectively owned – we and our original – the original investor group owned 20% of the (theme) and as you go forward, it would be no more than that 20% that we would fund on future losses. So, again, you won’t have that, I think, volatility of us being 100% and then recovering going back.

Openings Momentum

Samit Parikh – ISI: Thanks for taking my questions. I wanted to ask you a little bit more on Ridge Hill. I know you spoke shortly about it in your comments. But with Legoland opening yesterday, and I guess the UNIQLO on the way, can you just talk about what you have out there or just give us the sense of the momentum on what you have out there at retailers in terms of LOIs and since you re-casted this new loan on the asset, is it sort of more lenient in any way in terms of your ability to sign leases that may be more favorable rents for the retailers just to get sort of leasing and NOI moving in the right direction on this asset?

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David J. LaRue – President and CEO: Let me address the first part of that which is momentum, and again, we realized and we stated before that we have been making great progress in terms of opening the tenants and the deals that we had signed and had committed over the time to that same time singing and executing new leases was falling behind our expectations. With the opening — the continued opening of quality tenants going from Lord & Taylor last year and Apple last year and Brooks Brothers this week and Legoland this week and with UNIQLO opening in mid-April is our current projection or anticipated opening. We think we have a plan and positive momentum to continue to build on. As you know we don’t make aware everybody what LOIs we have out there, but based upon continued increase in visitors for the Center and traffic for the Center. Again, Legoland alone is projecting over 350,000 visitors a year that come to the shopping center. We think we’ve made it past that inflection point and have with regard to the bank trying to stabilize the property. We’re looking to stabilize the property over the next two years, so that’ll occur in 2015. Our bank line does not have I guess restrictions in it in terms of what flexibility we have to do deals with tenants. What we have been able to do with the recasting this pro forma, adding the additional tenant allowance that I mentioned during my comments is I think set in motion a plan and with available capital to allow the leasing team to execute on that strategy and again prove out that return that I mentioned…

Samit Parikh – ISI: So, you said now you’re expecting less than 5. Is there more of a specific you can give us? Are you thinking like 4 or lower than 4, somewhere between 4 and 5 now under the yield stabilization?

David J. LaRue – President and CEO: Again, I didn’t say sub-4. So, again, you’re in that right range when I say sub-5.

Samit Parikh – ISI: Then moving on, I guess, to call it – you got some important approvals I think recently, one at Cambridge. I believe you received an important approval to move ahead with building a new building for Millennium I guess on 300 Mass Ave and you’re also moving ahead, I believe, with sort of your redevelopment plan. I know it’s pretty sizable at Boston. Just wondering if you could give us any sort of comments on and details on timing and what you’re thinking about planning there?

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David J. LaRue – President and CEO: Yeah, thank you for the question. The deal 300 Mass Ave at our University Park project did receive approvals. We are 100% leased in that building with Millennium which is our current – I think our second largest tenant overall in our office portfolio, but they are going to take the building which is approximately 250,000 feet. We anticipate that that will get under construction by later summer or early fall of this coming year and again, we are very excited about being able to serve the tenants’ needs while we add to our own real estate portfolio in that very strong market. Ballston, we have been looking at that market. If any of you have seen the property, it really sits in a great submarket in the Washington D.C. area. We’ve owned the property for quite some time and we are looking at a redevelopment that enhances the retail while it allows for the addition of either residential units or other needs that – it could be in the market, it could be a hotel, it could be et cetera. It could be additional office if we find a tenant. So, the redevelopment plan, because of the dynamic of that market, is flexible, but with the overall plan, we see enhanced value opportunity, specifically in the retail, by making it more attractive, and I think it match the market demands better than it does now.

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Robert G. O’Brien – EVP and CFO: Dave, let me just comment on MIT, just so over there everybody is clear. We will do that development in joint venture with MIT as we did the balance of the park. They own part of the land on which we’re going to build. But we will be a 50-50 partner with MIT in that transaction; similar to the way we were originally in MIT. HCN is not part of this transaction, at least not initially. We may explore that once the building is open. I just want to make sure people are clear about our ownership interest there.

Samit Parikh – ISI: On Barclays Center, it looks like you had a pretty good pick-up in NOI there. It seems like momentum is really picking up the Center, you’re signing a lot of new events. Are you still thinking 2016 stabilization – do you think it could be earlier and do you have any sense of what you’re expecting in terms of annual NOI for ’13 out of this Center?

David J. LaRue – President and CEO: Yes, we’re still anticipating again 2015-2016 stabilization. That will be the – and I think ’15-’16; that’s the hockey season where the Islanders finally move into the Center. We have projected that $70 million stabilized NOI number to occur once the Islanders are in and we have the benefit of that additional acre at the property. In terms of ramping up between now and then, without giving you a specific number, I think 82% of the contractually obligated rent being signed allows us to have substantial increase in our revenues over the course of this 2013 operating year, and move towards that stabilized projection. So, without giving you the exact number, we are on track; I would tell you with moving towards that stabilized $70 million NOI.

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Samit Parikh – ISI: And then last question, for Bob, sir, what are you seeing from your lenders on refis on the sort of fixed rate debt that’s maturing at 5.9% this year? What are you getting back in terms of terms?

Robert G. O’Brien – EVP and CFO: Yeah, it’s a pretty robust market as I’m sure most of the participants on the call are aware of. Lenders are lending. Certainly, the stuff is coming up in our portfolio was all stabilized, well leased. As you referenced, we highlight just under 6% interest rate on $700 million, almost $800 million of stuff that mature in this year. Interest rates are 4% or below give or take and pretty generous terms and pretty robust competition out there. So, we feel, there is a real opportunity this year to accelerate those refinancings, work with our lenders to lower our overall interest rate and obviously interest expense, improving our debt metrics further. It’s clearly an attractive financing environment.

Samit Parikh – ISI: Do you think you can get terms like what we’ve seen from some of the REITs who are trading down from mid-5 to low-4s or is it not going to be that aggressive?

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Robert G. O’Brien – EVP and CFO: Well, I think it will be. We’ll have some things to announce probably by mid-year and a couple of our regional centers are coming due at the end of this year. We are already in discussions with some of the life companies who have providing financings in the past to get them to lock-in, so they don’t have competition and in order to do so they are going to be pretty aggressive. So, I think it will range from sub-4 to mid-4s, but probably an average theme is 4 to 4 in a quarter range and most of our stabilized property this year, so again it’s a fairly nice pickup.

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