Forest City Enterprises Earnings Call NUGGETS: Ridge Hill, Unexplored Land Sales

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

Ridge Hill

Richard Moore – RBC Capital Markets: First question from me is, on Ridge Hill you guys delivered that essentially. What would say the yield on Ridge Hill is currently I mean?

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

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

Robert G. O’Brien – EVP and CFO: The original construction (indiscernible) loan matured in early August. We got a short-term extension from the bank group as we work out a longer term extension with them. So the short-term extension was really to give us the time to allow, there’s I think 12 or 13 lenders in the bank group on this transaction to both understand and get through their credit committees on a longer term extension. So we are basically in agreement with the agent and we have to get that through the balance of the banks and while it’s not done obviously we can’t give complete assurance that it’s going to get done. We remain confident that the bank group is supportive. That will require as we talked about on prior calls lowering of their commitments and their obligation and commitment of additional capital from Forest City, all of which is in our plans, so well within our liquidity requirements as we continue to finalize and stabilize Ridge Hill.

Richard Moore – RBC Capital Markets: No thoughts here Bob on the rough sides of that loan when you guys are done?

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

Richard Moore – RBC Capital Markets: On Spruce, sort of the same think I realized, you’re not disclosing the yield, but why that one in particular the interest in JVing that particular assets and how is it performing versus your yield expectations? You don’t have to disclose your yield obviously, but I mean how is that versus, what you had anticipated?

David J. LaRue – President and CEO: I will deal with some of this and then we can let Matt chime as well. We looked at 8 Spruce – again, as I mentioned, it’s an iconic asset, but we also look at the fact that, as we mentioned, we are hitting pro forma from a lease up standpoint. When you look at values being attributed to multifamily properties in markets such as New York, we believe that it was very appropriate to take advantage of the market’s interest in assets of this quality and explore an additional recapitalization and therefore, freeing up some of the equity value that we have invested in the building and allowing us to take that capital and continue to execute on our other strategies, and come out on a positive basis from an overall cost to capital standpoint. Matt, if you have any additional comments.

Matthew L. Messinger – EVP, Investment Management: I think that’s right. I think in the past we’ve been clear when we talked about the possibility of transaction here, that this is just a continued part of our strategic plans of looking at where we have capital invested, the cost of that capital, other uses for that capital and cost of capital overall for the Company. Obviously, multifamily is hot, New York continues to be an extremely, extremely, extremely strong market, and on top of those two factors this is a very, very special building and the only Frank Gehry tower in the world. So, I think that was sort of the basis of us testing the market to see if those two or three elements provided a scenario where we could perhaps redeploy the chunk of the cash in the building at an economically advantageous number.

Unexplored Land Sales

Richard Moore – RBC Capital Markets: If I could guys, on land business you are obviously making very good progress there and when you have – I realize you don’t have to mark anything to market until you reach a point where you decide to sell something, but it’s sort of a bit of a surprise that there’s another piece of land that comes into the picture that you have to take a write-down on. I mean is there more unexplored land sales (indiscernible) generate write-offs as we go forward or is that kind of done?

David J. LaRue – President and CEO: Rich, you are referring the Central Station?

Richard Moore – RBC Capital Markets: Exactly David.

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

Richard Moore – RBC Capital Markets: Then last thing if I could, the write-offs of the abandoned projects what were those in particular, things we knew about before or I guess what’s in there?

Robert G. O’Brien – EVP and CFO: Rich, I think, as we look at our development pipeline and our investment in development opportunities and we put that up against our strategy and monitor obviously the macro environment, I think we’re just being as critical as we can about what projects are going to make sense. So, in evaluating that, we decided to not continue to pursue a number of transactions that we had pursued over the last few years, that for a one reason or another, either yields or not fitting the strategy, we decided that prudent course was to let those opportunities go and just focus on the key ones in our key markets. So, that’s something we do each and every quarter and continue to scrutinize those investments to make sure that they’re both viable and fit our strategy.

Richard Moore – RBC Capital Markets: First question from me is, on Ridge Hill you guys delivered that essentially. What would say the yield on Ridge Hill is currently I mean?

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

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

Robert G. O’Brien – EVP and CFO: The original construction (indiscernible) loan matured in early August. We got a short-term extension from the bank group as we work out a longer term extension with them. So the short-term extension was really to give us the time to allow, there’s I think 12 or 13 lenders in the bank group on this transaction to both understand and get through their credit committees on a longer term extension. So we are basically in agreement with the agent and we have to get that through the balance of the banks and while it’s not done obviously we can’t give complete assurance that it’s going to get done. We remain confident that the bank group is supportive. That will require as we talked about on prior calls lowering of their commitments and their obligation and commitment of additional capital from Forest City, all of which is in our plans, so well within our liquidity requirements as we continue to finalize and stabilize Ridge Hill.

Richard Moore – RBC Capital Markets: No thoughts here Bob on the rough sides of that loan when you guys are done?

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

Richard Moore – RBC Capital Markets: On Spruce, sort of the same think I realized, you’re not disclosing the yield, but why that one in particular the interest in JVing that particular assets and how is it performing versus your yield expectations? You don’t have to disclose your yield obviously, but I mean how is that versus, what you had anticipated?

David J. LaRue – President and CEO: I will deal with some of this and then we can let Matt chime as well. We looked at 8 Spruce – again, as I mentioned, it’s an iconic asset, but we also look at the fact that, as we mentioned, we are hitting pro forma from a lease up standpoint. When you look at values being attributed to multifamily properties in markets such as New York, we believe that it was very appropriate to take advantage of the market’s interest in assets of this quality and explore an additional recapitalization and therefore, freeing up some of the equity value that we have invested in the building and allowing us to take that capital and continue to execute on our other strategies, and come out on a positive basis from an overall cost to capital standpoint. Matt, if you have any additional comments.