Welcome to the Forest City Enterprises Fourth Quarter and Year End 2014 Earnings Conference Call.
The company would like to remind you that todays remarks include forward-looking comments that are covered under Federal Safe Harbor provisions. Actual results could differ materially from those expressed or implied in such forward-looking statements due to various risks and uncertainties and other factors. Please refer to the risk factors outlined in Forest Citys annual and quarterly reports filed with the SEC for discussion of factors that could cause results to differ.
This call is being recorded and a replay will be available beginning at 4 PM Eastern Time today. Both the telephone replay and the webcast will be available until March 25, 2015 11:59 PM Eastern Time. The company would like to remind listeners that this we 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 Citys quarterly report filed with the SEC and supplemental package which are posted on the companys website at www.forestcity.net for an explanation of these terms and why the company uses them as well as reconciliations to their comparable financial measures in accordance with generally accepted accounting principles. At this time, all participants are in a listen-only mode. Participants on the call will have the opportunity to ask questions following the companys prepared comments.
I would now like to turn the call over to Forest Citys President and CEO, David LaRue. Please go ahead, Mr. LaRue.
Thank you, operator and good morning everyone. With me is Bob OBrien, our Chief Financial Officer. We are pleased to be with you today and share our fourth quarter and year end results and update you on where we stand today and what we see for the year ahead. We also look forward to your questions.
Before we go further we are deeply saddened by the news yesterday that a worker died in a construction related accident at the Barclays Center Arena. This is a terrible tragedy and our thoughts go out to the family and friends of this individual.
Today, we will be using slides in this call. If you are on the webcast youre already seeing the slides in the webcast player. You can advance the slides with us using the arrow in the lower right-hand corner of the player. You can also download todays earnings call slides from the Investor section of our website at www.forestcity.net.
Lets look at the agenda for todays call on Slide 3.
I will begin with an overview of the fourth quarter and full year 2014 results including development activity. I also will provide brief updates on our fourth quarter impairment and the NETS and Barclays Center and comments on our planned re-conversion which we announced last month. Bob will then provide more details into our results and give an update on asset dispositions. I will give an overview on our recent openings and projects under construction and offer some closing thoughts and then we will get to your questions.
Turning now to Slide 4, as you saw in our earnings release which went out yesterday afternoon, we closed out very positive 2014 with a strong fourth quarter results across our portfolio. FFO in the fourth quarter was $220.2 million or $0.95 a share giving us total FFO for the year of $394.6 million or $1.75 per share. FFO in the fourth quarter included net gains on changing control of interest at two properties that contributed approximately $140 million net of tax or $0.59 per share to FFO.
As we noted in our press release excluding those gains, FFO for the year would have been $1.16 per share versus consensus estimates of $1.11 per share. Operating FFO was also up significantly for both fourth quarter and full year. O-FFO in the quarter was $78.1 million up 52% over the same period in 2013 and full year O-FFO was $248.4 million up 51% increase over 2013.
Negatively impacting earnings was a pretax impairment in the fourth quarter related to our B2 Brooklyn project and the modular factory of $146 million of which $38.7 million represented the write-off of the factory. While the impairment is a disappointment we are confident in our ability to complete the building and expect to open in the third quarter of 2016. We are seeking to recover damages including the cost to complete the B2 project under our lump sum agreement with our former construction manager.
We had a strong fourth quarter operating results from our portfolio led by retail and office. The comp NOI in the fourth quarter was up 7.7% with an increase of 10.5% in retail, 9.2% in office and 2.8% in residential. Bob will provide color and comp NOI growth in each of our primary asset classes later in the call.
Stapleton in Denver also had a great year both in terms of sales and margins. On Slide 5, you will see a graph showing the sales of lots to builders over the last five years. 2014 was the third-best year in project history in terms of lot sales. Stapletons 2014 performance ranked as Colorados fastest-growing master-planned community according to Metro Study and is the sixth fastest growing in the nation according to RCLCO.
We continue to be activate in title development opportunities in our core markets and move new projects through our pipeline into our portfolio. You can see the renderings in some of our newest projects on Slide 6. During the fourth quarter we started four new projects including 1001, 4th Street, Southwest an apartment project at Waterfront Station in Washington DC that is part of our residential development fund with the Arizona State Retirement Systems or ASRS.
We also started 535 Carlton at Pacific Park, Brooklyn that is part of our strategic partnership with [Greenland, USA]. In addition, we staged a groundbreaking event with our partner on 550 Vanderbilt Avenue, the first condominium building at Pacific Park Brooklyn and expect that the building to be added to our under construction pipeline in the second quarter.
Also during the fourth quarter, we began work on 1812 Ashton Avenue, 164,000 square foot office building that is 70% pre-leased at our Science and Technology Park at Johns Hopkins in Baltimore. I will provide more detail on the pipelines including overall anticipated starts in 2015 later in the call.
Before I turn the call over to Bob, let me provide a quick update on two other topics. First is the NETS and Barclays Center Arena. Slide 7 shows the current ownership structure of those two assets. As we stated previously, we are exploring the potential sale of our non-controlling minority interest in the NETS and a potential recapitalization of Barclays Center Arena. In addition, Onexim, our majority partners in the NETS has publicly acknowledged that they are open to listening to offers on the theme.
Our objective is to maximize value in any potential transaction and we believe we can best achieve that by coordinating with our partner. We would hope to have a potential sale or sales under contract if not closed this year. Of course, I need to add that no transaction for either our interest in the team or the arena can be guaranteed. In January, we announced that our Board had approved the plan under which we intend to convert to a Real Estate Investment Trust effective January 2016. That process is well underway. There is a lot of work ahead of us, but we anticipate meeting our deadline and achieving a smooth transition at year-end. As we indicated in our January announcement we expect to provide more details by mid-year.
With that, let me turn the call over to Bob.
Thanks Dave. Good morning everybody. I certainly want to echo Daves comments about the strengths that our overall business demonstrated in 2014. It was a great year, we have an ambitious agenda for 2015 and were excited about getting to that as well.
I also want to mention to everyone on the call that in addition to the slides that accompany todays call, we have a fully updated 2014 year-end investor deck that is now available in the Investor section of our website. Especially for those who may be new to following Forest City, I encourage you to take a look.
A number of the key elements of our strong 2014 performance can be seen in our operating FFO results for the year, so I would like to begin by walking through the year-end 2014 O-FFO bridge which is Slide 8 in the presentation, its also on Page 34 in our supplemental package.
On the left-side of the bridge, you see our 2013 O-FFO of $164.2 million. Moving to the right, we had decreased interest expense both corporate and in the mature portfolio of $33.2 million, a direct reflection of our efforts to delever our business, improve our balance sheet and effectively manage debt at the property level.
Next to that is increased NOI from our mature portfolio of $23.9 million. There are times when our development activity tends to overshadow our operating portfolio. This years NOI performance is particularly gratifying because it clearly shows the quality and productivity of our mature rental propertys portfolio and the strength of the core markets where we are focused.
The next block is $23 million of other increased O-FFO primarily lower expensed overhead as we have activated more opportunities from our development pipeline and capitalized more overhead to those projects. Notably with our strategic partners investing alongside us in the majority of this new development, we are able to effectively balance both risk and capital requirements a win-win for both us and our partners.
Next you see $21.9 million in higher land sales at Stapleton compared to the prior year. As Dave said, Stapleton had a great year and continues to contribute meaningfully to our results. The next item is $10.8 million of increased operating FFO from new property openings showing a net positive contribution for properties opened but not yet included in our mature portfolio.
That last green block is increased operating FFO of $8.9 million around 2014 legal settlement. All those gains were partially offset by reduced operating FFO from property sold of $37.5 million, a reflection of our program of non-core asset sales bringing us to our full year 2014 operating FFO of $248.4 million, a 51% improvement over the prior year.
Moving on to Slide 9, you see the results of a very active year in asset dispositions primarily a non-core markets as well as our joint-venture activity with Greenland and ASRS. We ended 2014 with total net proceeds from these combined efforts of approximately $448 million. Our program of asset sales and joint ventures has been a key part of our efforts to delever our balance sheet, focus our portfolio on strong urban market and invest in new opportunities in those markets.
Turning to some of our operating metrics earlier Dave touched on our portfolio level comp NOI levels for the quarter. I will comment on a few of the major ones and the drivers behind them as summarized on Slide 10.
Retail comp NOI which is up 10.5% was partially driven by growth at our Westchester Ridge Hill in Yonkers, New York. Ridge Hill was added to our comp retail portfolio properties in the third quarter of 2014 and has shown good quarter-over-quarter growth and reached 80% leased in the fourth quarter. As we pointed out in the press release excluding Ridge Hill growth in our retail comp NOI wouldve been 7.4% that strong showing reflects the quality of our retail assets and the markets they are in as well as the impact of our ongoing program of renovations, expansions and remerchandising at regional malls.
On a rolling 12-month basis rents on new same-space leases rose 26.9% in our regional malls. Our office comp NOI which grew 9.2% in the fourth quarter was driven primarily by the lease up of vacancies at One Pierpoint Plaza in Brooklyn. Again, those of you who have followed us for the past couple of years know that significant vacancies at Pierpoint held down our office performance in prior periods. Were not benefiting from the successful lease up of the majority of that space.
Growth at Pierpoint was partially offset by the timing of vacancies at 88 Sydney Street at University Park at MIT in Cambridge. Approximately 70% of the vacancy at 88 Sidney Street has now been re-leased. As we indicated in our press release with these two successful lease ups in the stable fundamentals in our core markets, we expect continued solid comp NOI growth in the office sector for the balance of 2015. At year-end rents for new same-space leases in our office portfolio were up 5.5% on a rolling 12 month basis.
Comp NOI in the residential portfolio was up 2.8% as most of you know over the past 2+ years, our residential comp NOI growth has generally outpaced peer averages. So we are going up against some significant prior period gains. Also as anticipated new supply in certain core markets including Boston and Washington DC has put some near-term pressure on rent growth as new units are observed in those markets. We believe this is temporary and were certainly confident in the long-term strength and overall growth prospects of these markets, in particular the submarkets where we are focused.
In addition, we continue to see considerable strength in Brooklyn as well as in Los Angeles and San Francisco on the West Coast. In the fourth quarter, total comparable monthly average rents in our apartment portfolio grew 2.2%.
Before I turn the call back to Dave for a pipeline update and closing thoughts, let me give a brief update on our expectations around non-core asset dispositions as summarized on Slide 11.
Dave commented earlier on the NETS and Barclays Center. In addition to those, we are exploring a potential sale or joint venture of 625 Fulton, a development site at our MetroTech Center Campus in Brooklyn. As we have previously disclosed, were also looking at the potential sale or a joint venture of a majority of our remaining downtown Cleveland office assets in the adjoining retail at Tower City Center.
Were also actively marketing a potential transaction for our Illinois Science and Technology Park near Chicago. And lastly we have a legacy portfolio of assets consisting of 33 apartment communities and four office buildings mainly suburban where we are also exploring opportunities for outright sales or joint ventures.
In our January announcement about the Boards approval of the plan for re-conversion, we indicated, we expect total 2015 asset sales to generate total net proceeds well in excess of our historical averages. Given the unpredictable nature of sale negotiations however, were not prepared to put a specific dollar figure on total 2015 dispositions today. We expect to gain greater clarity as the year progresses and to update the market accordingly.
As Dave stated earlier though no specific transactions can be guaranteed, we will not transact if we feel the economics are not right. Its also important to note the successful completion of these or other asset sales in 2015 is not a requirement for our re-conversion.
With that, let me turn it back to Dave.
Thanks Bob. Details of on our recent openings and projects currently under construction are included in our press release and filings. I will touch on a few highlights here and we will be happy to answer your question – any specific questions during Qamp;A.
As you can see from our year end pipeline on Slide 12, for the full year 2014, we opened five new properties all of them multifamily apartments and completed the renovation and expansion of one of our regional malls in Southern California. These projects added almost 300 million of completed rental properties to our pro rata balance sheet.
We ended the year with nine projects under construction, six of those projects are apartments and of the six three are part of our ASRS development fund and one is part of our strategic partnership with Greenland, USA. The remaining projects under construction at year-end include two office buildings one at University Park at MIT that is fully leased and one at the Science and Technology Park at Johns Hopkins that is already 70% leased.
The final project is an expansion of our Galleria at Sunset regional mall in Henderson Nevada outside of Las Vegas, which is part of our partnership with QIC. Upon completion these projects currently under construction will add approximately $500 million and completed rental properties that are shared to the balance sheet.
As we stated in our press release in 2015, we expect to start nine additional projects at a total cost of approximately 950 million at 100% or 390 million at our pro rata share. Of the nine, five are expected to be undertaken through our partnerships with Greenland, USA, ASRS and QIC. As Bob mentioned earlier this level of activity reflects our strategy of activating title opportunities on our balance sheet and if we are doing so together with strategic partners, the balance risk.
Before we get to your questions, let me summarize by saying how excited I am about the companys performance in 2014 and the fourth quarter of that year. The results are direct reflection of the dedication and hard work of our associates that are working to execute our strategic plan. We have got a path forward they are focused on the strategies and where executing on those and again, I think they show up clearly in our results.
Based upon this strong performance, we have a positive outlook for 2015 and we set an aggressive agenda as we continue to transform the company including through a re-conversion. There will clearly be challenges along the way, but we are confident in our ability to continue to deliver increased shareholder value.
With that, lets get to some of your questions. Operator?