Thursday, June 17, 2010

At Forest City's annual meeting, talk of "de-risking the business," the huge improvement over 2009 for AY, and a "very profitable" arena

The unencumbered development opportunity with Atlantic Yards and its expected “very profitable arena” were among the highlights cited by Forest City Enterprises (FCE) executives yesterday at the corporation’s homey annual meeting in Cleveland. (I listened via a webcast.)

Referring to the corporation’s efforts as a whole, CEO Chuck Ratner said “we have de-risked the business,” surely an important message to shareholders but a statement that should raise questions among the developer’s governmental partners and the public.

If they’ve gotten rid of risk, has it simply evaporated, or been shifted?

In the case of Atlantic Yards, run by subsidiary Forest City Ratner, evidence suggests it’s been shifted. The New York City Independent Budget Office, for example, considers the arena a net loss for New York City. (It calls the arena a modest gain for the state, but that’s without considering the naming rights the state gave away.) Penalties for delay are slight.

There were no questions from the audience in the 73-minute meeting, which devoted a 22-minute segment to the somewhat erratic world-historical musings of Sam Miller (born 1921), the co-chairman of the board.

And, unlike in 2009, there was no surprise appearance from a shareholder like activist Daniel Goldstein of Develop Don't Destroy Brooklyn.

(The big news, according to Crain's Cleveland Business, was the authorization "to increase the volume of Class A common shares by 37% to 371 million from 271 million. Shareholders also approved authorizing the board to double the volume of preferred, or Class B, shares to 20 million from 10 million." That means that current stockholders see their value diluted--though the stock had doubled since the last issuance.)

Undervalued stock

Executive VP and CFO Bob O’Brien said he thought the company stock was undervalued: “I believe the portfolio, together with the pipeline currently under the construction, is worth considerably more than the current market value of our stock, and that’s before any consideration of the embedded value creation inherent in the combination of our development talent and the fully entitled opportunities we have at projects like Atlantic Yards in Brooklyn, Waterfront Station and The Yards in Washington, DC, Central Station in Chicago, Stapleton in Denver, and Mesa del Sol in Albuquerque, to name just a few.”

A “fully entitled opportunity” means FCE need not go through any more governmental hoops to build. In the case of Atlantic Yards, it also implies that there are no significant penalties for moving slowly and that the government didn't see fit to get a cut (as some suggested) when Forest City Ratner last year negotiated the Vanderbilt Yard deal with the Metropolitan Transportation Authority.

Contrast with 2009

Chuck Ratner (right) said, “Look folks, we’ve come a long way… Think about the fact that one year ago, standing right about where [Executive VP] David [LaRue] is sitting, was one Mr. Goldstein, who had come to our annual meeting to take on our board over the Atlantic Yards transaction, and how unfairly we were treating him and his neighbors, and why don’t we just leave and go away.”

(While Goldstein did cite “staunch and widespread community opposition, ongoing and potential new litigation, diminished political support, and an extremely challenging economic environment,” he didn’t complain about unfair treatment but asked Forest City executive to tell shareholders its contingency plans “if and when you don't break ground in 2009 and can't open the arena in Brooklyn in 2011?”)

“[Co-chairman] Albert [Ratner] handled him, I thought, extremely well, and he basically left,” Chuck Ratner continued. “And here we sit one year later, and for an exorbitant price, we bought him and his interest out.”

Exorbitant? That’s the official line, but it’s pretty much what they paid speculators five years earlier for the buildings containing Freddy’s Bar & Backroom.

“Look what we’ve accomplished in just that year, just in that one place," Ratner continued. "We’ve gone from a position where we had a large debt due, actually in the month of February, one year ago, and we didn’t know where we were going to get the capital we needed to proceed. We hadn’t yet obtained full possession of the property. Lawsuits were outstanding.”

That big hurdle was a land loan from Gramercy Capital.

“And Bruce [Ratner] and Joanne [Minieri] and the full team in New York--what an amazing, amazing turnaround, after working on this for five or six years, to put us in a position where we’re now fully engaged in this construction of the arena, which for us is going to be a very profitable venture, I would predict.” Ratner said.

“We have sold the great majority interest in the team, 80 percent interest, to a partner and investor who has the kind of capital and passion to make this a success and will move it to Brooklyn and will play in our arena,” he said, referring to Russian billionaire Mikhail Prokhorov.

He didn't mention affordable housing, or open space, or blight removal.

De-risking the business

“We’re on the cusp, I think, of turning a real issue and problem into a great opportunity, as we always dreamed it could be,” Ratner said. “That’s just an example of how we have done… The thing I think we are most proud of is that we have de-risked the business, we have taken risk out of the balance sheet, we have taken risk out of the income statement….. that’s a very important thing to do.”

Ratner allowed that he could be asked how Forest City was put in such a position. “Well, I fully accept the responsibility for that, but the economy didn’t help,” he said.

Going forward

Going forward, Ratner expressed optimism that the combination of the country’s population growth, densification, and the “lack of new product” caused by the economic slowdown will “create tremendous opportunity for those of us who can build,” especially given that Forest City has positions in several of the “new markets that are going to grab the lion’s share of that growth.”

“The country is not over-retailed, it’s under-demolished,” he added, reflecting on what he recently learned at a shopping center convention.

Relying on relationships

Al Ratner (right) got to close the meeting, with reflections on relationships that suggested a warm and fuzzy family-oriented company. Unmentioned was how that company can play hardball when it wants to (such as renegotiating contracts at Beekman Tower, or offering strategic contributions and gag orders), and that the company especially seeks political relationships.

“You go through all the figures, you look at all the statements, the net worth, the stock prices, you really ask yourself a question: what’s the secret to the success we’ve had to the extent we’ve been successful? I think the answer to it is a single word, and that word is relationships.”

“When Chuck’s father, Uncle Max, would come visit me, after I went to see Sears Roebuck, his first question was never Did you make the deal?, it always was What do they think of us? How do they hold us in their thoughts about what kind of company we are?

“If you’d ask me the reasons for our success over this time, it’s because we’ve been a relationship company,” he said. “The people on our board--it’s a relationship. The people--all of you—it’s relationship.”

(Graphic of family tree from a former version of the FCE website. Click to enlarge.)

“People say to me, how is it you can make such good employees?” he asked rhetorically. “And the truth of the matter is: we don’t make good employees. Good employees make our company. We try to attract people, but we’re not magicians. We attract the kind of people who believe you make money with people and not on people.”

Not on people? Well, he forgot the people who were living in the Atlantic Yards footprint while utility work continued.

“So I think what I’m the proudest of over 50 years, that if my father and my uncle and my mother and my aunt, all the people who were here when this business started… Whatever year it was that we started, the thing that I’m the proudest of, if they were here today, they’d be very proud.”

No questions

Ratner opened up the floor to questions. No one asked.

“It used to be, we were very self-conscious, so we used to plant questions,” Ratner reflected. “Now we feel more secure. If nobody wants to ask a question, it’s fine with us.”

The Sam Miller Show

Forest City Enterprises is a multi-billion-dollar company, but it’s controlled by one extended family, and its annual meeting had the air of an extended family reunion, especially when Miller took the podium midway through.

Now Miller is a legendary powerbroker in Cleveland--note this indulgent treatment in Smart Business Cleveland and acid coverage from watchdog journalist Roldo Bartimole--but he came off yesterday more like the great-uncle who gets to hog the microphone at the family reunion because he’s always rented the venue.

Miller was introduced by Al Ratner, his former brother-in-law, who described him as “a partner of mine, for almost 60 years… It’s been an amazing relationship, because we agree on absolutely nothing other than the fact that we love one another.”

That presumably was an example of how “the annual meeting is also known for the humorous banter and lighthearted wordplay among the company’s leaders,” as described in a June 2007 issue of Forest City Times.

Miller, whose delivery was slightly shaky but who still has presence, began with some shtick: “I recently left the hospital. I had to, when I found out how much the bill was.”

Thinking positive


“If I were to ask what you’d consider the major problem of our beloved America… the economy… 9/11, oil spill, international situation,” he said, indicating that “All the items will only be footnotes in the history of our country.”

“The economic future of this country, I am totally positive, is secure,” he said, comparing the United States to Europe and England. “It’s still the greatest country in the world."

“Between now and 2020, there will be moving to the urban centers of the world approximately 5 million people a week,” he said. While a focus on certain urban centers is the basis of FCE’s strategy, Miller pointed instead to the effects of such a migration in China, including strikes and worker suicides.

“It’s estimated that 40% of the world’s population will have achieved… middle class status by the year 2020, and the 20% of the population of the world will be working in jobs that were not created up til now. Think of it.”

(Here’s an estimate of 3.2 billion middle-class people in 2020, and a total of less than 8 billion.)

“This is our secret weapon, that we have in this country… history shows that when it comes to innovative thinking, whether in war or peace, our country leads the world,” he said, contrasting the Unite States with China, which is “trying to keep as much public information away from their people as possible.”

(Um, Forest City Ratner isn’t so great at information sharing, as DDDB has pointed out multiple times.)

Birth rate

America’s secret weapon? “We have one of the highest birth rates in the world. Because people mean business,” Miller said.

“Be proud that our country leads the world, with exception of some African states, in birth rates,” he added later.

Actually, the United States is ranked 151 out of 223 countries, according to the CIA. Now that’s ahead of all our first-world economic competitors, and thus significant, but Miller wasn’t making that comparison.

State capitalism

“Now let me tell you why we don’t have to worry,” he said. “When you look at the countries that are doing well today, like China, or India, or Russia, there’s a difference between state capitalism and democratic capitalism.” (So, was he criticizing Mr. Prokhorov?)

“State capitalism is a form of regular capitalism that is built on top of a tyranny,” he said. “And the monies that come in and the wealth that’s accumulated goes to a few people who are in power, and they use those funds to continue to stay in power… until the people of a particular country wake up.”

He offered a contrast: “Now, democratic capitalism is money coming in, but for the betterment of most of the people who are part of the system.”

Unmentioned: Forest City Enterprises and Forest City Ratner have gotten pretty good at crony capitalism themselves. (Fred Siegel famously described Bruce Ratner as a "master of subsidy.")

New blood needed

Miller concluded that the solution was immigration, new blood.

He closed by tying it all together, sort of: “Now, contemplating all the conflicting pressures and divergent possibilities that will happen in the next ten to 20 years, I tried to make a study of who does better: optimists or pessimists? And I learned something. That over a 500-year period, they say that optimists have never always been right, but because they are positive, even when wrong, they are positive, and that is the way of achievement and success and improvement and I’m certain that we’ll all meet again here next year.”

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