Forest City Enterprises Earnings Call Nuggets: Level of Activity, Residential Units

On Friday, Forest City Enterprises Inc A (NYSE:FCEA) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Level of Activity

Sheila McGrath – KBW: David, on Ridge Hill, I was just wondering if you could talk about level of activity with kind of conversations. Is that picking up at all since Lord & Taylor is opening next month?

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

Sheila McGrath – KBW: Then, on Spruce Street, you do have the most expensive units you got to lease. I am just wondering how the level of activity is on those higher-priced units and if you expect that these might take a little bit longer to lease given the price point?

David J. LaRue – President and CEO: Well, yes, I think there’s two-way stance to that. We have had significant interest in demand as I stated during the call. We’ve actually combined some units; actually make them bigger. Therefore, we have a smaller number of units – the rental area obviously stays the same. So, that came from anticipated and stated interest in having those larger units, which are obviously going to be the higher-priced units. So, we are anticipating that the demand for these units will continue. With regard to the timing, as we said in the past, we had originally pro forma’ed a two-year lease-up of this project; one, because of the size; and two, because we are actually starting to re-lease some of the spaces that we leased last March when we’d opened the building. So, we are still on schedule on track for that pro forma and anticipate continued market acceptance of the building.

Sheila McGrath – KBW: How are the rents stocking up against pro forma?

David J. LaRue – President and CEO: Again, at this point and to this point, as we’ve said, we are on pro forma. You point out the obvious risk. The higher-priced floors have yet to hit the market. I think the balance of the units we will receive are temporary certificate of occupancy late in April or May, so by time we can actually be able to occupy those during the prime leasing season, we will be able to measure that better by the next call and give you an update at that point, but I’d say at this point we are optimistic that we’ll stay on track.

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

Robert G. O’Brien – EVP and CFO: I don’t know that we are going to give it by quarter, I don’t know if they were that good Sheila, but it’s a question of demand, and we are pleased with the acceptance, certainly 8 Spruce is ahead of schedule on that two year lease-up schedule. We are hoping we can do better, but as you correctly point out, the higher lease units. Our expectation at 8 Spruce is that it’s going to stabilize in ’13, is that earlier or mid, probably I guess we would tell you mid, and hope we do better. But that’s kind of the timeline for 8 Spruce. Ridge Hill, as well as quite frankly The Arena, we expect to hit a full stabilization some time in 2014. So the first full year of stabilized income adds 2015. Again, I think we will see how momentum occurs at Ridge Hill as we get Lord and Taylor and couple of other key tenants open, in the near term here, and we have the opportunity, we had a Board meeting in New York a week ago, and had the opportunity to see The Arena, it’s a pretty amazing thing, and we are pleased with the progress on contractually obligated income, the signing there, and we think that’s going to be a solid contributor, but will stabilize in 2014.

Sheila McGrath – KBW: Last question, EBDT versus FFO. I know EBDT strips out straight lining, what are the other major buckets that you see the variation between the two?

Robert G. O’Brien – EVP and CFO: The other large item is amortization of mortgage procurement costs. We add that back and FFO does not. So from a headline number, that will reduce FFO. That’s probably the most significant thing, and then taxes have an interplay in there as well. Little late out in the schedule, end of the first quarter, kind of showing the reconciliation between the EBDT and FFO.

Residential Units

Wes Golladay – RBC Capital Markets: It looks like the residential units are tracking really good on a same-store basis, so two back-to-back quarters of roughly 12%. Can you walk us through what’s causing the strength there and where do you see that — I guess going over the next few quarters?

David J. LaRue – President and CEO: Well, clearly anything in the 11% rate, we agree with is outstanding. The interesting thing was when we took a look at the portfolio to see where the particular driver of that increase was, we were surprised to see it across every market segment. Markets, we’ve talked a lot about our core markets and where we are going to look to invest and activate new development. While, we have some legacy markets that contain, again if you looked at our disclosure and supplemental, about 25% of our total NOI. In the residential portions of those markets, the assets are performing at very high levels as well. As we look forward, I think you have to always be cautious in terms of what the dynamics are going to be. Right now, we feel just like I think most of the owners of residential multifamily properties are very bullish. Based upon the fundamentals going on in the marketplace, job creation, 3% reported GDP growth in the last quarter and continuing questions in the housing market regarding owned versus rent. Looking forward over the next quarters, we see those fundamentals on a national basis being very supportive of our portfolio and our rental strategy in each of our assets.

Wes Golladay – RBC Capital Markets: One more question. What do you guys have thought with all the strategic developments going on with the Company? What are your thoughts of going to one class of stock?

David J. LaRue – President and CEO: Well, that has been a recent discussion. At this point, Wes, we are going to continue to have the two classes of stock. We have addressed some major issues that were brought up at the same time with regard to our Board composition and structure. We, as the management of the Company are focused on getting the – making the operations perform at the highest level dealing with the strategic initiatives and objectives as I have outlined, and that particular issue is one that the stockholders is we’ll deal with them in the future. At this point, as we look at the dual classes, the A stock and the B stock, we believe that there is clear alignment between the holders of those different classes of stock with regard to the benefit and – the benefit that can be received vis-a-vis improved performance of our stock based upon the value that we create in the business.

To contact the reporter on this story: Lindsey Grossman at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com

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