Edited Transcript of Forest City Enterprises Inc earnings conference call or presentation 4-Nov-15 4:00pm GMT

Thomson Reuters StreetEvents

Q3 2015 Forest City Enterprises Inc Earnings Call

Cleveland Nov 17, 2016 (Thomson StreetEvents) -- Edited Transcript of Forest City Enterprises Inc earnings conference call or presentation Wednesday, November 4, 2015 at 4:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David LaRue

Forest City Enterprises Inc - President & CEO

* Bob O'Brien

Forest City Enterprises Inc - CFO

================================================================================

Conference Call Participants

================================================================================

* Sheila McGrath

Evercore ISI - Analyst

* Christy McElroy

Citigroup - Analyst

* George Auerbach

Credit Suisse - Analyst

* Brad Burke

Goldman Sachs - Analyst

* Jamie Feldman

BofA Merrill Lynch - Analyst

* Michael Bilerman

Citigroup - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to the Forced City Enterprises third-quarter and year-to-date 2015 earnings conference call. The Company would like to remind you that today's remarks include forward-looking comments that are covered under the federal Safe Harbor provisions. Actual results could differ materially from those expressed or implied in such forward-looking statements due to various risks, uncertainties, and other factors.

Please refer to the risk factors outlined in Forest City's annual and quarterly reports filed with the SEC for discussions of factors that would cause results to differ. This call is being recorded and a replay will be available beginning at 1:00 PM Eastern time today. Both the telephone replay and the webcast will be available until December 4, 2015, 11:59 PM Eastern time.

The company would like to remind listeners that it will be using non-GAAP terminology, such as operating FFO; FFO net operating income; comparable property net operating income, or comp NOI; and pro-rata share in its discussions today. Please refer to Forest City's quarterly report filed with the SEC and supplemental package, which are posted on the Company's website at www.ForestCity.net.

For an explanation of these terms and why the Company uses them, as well as reconciliations of their comparable financial measures in accordance with Generally Accepted Accounting Principles.

(Operator Instructions)

I would now like to turn the call over to Forest City's President and CEO, David LaRue. Please go ahead, Mr. LaRue.

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [2]

--------------------------------------------------------------------------------

Thank you, operator, and good morning, everyone. With me is Bob O'Brien, our Chief Financial Officer. As you saw in our earnings release, we continue to execute on strategy, as reflected by both solid results from our portfolio and transactions that will raise significant equity, contribute to greater focus and further debt reduction as we prepare for REIT conversion.

Operating FFO per share was up 24% for the quarter and 19% year-to-date compared to the same period last year. The biggest drivers of those gains were increased NOI from the mature portfolio, increased operating FFO from new properties and new openings and acquisitions, and lower interest expense. Here again, each of those drivers is very much in line with the continued execution our strategies.

Comp NOI and occupancies were up across all major asset classes. In our regional malls, we're seeing positive impact of the strong same-space leasing spreads we've been reporting as a result of our renovation, expansion, and remerchandising programs. In the third quarter, those spreads were up 26% on a rolling 12-month basis, the sixth consecutive quarter with spreads above 20% in our malls.

Office results reflect ongoing strength in our life science portfolio, including the lease-up 88 Sidney at University Park at MIT, which we reported last quarter, as well as strong demanding in key markets, particularly Brooklyn. Apartments continue to post positive gains, with third-quarter results reflecting increased competition as new supply comes in line in a number of our sub markets. While that new supply is being absorbed, we expected more modest results in the near- to mid-term, with somewhat lower NOI growth than our averages over the past couple of years. Longer term, we believe our properties are located in some of the strongest markets in the country with good demographics and solid long-term growth outlooks. Bob will share more details on our results later in the call.

I'll turn now to the transactions we announced with our earnings. We expect these and others still in the works will continue to focus our business and generate capital to drive continued progress towards our deleveraging goals in line with the strategy we shared with investors back in May.

First, at Westchester's Ridge Hill regional mall in Yonkers, New York, we are commencing site work to bring the home improvement retailer, Lowe's, to the center on a 5-acre parcel at the southern end of the project. We expect to have a signed lease in the near future. We believe that together with other recent new tenants, the addition of Lowe's puts Ridge on a solid path to stabilization.

With that milestone, we have reached an agreement QIC, under which we expect to expand our existing regional mall joint ventures to include Ridge Hill in the fourth quarter. In addition, we plan to add the Shops at Wiregrass near Tampa and Ballston Commons in Arlington, Virginia to our QIC joint ventures in the first half of 2016. Our relationship with QIC has been a great success to date and we're seeing positive impact on our retail results as we invest together to further improve the centers in the portfolio.

Bringing these three additional centers into the QIC joint venture portfolio is expected to generate net proceeds with approximately $150 million. As a result of the agreements that include Ridge Hill and our QIC joint venture, we recognized a $372.6 million non-cash impairment of that asset during this quarter. The impairment reflects the challenges the center has faced, including opening [into a piece of] the Great Recession. Importantly though, Ridge Hill now has considerable positive momentum, is achieving sales per square foot well above of our regional mall average, and fits into the quality mall portfolio we own with QIC.

We also now, after receiving multiple offers from interested parties and conducting a competitive bidding process, we have negotiated an agreement in principal to sell our military housing business to the Hunt Companies, a significant player in the military housing space. We expect to execute a purchase agreement in the near future and are targeting a closing, subject to appropriate consents and closing conditions by year-end. Expected proceeds from the disposition of this business is approximately $200 million.

In addition, in Brooklyn, we have executed purchase agreements with the Rabsky Group for the sale of 625 Fulton Street, a development site adjacent to our DKLB BKLN apartment community. We expect the sale of this property, which is unencumbered, to generate gross proceeds of approximately $158 million. That pricing represents roughly $255 per square foot based upon current zoning.

In total, these transactions, the three new QIC joint ventures, the disposition of the military housing business, and 625 Fulton, are expected to result in total net proceeds of approximately $500 million, in line with the strategies we presented to investors in May. We are pleased that we have identified and are working to close opportunities representing a significant portion of the equity needed for our transformation. We remain fully focused on pursuing the remaining non-core dispositions. We will provide additional updates on each of these transactions as they close. Of course, there can be no assurance that we will be able to close all or any of these ongoing transactions mentioned on this call or in our earnings release. Nonetheless, we remain confident in our ability to continue to execute our strategies, to focus our business, further delever, and activate growth opportunities with our strategic partners.

There were two other impairments in the quarter that I should comment on. The first of our Illinois Science and Technology Park in Skokie, Illinois, where we recorded an impairments of $26.2 million, or $16.1 million net of tax. The other impairment, which impacted FFO results, was on land in downtown Las Vegas, where we recognized impairment of $16.3 million. We are actively marketing both of these assets and have revised our valuation assumptions based upon negotiations with prospective buyers. Also in our earnings, we noted that after the end of the quarter, we closed financing on the redevelopment of Nassau's Veteran Memorial Coliseum and brought Onexim Sports and Entertainment into that partnership as an 85% majority partner.

Before I turn the call over to Bob, I just want to thank shareholders for the support they showed by approving all proposals put forth for the vote related to our planned REIT conversion at the special shareholder meeting held on October 20. With that, I'll turn it over to Bob.

--------------------------------------------------------------------------------

Bob O'Brien, Forest City Enterprises Inc - CFO [3]

--------------------------------------------------------------------------------

Thanks, Steve. Good morning, everybody.

I'm going to begin this morning by walking through our third-quarter operating FFO bridge, which can be found on page 43 of the supplemental package. The bridge begins on the left-hand side with our third-quarter 2014 operating FFO of $61.6 million. Moving to the right, our OFFO results for this year's third quarter were positively impacted by increased operating FFO from new property openings and acquisitions of $10.4 million, with much of that gain coming from our acquisition in June of our former partner's interest in University Park at MIT.

Next is decrease expense of $9.9 million, including both corporate- and property-level interest; increased NOI from the mature portfolio of $5.3 million; increased FFO from a variety of other sources of $5.2 million; increased capitalized interest of $3.7 million, as we have activated new development projects; increased OFFO from land sales at Stapleton of $1.1 million; and increased OFFO from military housing of $1 million.

These positives were partially offset by lower OFFO from property sold of $1.5 million, resulting in third-quarter operating FFO of $96.7 million, or $0.36 per share, a 24% increase over OFFO per share in the third quarter last year. Overall, as Dave pointed out, it was another solid quarter and reflects the positive impact of our continuing execution of our strategies.

Our team is continuing to put forth the extraordinary efforts needed to achieve our goal of REIT conversion as of the beginning of the new year. As Dave indicated, there are a number of pending and potential joint ventures and sales transaction that we are targeting to close by year-end. Each of these transactions will have a meaningful impact on our taxable income or loss for the year and will have a material effect on our cumulative earnings and profit calculation as of 12/31/15.

The military housing and 625 Fulton sales will generate significant taxable gains, while the Ridge Hill joint venture when closed will result in a taxable loss. We are working diligently to minimize the tax and E&P impact these transactions have on the Company. You'll note in our filings, we changed the assumptions about the range of any potential E&P distributions to less than $75 million, if any.

Given the volume of transactions and the potential for the timing and the closing of these transactions to shift between 2015 and 2016, we would expect to make the required E&P distribution, should there be one, sometime in early 2016. You will also note in our construction pipeline in the supplemental package, you'll see cost increases of approximately $30 million for B2 in Brooklyn.

These increases reflect a more complete assessment of construction conditions in the field, including the degree of completion of units already at the building site and those remaining in the factory. We also experienced greater delays than anticipated and costs related to rehiring or replacing talent that was let go when our former partners separated from the project. We have made significant progress in the factory and at the site and our team is very focused on completing this project.

As we indicated in our filings, we are finalizing the negotiation of a new line of credit for the Company. Terms of the new line will better align with our new structure as a REIT and reflect the significant progress we have made thus far improving our balance sheet and our risk profile.

One last thing, I certainly hope our investors recognize, as I do, that there is much to be done between now and the end of the year. I know that our teams are focused on our near-term objective and the good news is that our goals are in sight and achievable. I want to acknowledge their efforts and thank all our of stakeholders for their support.

Let me turn it back to you, Dave.

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [4]

--------------------------------------------------------------------------------

Thanks, Bob. Our press release and filings contain information on our projects under construction. I will take the time now to talk about the specific projects, but we would be happy to address any questions during Q&A. In September, we announced that we would move to a new organizational structure to better align with our strategies, enhance efficiency, and help us achieve our targeted margin improvement.

Our teams are nearing completion of the planning and design for the new organization, with execution in 2016 and a steady-state goal in 2017. The new structure will be a key driver in meeting and exceeding our targeted annual cost savings and margin improvement we outlined back in May. In summary, our third-quarter and year-to-date results showed solid momentum in our portfolio.

We continue to execute on strategy, including growth from core product and stronger the markets, improving our balance sheet, debt metrics, and activating new developments. The transactions we have announced will help accelerate our transformation, including significant additional debt reduction. With shareholder approval of the proposals related to our conversion to REIT status, we have passed another milestone in our journey as a Company and are confident in our outlook and ability to deliver value for all stakeholders.

Before we go to your questions, I'd like to say special thank you to our associates and advisors. Between REIT conversion and our organizational structural changes, to say nothing of the day-to-day work of running a successful business, it's hard to overstate the efforts that our teams, and in particular, our legal, tax, IT, finance, accounting, and operating teams, have put forth and continue to put forth to make sure our transformation is a reality. That effort is deeply appreciated and I thank all of our associates for the dedication and hard work.

With that, let's go your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions)

Sheila McGrath, Evercore ISI.

--------------------------------------------------------------------------------

Sheila McGrath, Evercore ISI - Analyst [2]

--------------------------------------------------------------------------------

Good morning. Bob or Dave, could you tell us approximately, if you sum up all these dispositions with a $500 million net proceeds and also the debt that might go to your partners on the JV, where this gets to on a net debt-to-EBITDA basis?

--------------------------------------------------------------------------------

Bob O'Brien, Forest City Enterprises Inc - CFO [3]

--------------------------------------------------------------------------------

Sheila, I'll take that. Good question. We said at the end of the -- or last quarter, at about 10.5. If you annualize that for the QIC acquisition, it's really about 10.2. We think that the transactions we announced together with using the proceeds to pay down debt, absent any other changes, will reduce that back by a 0.5 turn, so just high 9s.

--------------------------------------------------------------------------------

Sheila McGrath, Evercore ISI - Analyst [4]

--------------------------------------------------------------------------------

High 9s. Okay. Great. And then on the impairment on Ridge Hill. In your explanation of it, this is helping to shelter gains and minimize the E&P distribution. Is that accurate? Is that how the E&P is going lower?

--------------------------------------------------------------------------------

Bob O'Brien, Forest City Enterprises Inc - CFO [5]

--------------------------------------------------------------------------------

Short answer to that is yes. The impairment was a results of our decision to enter into the joint venture with QIC, when we changed the hold period and knew we were going to transact or increased the probability we would transact on that, that's what triggered the impairment for GAAP purposes.

The tax loss will be realized, and there is one here, when we close. We're obviously pushing to get that closed this year. It's substantial, similar in amount to the impairment we took. Obviously that would reduce our cumulative earnings and profits, as well, so if we can successfully close that this year, that will dramatically lower on potentially -- E&P purge -- potentially to [zero].

--------------------------------------------------------------------------------

Sheila McGrath, Evercore ISI - Analyst [6]

--------------------------------------------------------------------------------

Okay. One last question. Just on -- everyone was probably pleasantly surprised on the value of the residential parcel, as well as military housing, but there was no real update on the Nets and the arena, but in the Q, the forbearance date changed. So I wonder if you could just explain what that date means, how much that is, and where you are in the process of those discussions?

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [7]

--------------------------------------------------------------------------------

Sheila, thank you for the question. This is Dave. Again, with all of our non-core asset, and again we've talk again about this particular asset being a core asset but not for our Company because it's the operation of the arena and an NBA sports team. We continued to make progress and have discussions. I wouldn't look too much into the dates that are and there.

We continue to advance discussions on the Nets and the arena, along with other assets. As I said during my comments, we're going to remain focused on transacting those because we understand the importance of the transactions on the simplification of our business and our story, the capital that can be raised, and just getting to where we want to end up with that portfolio that is going to be the main basis of value, the value proposition that we look forward to.

--------------------------------------------------------------------------------

Sheila McGrath, Evercore ISI - Analyst [8]

--------------------------------------------------------------------------------

Okay. Great. Thank you.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Christy McElroy, Citi.

--------------------------------------------------------------------------------

Christy McElroy, Citigroup - Analyst [10]

--------------------------------------------------------------------------------

Hi. Good morning. Thanks. Dave, just following up on the recently announced organizational changes now that they have been detailed. Can you update us on your estimate for cost savings. Previously it was a range of $35 million to $45 million? Can you also provide some additional details around the level of G&A savings versus expected operating margin improvement there?

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [11]

--------------------------------------------------------------------------------

Hi, Christy. Thanks for the question. We are comfortable that we are -- again, we don't have any final specific targets, that we are in the range, still more towards the mid to upper part of that range. As we are looking at the plans come together now, the breakdown between what G&A and what is going to pass through the allocation system to the properties has not yet been finalized.

So we're hoping by our next quarterly call, after we have had that budget complete, that we see the impact of the savings roll through our model, so to speak, and different partnerships. We will be able to give you more insight into how that broke down between G&A and property NOI enhancement.

--------------------------------------------------------------------------------

Christy McElroy, Citigroup - Analyst [12]

--------------------------------------------------------------------------------

Okay. With regard to the Ridge Hill contribution in Q4 since it's the most immediate, as we think about it from a modeling standpoint, how much retail NOI will you lose in the sale? In thinking about it in the context of your stabilized NOI estimate of $33 million, what's the time frame for reaching that stabilized NOI now that you have visibility on the Lowe's deal?

--------------------------------------------------------------------------------

Bob O'Brien, Forest City Enterprises Inc - CFO [13]

--------------------------------------------------------------------------------

Christy, it's Bob. With respect to Ridge Hill's impact in the fourth quarter, I would expect that, that would close -- the joint venture -- if we can get it closed this year, we'll close late this year, so we will have a modest if any impact really on the current run rate of NOI at the center. Lowe's, as Dave indicated, is coming, but the lease is not yet signed; that will happen sometime, presumably in 2016 or early 2017, so we're on a glide path to get to that $33 million of NOI and that's expect to stabilize in 2017.

--------------------------------------------------------------------------------

Christy McElroy, Citigroup - Analyst [14]

--------------------------------------------------------------------------------

So then what will be the impact on Q1 then?

--------------------------------------------------------------------------------

Bob O'Brien, Forest City Enterprises Inc - CFO [15]

--------------------------------------------------------------------------------

Well you can expect that QIC will be in. The goal is to get them in by the first quarter, so as I indicated, we're trying to get that closed this year, so they would be in for the full first quarter. So you can look at our quarterly run rate. That should improve as occupancy continues to improve, but they will be taking roughly one-half of that.

--------------------------------------------------------------------------------

Christy McElroy, Citigroup - Analyst [16]

--------------------------------------------------------------------------------

Okay. You've said in the past that with the REIT conversion, you would be willing to start providing possibly FFO and other guidance. Would you expect to do that for 2016? Can you update us on that?

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [17]

--------------------------------------------------------------------------------

That is something that we've talked about. We've considered, as you've noted in your own comments about the quarter, we have some choppier results because of the transactions. What we're evaluating is, as we look forward, how can we get to a steady-state operating number.

As these transactions close, as we make progress on some of these still major transactions that we haven't announced that we are working on, it will give us a better idea when we can get to providing guidance regarding operating FFO, or FFO, et cetera, in line with other peers do in the marketplace. But during this transformation, and again, as I said, it's going to go through 2016 until we get to a steady-state, at the right point, we will be able to give with confidence those numbers.

--------------------------------------------------------------------------------

Christy McElroy, Citigroup - Analyst [18]

--------------------------------------------------------------------------------

Right. Especially as you're moving through these transactions, some guidance on the movement in FFO would be extremely helpful. And then just lastly for me, have you finalized dividend policy? What are you expecting now that we're getting closer to 2016?

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [19]

--------------------------------------------------------------------------------

We have not -- again, that's a decision the Board makes. We're going to have a Board meeting later this month. As we discussed with a number of new investors and analysts and internally, we believe that, for Forest City Realty Trust, that the correct dividend policy will be to pay what is required per the REIT statute, which is close to our taxable income, getting that range.

Continue to use excess capital generated from the portfolio to address our other strategic initiatives, deleveraging, and other needs in the business. So we hope to have an answer to that. Again clearly by our February meeting, we will have to declare what that dividend is, but if we make a decision sooner, we will obviously announce that after the Board meeting.

--------------------------------------------------------------------------------

Christy McElroy, Citigroup - Analyst [20]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [21]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

George Auerbach, Credit Suisse.

--------------------------------------------------------------------------------

George Auerbach, Credit Suisse - Analyst [23]

--------------------------------------------------------------------------------

Thanks, good morning. On the mall sales and understanding that you had the QIC venture already set up and that they had to have a appetite to grow that venture with you. But going forward, has your appetite changed at all to sell more stabilized core asset in addition to non-core assets, or was this a one-off transaction?

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [24]

--------------------------------------------------------------------------------

George, thanks for the question. Again QIC is a series of joint ventures. It is just not one. Each one of the properties is a separate joint venture, just clarifying that it's not all in one, but similar structures in each. I don't think our appetite has changed regarding core assets.

If we look at the make-up of each one of these, the characteristics of each asset. Ridge Hill, again, we were able to get a Lowe's deal done, we were able to again make a decision on stabilization, we changed our whole period. It made sense for us to look for a partner and they were most likely, as you can tell, the logical partner for us because we believe in the long-term value of Ridge Hill and putting it in the portfolio is beneficial -- putting in into their strategic portfolio is beneficial to us and them.

Ballston, we've talked about the complete renovation and repurposing opportunities at Ballston. Again, they are investing in a partial operating assets, but more investing in the future. Then just so from a risk standpoint and having again a strong capital partner that understands the real estate business during a redevelopment is beneficial to us as well, so we can begin to appropriately allocating capital, our share of capital spending redevelopment, at the same time focusing capital on other investment opportunities.

And then with regard to Wiregrass, as we were looking at the portfolio, it was something we have been talking about during the last [string] and we just couldn't get to the value equations at that point and the property has improved over time and we were able to get to an agreed-upon value between us. So each had its own different characteristic with regard to the regional mall portfolio, and again, that should be the partnership makes sense for us.

With regard to any other assets, any other core asset, as we said many times, our focus is on the non-core. We realize there is significant value in core asset sales today, but we believe long-term the type of properties we want to own and operate and grow value from, some of the core properties would be non-replaceable for us. So we want to maintain a hold on our great assets and again focus on the assets that we've stated and are out there in the marketplace, trying to market.

--------------------------------------------------------------------------------

George Auerbach, Credit Suisse - Analyst [25]

--------------------------------------------------------------------------------

That's helpful, especially on the Ballston comments. On that theme, as you think about South Bay Galleria redevelopment in the future, could that asset also be a candidate for a QIC venture, just as you look to bring in capital partner?

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [26]

--------------------------------------------------------------------------------

That's already in the venture. That was put in back in September of 2013, I believe, was when we closed. So that's already in. Again, they are fully committed to the repurposing and redevelopment of that, and again [that will fit] beyond their knowledge of redevelopment of properties, their partnership from a financial standpoint is also beneficial.

--------------------------------------------------------------------------------

George Auerbach, Credit Suisse - Analyst [27]

--------------------------------------------------------------------------------

Okay. Last one for me. The NOI margins have already started to tick higher this year, up about 300 basis points year-over-year. Are there any expense savings reflected in those numbers or is the margin improvement simply a reflection of the same-store NOI growth and the mix of assets?

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [28]

--------------------------------------------------------------------------------

So George, if I understand the question you're asking, if there is some savings already showing up in the operating margins?

--------------------------------------------------------------------------------

George Auerbach, Credit Suisse - Analyst [29]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [30]

--------------------------------------------------------------------------------

Yes. What we have done is we've started again this process with our advisors and our internal review of our structure and our costs and things that we are able to execute on without impacting -- because we don't have that final plan done -- we have taken action on.

Some of that margin improvement is showing up this year, but again, as we -- as I stated earlier, once we finalize that plan and start executing through 2016, that steady-state, and again all of that operating margin expansion will show up in a steady-state more in 2017, but there is some of that happening this year already.

--------------------------------------------------------------------------------

George Auerbach, Credit Suisse - Analyst [31]

--------------------------------------------------------------------------------

That's great. Thank you.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Brad Burke, Goldman Sachs.

--------------------------------------------------------------------------------

Brad Burke, Goldman Sachs - Analyst [33]

--------------------------------------------------------------------------------

Hey, good morning, guys. Follow-up to Sheila's question, Bob. Just thinking about your question on debt-to-EBITDA. I think you said that you're going to get the high 9s post the asset sales, but that also assumes that you've fully redeploying net proceeds into debt repayment, and as I look at your development pipeline, you have just under $550 million remaining to fund there.

So a two-part question. First, how you're feeling about getting the 7, 8 times leverage level that you laid out previously. Then second, how you're thinking about funding that development pipeline, if the base case assumption is that you'll use sales proceeds for deleveraging?

--------------------------------------------------------------------------------

Bob O'Brien, Forest City Enterprises Inc - CFO [34]

--------------------------------------------------------------------------------

A couple things. Obviously, our leverage bridge that we shared with investors back in May had a number of components. I know asset sales was a significant, but certainly not the only component there. So my response to Sheila -- I should have said was mid to upper 9s, based on the transactions announced is really what I wanted to -- I should have emphasize, and again, you are right, assuming we use 100% of those proceeds to reduce leverage.

You're also right that we have obligations related to that construction pipeline, a significant portion of which -- of the remaining funding is debt, but there is probably $100 million to $150 million of equity obligations that we have to fund our share in that pipeline. That identified it from both cash flow from operations, as well as incremental asset sales.

As Dave indicated in his prepared remarks, and as well as afterwards, there's more to come. We're focused on executing the strategies that we laid out. That includes some additional non-core asset sales. We've given ourselves the time and laid out a timeline under which we think we can get that done.

The announcement we were making with our release yesterday and the discussion today goes a long way to getting there, but there's still a lot of work to be done. So it's really going to be the debt reduction and the funding of that equity. The majority of the funding of the equity requirements in the construction pipeline are coming from these asset sales, but a portion is coming from the ongoing cash flow from the business, as well.

--------------------------------------------------------------------------------

Brad Burke, Goldman Sachs - Analyst [35]

--------------------------------------------------------------------------------

So if I think about the development -- your comments that only about $150 million of equity and the remainder would debt, that works out to the better part of $400 million of debt that you'd be taking on to fund those developments. Inclusive of that increase in debt, you still feel like the glide path that you laid out previously is reasonable over the timeline that you had indicated?

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [36]

--------------------------------------------------------------------------------

Yes because obviously over -- particularly in 2016 and into 2017, we'll be opening a number of these and those will be additive to our NOI. You see, particularly on the commercial side, the pre-leasing on the office stuff. That will add immediately. Obviously, residential will ramp up over time.

So again the components to get to that 7 to 8 times are numerous and includes the conversion of our converts. There is additional debt reduction from non-core asset sales that will come, there's a margin improvement that we've been talking about, and we're focused on all those. But the bottom line is yes, we are focused on getting to that 7 to 8 times and then confident we are going to get there within the time frame we articulated.

--------------------------------------------------------------------------------

Brad Burke, Goldman Sachs - Analyst [37]

--------------------------------------------------------------------------------

Okay. Then I realize that you have a lot of moving parts, but I was hoping for some additional color on what drove the big increase in adjusted EBITDA from the second quarter. You obviously had the full-quarter contribution from MIT. I estimate that's maybe $7 million, $8 million of sequential improvement. But otherwise arena, senior housing, military housing, land development, it looks like were all down sequentially, so I was just trying to understand what would be driving such a big increase sequentially?

--------------------------------------------------------------------------------

Bob O'Brien, Forest City Enterprises Inc - CFO [38]

--------------------------------------------------------------------------------

Yes actually land was up. I'll have to check that. The big difference quarter-over-quarter was there was a fairly sizable project right off last quarter that didn't recur this quarter. That's one of the bigger driver for the two. And MIT is a significant component as you identify.

--------------------------------------------------------------------------------

Brad Burke, Goldman Sachs - Analyst [39]

--------------------------------------------------------------------------------

And that project right off was captured in 2Q adjusted EBITDA?

--------------------------------------------------------------------------------

Bob O'Brien, Forest City Enterprises Inc - CFO [40]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Brad Burke, Goldman Sachs - Analyst [41]

--------------------------------------------------------------------------------

Okay. And then the last one for me. I appreciate the color on B2, but since you're doing so much on development, I was just hoping for your comments on how you're thinking about construction cost escalation risk and what you're seeing on the ground in your markets?

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [42]

--------------------------------------------------------------------------------

Brad, thanks for the question. That is a real occurrence that is happening. We see it each time we go to the market. In each of our core markets, that there is greater demand for the service that is being offered, so therefore, there is an increase in cost occurrence. The strength of the markets that were building in so far has been able to absorb that cost.

Again, we've talked about in the past, the nature of our development projects based upon where we're at from a cost perspective when we start, when we have a final contract in place and final [drawings]. In measuring the potential income, we make the decision to go forward, and if that doesn't balance, because these projects aren't the sizable projects that we had when we went in, they are not $800 million or $900 million projects. They're much more compact.

We have equity partners and development partners taking that risk with us and disbursed across markets, we think that from a risk standpoint, we have that balance, and at the same time, we see that cost escalating faster than market rents would allow us to get a return, we can make the choice not to proceed. So it's just a different make-up of the development portfolio that helps us deal with that cost increase, which again, as you noted, we are seeing.

--------------------------------------------------------------------------------

Brad Burke, Goldman Sachs - Analyst [43]

--------------------------------------------------------------------------------

Are you able to give a broad strokes percentage increase year-over-year, what you're seeing on the ground across the portfolio on construction costs, maybe eliminating some of the idiosyncratic that -- happening at B2?

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [44]

--------------------------------------------------------------------------------

I don't, off the top of my head, Brad, have that number because New York is different than Washington, just a fact based upon labor conditions. Denver is different than San Francisco and Los Angeles. I don't have it off the top of my head and I wouldn't want to guess as we're on the call.

--------------------------------------------------------------------------------

Brad Burke, Goldman Sachs - Analyst [45]

--------------------------------------------------------------------------------

No, that is fair enough. Thank you very much.

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [46]

--------------------------------------------------------------------------------

All right. Thanks, Brad.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

Jamie Feldman, Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Jamie Feldman, BofA Merrill Lynch - Analyst [48]

--------------------------------------------------------------------------------

Thank you and good morning. You had commented on the outset of the call that you are seeing more challenging conditions in Brooklyn on the residential side. Can you just provide more color on what you're seeing on the ground?

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [49]

--------------------------------------------------------------------------------

Yes, what I was talking about, not so much Brooklyn, but I was talking about new supply coming into some of our submarkets is more focused, Jamie, on just the East Coast, where we are developing product in New York and we just did -- we're opening DC, we opened 1212 and have another building under development that will be opening soon.

As we look across that East Coast market, in our submarkets particular, as I said, we see buildings opening, and even against ourselves at The Yards in Washington, for example, impacting our revenue. We are pretty standard -- pretty much in line with our expense increases and we're focused on keeping those expenses under control, but new supply is coming into the market, and it has impacted that NOI to the 2.2%, and again, that mostly on that East Coast portfolio for us.

--------------------------------------------------------------------------------

Jamie Feldman, BofA Merrill Lynch - Analyst [50]

--------------------------------------------------------------------------------

Okay. And just to gauge your -- is this a change in view from last quarter? Is it materially worse than you thought it would be heading into the third quarter?

--------------------------------------------------------------------------------

Bob O'Brien, Forest City Enterprises Inc - CFO [51]

--------------------------------------------------------------------------------

No, it's pretty much in line with where we thought it was going to be. More important, rather than quarter-to-quarter, if we look at where we are year-to-date. Year-to-date, we're still well about 4%, 4.5%. The markets have been resilient and pricing has been in the landlords' favor in the markets because of demand in each of these markets where we have product.

So it was just the particulars with just the buildings opening in our sub markets that has caused this more of a down-trend. We expect that will continue in the near term, as I said, as these buildings continue to lease up, the competitors' buildings continue to lease up, but again, long-term, the strength of the markets, we think, is going to continue to rule the day and we are going to be able to take advantage of the strength in that rentable sector.

--------------------------------------------------------------------------------

Jamie Feldman, BofA Merrill Lynch - Analyst [52]

--------------------------------------------------------------------------------

Okay, and does this change or appetite for starts or maybe push out stabilization on any of your assets that are in the pipeline?

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [53]

--------------------------------------------------------------------------------

Yes we don't see pushing out stabilization at this point. Again, we'll feel that when we actually start opening these buildings and leasing them more in 2016. But again, we're going to be focused on whether or not our appetite should change, and as I addressed in the previous question, the make-up of our portfolio is going to allow us to make that choice based upon current information.

And that includes a new supply into the marketplace, a new demand into the marketplace, and construction costs and how that all impacting returns. So we will remain vigilant and make sure we are careful about where we are allocating capital in that regard to that growth opportunity.

--------------------------------------------------------------------------------

Jamie Feldman, BofA Merrill Lynch - Analyst [54]

--------------------------------------------------------------------------------

Okay. And then can you just address office leasing spreads. They were pretty light in the third quarter. What should people be expecting going forward?

--------------------------------------------------------------------------------

Bob O'Brien, Forest City Enterprises Inc - CFO [55]

--------------------------------------------------------------------------------

The third quarter is more of an anomaly compared to where we've been. We're in the 4%-plus year-over-year versus relatively flat in this quarter. So it all depends what particular leases rolled that quarter, where they were at versus what we signed back up. So it's just maybe a tough quarterly comparison.

--------------------------------------------------------------------------------

Jamie Feldman, BofA Merrill Lynch - Analyst [56]

--------------------------------------------------------------------------------

Okay. Similar question. You had an occupancy dip in both retail and office (multiple speakers)?

--------------------------------------------------------------------------------

Bob O'Brien, Forest City Enterprises Inc - CFO [57]

--------------------------------------------------------------------------------

Very minor reduction. 0.4[%] and 0.6[%] or something. Again, that's more just an anomaly versus anything major. As I said, the markets where our office value sits in New York and Cambridge continued to see increases in demand, increases in tenant demand and revenue, so again where our assets are positioned in the markets are in a strong place and we will be able to capture that strength as leases come up.

--------------------------------------------------------------------------------

Jamie Feldman, BofA Merrill Lynch - Analyst [58]

--------------------------------------------------------------------------------

Okay. And then we've been hearing a lot about GSA requirements over the next several years in DC. Do you have a sense of what that might mean for your development pipeline or opportunities where you have land?

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [59]

--------------------------------------------------------------------------------

Well again, we have in Washington our Yards project entitlement for 1.9 million square-feet of office space. We believe that we are creating a superior, unique location for office users that is unlike any other one in the district, where you can have an environment that is not just office and close to Capitol Hill and convenient to Metro and public transportation, and so as GSA goes out into the marketplace, we think we're going to be able to be competitive and realize value that is tied up -- that we have there in the land and bring value to the stockholders.

Again, we will look at the deal, see if it makes sense for us to do, judge the size of it. If we have the capacity to do it ourselves, we will. And if it is too large because it end up being a sizable deal, there's -- we have a history of making sure that we balance that risk and size against what the opportunity is.

--------------------------------------------------------------------------------

Jamie Feldman, BofA Merrill Lynch - Analyst [60]

--------------------------------------------------------------------------------

Do you have an early sense of when we will start to see those commitments come out -- or the RFPs come up?

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [61]

--------------------------------------------------------------------------------

No, again, there are some requests and some deals floating around the Washington market right now. So, again, I can't say when the rest of them will come out, but there are some active GSA deals currently in the marketplace that we're aware of and we're having discussions about.

--------------------------------------------------------------------------------

Jamie Feldman, BofA Merrill Lynch - Analyst [62]

--------------------------------------------------------------------------------

Okay. And then just my last question. The Nets arena and even some of your legacy midwest assets, the market seems pretty anxious to see those get sold. Can you just give us maybe a realistic time frame of, as we head into 2016, is this something we could see earlier or is this going to really take a while?

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [63]

--------------------------------------------------------------------------------

Jamie, again, the market is anxious about everything we're doing. I hope that the announcements that we've made answer a lot of the questions and pushback we've gotten over the last number of meetings and discussions we've had with investors and analysts whether or not we were committed to making the transactions occur on selling these. This quarter clearly demonstrates that we have been focused and making progress.

So those assets that you mentioned, again, aren't in the long term. We anticipate near- to mid-term announcements, and if those aren't going to happen, we will tell you they are not going to happen and why. But at this point things that we have talked about transacting, we're having discussions on, and when they're ready to announce. We'll do that and it will be near- to mid-term, not it's just going to sit on the balance sheet until we get around to it.

--------------------------------------------------------------------------------

Jamie Feldman, BofA Merrill Lynch - Analyst [64]

--------------------------------------------------------------------------------

Okay. Thanks for the color.

--------------------------------------------------------------------------------

Operator [65]

--------------------------------------------------------------------------------

Christy McElroy, Citi.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup - Analyst [66]

--------------------------------------------------------------------------------

Hey, it's Michael Bilerman. I just had a couple of questions. Bob, thanks for the cost incurred to date on page 47 on the development pipeline.

--------------------------------------------------------------------------------

Bob O'Brien, Forest City Enterprises Inc - CFO [67]

--------------------------------------------------------------------------------

See we are listening a little. We're slow, Michael, but we're listening.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup - Analyst [68]

--------------------------------------------------------------------------------

So now all we need is construction loans by project in terms of total amount and amounts drawn, and ultimately, this will be a fight for the next few years, yields by type or by project, which would be helpful. But I wanted to thank you at least for putting these costs incurred to date in.

--------------------------------------------------------------------------------

Bob O'Brien, Forest City Enterprises Inc - CFO [69]

--------------------------------------------------------------------------------

Appreciate that. We're keeping a list, Michael.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup - Analyst [70]

--------------------------------------------------------------------------------

As we think about the QIC assets, if you were to take your NOI from page 15, you look at your mall NOI, $33.2 million in the third quarter, so an annualized about $132 million and a stabilized number of $140 million, which I assume includes the $33 million from Ridge Hill. How much current NOI is there from the three projects and how much stabilized NOI is there from the three projects?

--------------------------------------------------------------------------------

Bob O'Brien, Forest City Enterprises Inc - CFO [71]

--------------------------------------------------------------------------------

I'm not going to give you the current NOI on that, and Dave tried to articulate to one of the questions, George's question on the malls, that Ridge Hill has been in transition. We've highlighted that specifically given its size and magnitude to the Company, and the timeline for us to get there, as I said, should stabilized in 2017. The other two are in some form of transition.

Wiregrass is a little closer to stabilization, as it currently exists. There is an actual small project adding a theater and some an additional restaurant and retail at a site right adjacent to the mall that QIC will be part of, as well. So they are buying in not only to the existing center, but the opportunities that exist adjacent to that.

Then Ballston in Arlington is undergoing a pretty sizeable and significant transformation, really opening up the center to the outside, really a significant transformation of the tenancy to really reflect what it is, which is it's going to continue to be a great urban center in the middle of what has grown up to be a great downtown.

So you can -- we talked last night via email, the cap rate that QIC is paying to come into Ridge Hill is relatively straightforward and obvious, given the disclosures we've made. I'm more aggressive on the other assets because of where they are and where they sit in their life.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup - Analyst [72]

--------------------------------------------------------------------------------

We just don't know, from a current basis, what NOI we have to strip out as this venture unfolded. Arguably, all three of these assets have some issues on a current basis but eventually will stabilize to a much higher NOI. From a transaction basis, it would be really helpful to know the current NOI that these projects are generating.

Otherwise you can say where debt-to-EBITDA goes, but if we don't know -- we know the debt. There is $460 million of debt of the three projects. Gross asset value for the venture is about $765 million just imputing the $150 million gross, so we know the debt and we don't the EBITDA though, so it would be helpful to get that number?

--------------------------------------------------------------------------------

Bob O'Brien, Forest City Enterprises Inc - CFO [73]

--------------------------------------------------------------------------------

Okay. We will take it under advisement. I agree with you.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup - Analyst [74]

--------------------------------------------------------------------------------

Is there any fees -- I remember this was circled when you did the internalization with Bruce. Is there any other fees going out for Ridge Hill to him?

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [75]

--------------------------------------------------------------------------------

Any additional fees as a result this transaction? No.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup - Analyst [76]

--------------------------------------------------------------------------------

No. And then what was the changes -- if I remember correctly, you had the 4% yield on $891 million of cost, which would be about $35.6 million of NOI. It is now listed at $33 million. I don't know of the Lowe's ground lease affected that difference or was there a revision overall to the project's ultimate occupancy and rent levels that would have caused the NOI to be different from what you had previously disclosed?

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [77]

--------------------------------------------------------------------------------

Michael, it is a majority of the transaction we're doing with Lowe's, but there are other factors in there, as we look into stabilization. It is where we came to an agreement with what that stabilized number was going to be with QIC. We put it on the page, so it's across again -- more tilted toward the big deal on the 5 acres, but also the other expectations as we move forward.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup - Analyst [78]

--------------------------------------------------------------------------------

Does the $150 million of cash you're getting in, does that include any funding for Ballston or Wiregrass or any build out at Ridge Hill? Or is that truly just standalone today as the assets and then you will co-funded 51%/49% any future capital commitments?

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [79]

--------------------------------------------------------------------------------

It's the latter. We're going to -- that will be the money we get in, and going forward, we will be JV partners on our ownership interest and funding partners.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup - Analyst [80]

--------------------------------------------------------------------------------

Okay. Just last two. Was there any seller financing or any debt on the military housing business? So that $200 million, is a gross or is that an equity number as we think about value?

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [81]

--------------------------------------------------------------------------------

That is the equity that we will be taking on.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup - Analyst [82]

--------------------------------------------------------------------------------

And how much debt is going along with military housing?

--------------------------------------------------------------------------------

Bob O'Brien, Forest City Enterprises Inc - CFO [83]

--------------------------------------------------------------------------------

On our balance sheet about $29 million.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup - Analyst [84]

--------------------------------------------------------------------------------

$49 million?

--------------------------------------------------------------------------------

Bob O'Brien, Forest City Enterprises Inc - CFO [85]

--------------------------------------------------------------------------------

$29 million.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup - Analyst [86]

--------------------------------------------------------------------------------

$29 million. And then there was no debt on 625 Fulton, right?

--------------------------------------------------------------------------------

Bob O'Brien, Forest City Enterprises Inc - CFO [87]

--------------------------------------------------------------------------------

That's correct.

--------------------------------------------------------------------------------

Michael Bilerman, Citigroup - Analyst [88]

--------------------------------------------------------------------------------

Okay. Perfect. Thank you.

--------------------------------------------------------------------------------

Bob O'Brien, Forest City Enterprises Inc - CFO [89]

--------------------------------------------------------------------------------

Thanks, Michael.

--------------------------------------------------------------------------------

Operator [90]

--------------------------------------------------------------------------------

I would now like to turn the call back over to Mr. LaRue for closing remarks.

--------------------------------------------------------------------------------

David LaRue, Forest City Enterprises Inc - President & CEO [91]

--------------------------------------------------------------------------------

Thank you. Thank you all for your questions and your participation in the call. As we reflect on how much progress we were able to announce this quarter, I think back to the comments Bob has made during numerous investor meeting where we keep telling whoever we are meeting with that we're like the duck underwater, we're paddling furiously beneath the water while we're calm on top.

This quarter is a reflection of us staying focused on the strategy and where we need to be and being able to announce things when we are able to and not beforehand. So it's important. We understand the importance of timing with regard to that, and again, our objective is to achieve our goals as soon as possible, but in a realistic timeframe.

At the same time, besides that timing being important, it's also important that we continue to maximize value for the shareholders during this entire transformation process. So we're focused on all of that combined, again from the operations of the business to the transformation of the business.

Thank you all for your support and your interest in Forest City and we will talk to you in the near future.

--------------------------------------------------------------------------------

Operator [92]

--------------------------------------------------------------------------------

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you very much and have a very good day.