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We are Forest City Realty Trust, Inc., an NYSE-listed national real estate company principally engaged in the ownership, development, management and acquisition of commercial and residential real estate throughout the United States.
Founded in 1920 and based in Cleveland, Ohio, Forest City’s diverse portfolio includes hundreds of exceptional properties located throughout the United States. We are especially active in our core markets - New York, Washington, D.C., San Francisco, Boston, Dallas, Los Angeles and Denver. These are great urban markets with strong demographics and solid growth potential.
We are active in a variety of areas:
Our Live portfolio consists of high-quality apartment communities in great locations across the country.
Our Work portfolio includes primarily build-to-suit office buildings and campuses to serve knowledge-based and life sciences tenants.
Our Shop portfolio includes regional malls across the country and urban retail centers primarily in New York.
In addition, Forest City is an industry leader in dynamic mixed-used communities and sustainable properties.
Mike: Welcome, everybody. It's 12:30 session here at NAREIT REITWeek. We're very happy to have with us Forest City Enterprise, currently a real estate operating company, a REOC, soon to be a real estate investment trust, about 60 years in the making, 95 years as an enterprise, and 55 years as a C Corp.
I'm Mike Bilerman from Citigroup. I cover the REIT sector. With me to my left is Dave LaRue, the CEO of Forest City. There's some of his colleagues in the crowd as well. The best way to go about this, is give Dave a couple of minutes just to open up about who Forest City is today and where they're going.
It is a very different C Corp and it's going to be a very different REIT from what a lot of you will look at. Part of that is driven by the fact that they're not in a single property type. This is a company that owns assets across the spectrum, regional malls, shopping centers, power centers, office buildings, life science buildings, senior housing, multi-family, military housing, owns obviously a piece of the Brooklyn nets, the Barclays arena.
It's a very vast business and company with a lot of expertise routed in development across some very strong core urban markets. Which is really the differentiating factor when you start thinking about being in multiple property types being able to concentrate those property types into some core urban markets that they Dave will talk a little bit about. Dave, I'll pass it to you.
Dave: Thank you. Thank you all for attending and Michael, thank you for taking the time to participate in this. Mike almost used my starting speech, except I wouldn't call it different, I'd say we're unique in that regard. We are as I mentioned earlier 55 years as a public company.
We have focused our investment strategy which we've been executing on over the last four years to a core urban strategy believing that in these environments there are opportunities with multiple products whether it's office retail or apartments to support the demand that's generated in these urban environments.
Our belief and I think you should look at what's happening in America. Cities are going to continue to garner a greater share, proportional share of the economic activity. The population growth, and that's where we think our unique talent across different product types in this similar urban environment is going to pay off.
One of the things that Michael mentioned that we're in the process of converting to REIT. We're trying to track , for January 1 of this year. One of the things because of that REIT conversion and that's news before (?)sitting and we recently did an equity offering and we have a lot of properties that we're looking to divest of as we continue to focus our story.
One of the things that gets missed a lot in our conversations with investor is truly the quality of the portfolio. We reported our first quarter in May and we had 5.5% comp increases as a total across a portfolio. If you look at each of those property categories whether it was the apartments, office, or retail they reflected similar strength.
That quality of the portfolio is really what the story of Forest City. That's where the value is going to be continued to be realized and created. On top of that is we do transition to a REIT. We're going to again make sure that we operate as best of class that we can through the restructuring in the process we're going through right now to organize our business more along as the lines of our strategy.
It's an exciting time for the company. We have lots of big challenges out ahead of us. We're up the task of meeting that and again we're looking forward that conversion and the completion of this transformation because we do believe that there is still great value that we had in our name and our stock. It's up to us to execute improve that to the investment community. Thank you, Mike.
Mike: What are going to be the top priorities as you think about heading into becoming a REIT early next year? What are the key things that need to get done? What is that road map from sitting here in June, getting to January being in that position?
Dave: That's again the near term. We have a lot of internal work that has to be done. We are again focused with our accounting, our legal or finance teams in making sure that conversion is under way. That is a detailed and complex process.
From an internal standpoint, that's a focus to organization and a prior order to make sure that we meet that hard date of January 1. Again, as I mentioned we're on track to do that.
During this process, during this time of change, we have our team, our management teams and across each of the activities while there's property operations, leasing, asset management remaining focused on the portfolio. One thing we don't want to happen and can’t allow to happen is this amount of change disrupt the positive metrics, positive operation of the portfolio. We're keeping keenly focused on that.
Again, as part of that road map we laid out there different steps on the bridge from where we sit today at about 10 times that EBITDA where we put a target out over the next 18 to 36 months where we're targeting to get seven to eight times net EBITDA. There's steps along the way that we need to execute to get there.
The biggest property dispositions, we have a significant pipeline of dispositions that we're looking to close and move on and use that to help on our deleveraging strategy. As I said we're looking at ways to expand our margin, that's an important step on that process. That happens the design of that happens here in the short term between now and the end of 2015.
During 2016 we'll start that implementation of that design as we have transitioned to the REIT. That's a lot to keep focused on but those are the things that myself and the balance of management team wake up. That's what we're thinking about and that's what we are activating and pursuing.
Mike: You talked a little bit about the asset sale process in terms of the size you have on the market today, the depth of the buyer pool, what the financing environment is like just to share a little bit it is a unique time to be selling assets. Talk a little about that.
Dave: In this road map that we'd put out to where we targeted to raise equity from assets sales and the range of 600 to $650 million. Today, the markets are very robust. Again, it is a combination of not only financing that makes the deals work but it's also the availability of equity in the market place.
There's a lot of capital both chasing great real estate, and there's also capital that's looking specifically at yield and opportunity. We have again Barclay Center to great assets here in New York. It's not going to be duplicated but for us ...
Mike: How many people seen or been to Barclay Center? Do you like Barclay Center?
Dave: Yeah. It's the newest arena in the country. It came out of the box, a very strong from the start. The operations are great, but for us it's a focused company that want to focus in the real estate space that's an asset that is great and it's core for somebody else. It's just not core for Forest City even though it's an excellent asset.
That's something that we are in discussions with our partners, having discussions with investors and we are participating beyond the Barclay Center, the team our 20% non-controlling interest in the team. We're also interested in selling, so the activity in that space.
The NBA space because of what's happened was in Milwaukee and what happened next with the Clippers and then recently with Atlanta has valuations showing an increase not only because of the quality asset or the team but the amount of capital is available in the marketplace.
Our other assets whether it's a development site in Brooklyn or an office buildings in Cleveland or some of our legacy assets in the Cleveland market are residential portfolio or suburban office. We've had brokers for the last few months and we've had in-depth discussions and we are moving and advancing those discussions forward so we can again realize those proceeds.
It's important to that bridge as we think about the REIT conversion and the way we think about it getting these assets in off of our balance sheet and having other investors. Those really does help our simplification and our story and we internally don't underestimate the value of that simplification.
Not only from an investor standpoint looking at the company but as we are restructuring the company as we're looking to a process as we can stop doing and what other work we can set aside. Making sure that we're designing an organization to work on the real estate that we want to own as key to helping us achieve those savings.
We're going to do that as quickly as we can to help not only the capital part in the balance sheet, but also our organization change.
Mike: You talked about the uniqueness of being in multi-property types not being different, being unique. Also, is somewhat unique is the development expertise and exposure of the whole leverage which is higher than where the REITs are today but the road map to take that to more REIT like estimate.
Maybe talk a little bit about those two factors about where you're going to from a development standpoint and still maintaining a core expertise but where do you want that to be as a whole your 13, $14 billion enterprise today? The leverage goal of that we're in a convention of going down the seven times over the next few years?
Dave: Yeah. There's a direct correlation that between the leverage that a company can have and how much development it can do. We do believe our development adds tremendous value to the proposition that Forest City Enterprises brings to the market.
Where we have opportunity in Brooklyn, and in Washington, D.C. and San Francisco, and Denver. We're developing a final office building at our University Park project. Those markets again the demand is clearly in place and the product that we're delivering is being well accepted the once that we've opened in the market dynamics remain strong.
What we're doing is we're doing it in more balanced measure. We're balancing how much development we want to do and as part of the road map forward, we had established a range of eight to 12% of development that we wanted to do is related to our balance sheet versus in the past going into the recession are substantially higher.
Just recently the close of this first quarter we're six or seven percent from a development and under construction standpoint. That will increase, we're going to put more of our development opportunities into construction that is in conjunction with the capital strategy where we brought in great a strategic partners here in New York.
The Greenland Group bought in to 70% as the development partner in our Pacific Park deal. We did a fund with Arizona State Retirement, ASRS. We've activated the fund was setup across the $400 million equity fund and they fund at 75% and we are going to activate our of our portfolio mainly. Developing pipeline of almost a a billion dollars of assets.
We're doing the development in a balanced manner and we're thinking a very creative manner. We recently put out over the last few years we've continued to improve our disclosure for the investor for the REIT over our financial statement. Whether it's our NAV component schedule, where we're breaking down the property types and showing the stabilized and aligning the debt related to each of those lines.
We recently in the first quarter put out that our development yields which was I guess a hole in our disclosure. We've now filled that hole in order ...
Mike: We still want it by project ... [Crosstalk 00:15:27] Once we're on the life.
Dave: I give it to you by project if you wanted by tenant.
Mike: I'll take it by project.
Dave: We put out that our development yields are in the range of five and half to six percent first year stabilized. We think about the markets where we're developing those assets. Our responsibilities to get a return on all of that money not just one project and that's one of the reasons that we're focused on the total more than the individual.
We have individual partners on those someone I mentioned earlier that really aren’t interested in us disclosing what the yields they're investing at. In total, we can show you what we're doing for Forest City Enterprises as to the investor in Forest City Enterprise the value proposition of that development.
It does play an important part of our company's growth in history. We're going to continue to do that but again, it's going to be focused mostly in this urban environments where we can appropriately deliver supply to meet demand that is in the marketplace.
Mike: You talked about the increasing disclosure that you had and the NAV disclosure while you don't provide an NAV there's a number of analyst to cover your stock that are probably in the low 30's. Now your stocks at around 23.
You mentioned over the [canvass 00:16:57] you recently did an equity offering, do you talk a little bit about doing an equity offering in such a discount to NAV number one. Number two, using a part of those proceeds to buy in your partner and MIT in Cambridge and just talk about how you view that equity and being able to do it?
Dave: Yeah. First, for those you've aren't specifically aware in early May, we did an equity offering sold 37.5 million shares of stock. Raised net proceeds in just over $800 millions, sold to 22.50 a share. We knew when we went to market as we were contemplating this that we were going to be selling stock at a discount to not only the NAV that analyst and investors have but a discount to what we believe the value of the company is.
We also knew that we were going to do that regardless. There was expectation in the marketplace and when we looked at the makeup of our balance sheet and where we want to generate capital, where we're going to apply capital, we weren't going to be able to get to that seven to eight times net debt to EBITDA without equity.
Until we get to [seven tray 00:18:31] seven to eight times net debt to EBITDA we don't think we're going to get to NAV. It's a chicken and the egg, which comes first. We knew that sometime in our future we were going to have to raise equity in the public market to help us achieve our long term goals to help us get and close that gap to NAV.
That's the overall strategic reason we did it. When we looked at the timing, what we had been telling the investment community is we are formulating our plan. We have a road map that we want to share, we had talked about mid-summer of being to share that road map. We came together quicker. The stock had moved up significantly over the last year. It had moved up significantly in 2015 for this first half of the year.
Once we had the plan together, and we could see how we were going to execute and to get to NAV by matching up the risk of the balance sheet, the quality of the portfolio, the development we could add, the restructuring of the business. We know what the environment is today.
We decided that now was the best time to raise that equity and went to market and knowing that at some point where you're going to be selling the load of equity to get to the goal anyway.
With regard to the use of proceeds about 50% of it went to the direct reduction of our leverage coupled with this 600 to $650 million of asset sales that were raised over these next months on our schedule 18 to 36 months is the whole bridge. Again, the sooner we do the asset sales, the better.
We're raising about a billion dollars of equity from these two sources public and then our own portfolio to address leverage. We allocated $400 million to acquiring our partners interest in our Cambridge asset. We think that-that was also a good use of equity.
It started with not again the sake of let's sell equity at below NAV. We'd looked at the opportunity to control a great asset, a 100%. We brought inHCN and they had been a great partner. They've been with us for five years but is that organization refocused in a different direction regarding their strategy. We'd had discussions with them and they had a right of first offer that was going to kick in, in February of 2016.
Rather than wait until that day, wait until a month after becoming a REIT, not knowing what the environment was going to be in 2016, not knowing what market conditions were cap rates going compress to want to expose our asset or potentially lose the asset through the sale because somebody aggressively goes after it.
We negotiated a deal with HCN and again brought on to the balance sheet, the interest that we had done a transaction with them five years ago, $30 million of NOI, $20 million of FFO, and as you look out into the future's substantial growth built in to the existing rent versus the current market rents that we're achieving.
All told, we think it was a great the right real estate decision. When we looked at what happens if we decide to sell because that was the other side of it. If you decide to buy that means you didn't decide to sell. By time we factored in the gain that would have been attributed to our share of the asset, there is almost $670 million of gain against $400 million of proceeds approximately.
To generate out of 50% ownership of our MITS it's a net $125 million and lose $20 million of FFO or 30 million of NOI, that was even more dilutive. We did it for the positive but then again we did the analysis on what if we would just sell and both pointed in the right direction.
Mike: Let me pause there and see if we have questions from the audience? I got a whole list.
Dave: You always does. He always has a list.
Mike: You talked a little bit about and I'm going to keep on referencing unique because I'm not going to say different anymore.
Dave: Thank you.
Mike: One of the other unique factors is your corporate governance. One of the only REITs something that we followed that we'll have a split structure NAV shares with the B shares obviously. The age is having super majority right, the B shares having super majority rights.
How do you think about, how's the board think about it in terms of how that maybe impacting the discount today? At what point would it be revisited if all the road map we've set out in terms of getting leverage down, improving the operating margins having solid execution on the development pipeline, getting that into a reasonable area selling off the assets becoming more focused?
Does it at only at that point come on table or is there a potential for it to be sooner?
Dave: First of all, when you talk about overall governance at Forest City Enterprises. The issue that frequently comes up, there's a factor in A share and B shares you suggest. If you look at the board's structure and what's changed over the last four years, we are an independent board.
There's seven independent directors and six inside including myself. That independence of the board does exist and that is a positive in terms of governance. As we look to this road map that we as management have to execute, we think what's stopping us from trading at NAV today is built into that road map.
If we perform, we believe that the governance issue and the NAV discount will go away and there won't be a governance issue. If you look at the specific strategies that we have executed on, you can see that there's complete alignment between the shareholders of the company, the A shareholder and the B shareholder.
If the B shareholder through its control didn't want to do what we are executing, the B shareholder could stop us but that's not been the case. The B shareholder supported a very difficult equity raise in 2009 which was very dilutive but very necessary and we don't look back and say, "Boy, I wish we wouldn't have done that." We had to do it, we raise the equity that was needed and that was supported by all shareholders including the B.
We got through the worst economic crisis in memory and the B shareholder continuous to support the strategies that we are executing on now that will in fact get us to NAV. It is an outlier in terms of appearance or few companies that do have a B share in the REIT world but again the majority don't.
We believe that it will be performance that outweighs that control. Its leverage that's more of a hindrance to our ability to trade an NAV today than whether the B shareholder has ten to one votes or not.
Mike: As you think about the different property types that you're in today, where are you seeing the greatest growth as you think about apartments and office and retail and senior housing and life science as you go down the road. What is the most appealing today in terms of growth prospects?
Dave: As I think reflect on the question, it's where the assets are located. Think about our office portfolio, it's mostly here in New York, Brooklyn, and Manhattan, and it's in Cambridge. We have offices in Cleveland, and some suburban office in Richmond, but as we look where the majority of those asset sets it's on these core markets.
The dynamics of these markets continue to improve, so those office assets whether its life science or traditional office, those fundamental metrics are positive. Would we like more job growth as citizen of the US the answer is yes, as the CEO of real estate company even more. It will help create more demand for the office.
There is demand and there is activity on our portfolio as well as in our office. The residential apartment portfolio, again we are as a nation creating less housing than we have done historically during any phase of an expansion which we're now in the sixth year of an expansion which just continuous create more demand for residential apartments in this urban environment.
I see that continuing as a demographic trend. In the way we have positioned our retail portfolio again here in New York where demand is high because of the density and demographic buying power of this particular markets and the regional shopping center where we're not creating many new regional shopping centers and so as supplies constraint. Quality is sought after.
The work we have done to position the portfolio to take advantage of these factors is showing up in fact in our operating metrics. We see strength in each of those product types and if you talk to each of the different owners of those individual categories, you'd hear the same response.
Mike: Great. We're taking down in 20 seconds. Everyone is in New York, so you're all going to go see a show at Barclay Center. You'll go rent an apartment over at ...
Dave: 8 Spruce.
Mike: At 8 Spruce.
Dave: We have a penthouse.
Dave: Penthouse will be nice.
Mike: Unfortunately, it's out of my pay grade. You should go at New York Times Building, go check that out. Go shop in 42nd Street, and then drive up to Ridge Hill and do some shopping, take your kids to Legoland.
Dave: Yeah, there you go.
Mike: Cleveland is going to win.
Dave: In six games.
Mike: Okay. All right. I have disclosures up here from a legal perspective. If anyone needs or anyone on the line, they can e-mail me. Thank you very much.
Dave: Thank you all. Appreciate it.