Skip to main content

Second hedge fund targets Forest City, blames "tangled web of nepotism and self-dealing" (and Bruce Ratner) for underperformance, losses

In the second harsh critique by activist hedge fund investors in months, Forest City Realty Trust yesterday was portrayed not only as underperforming relative to real estate peers, but self-victimized by "a tangled web of nepotism and self-dealing," and with the Bruce Ratner-led New York subsidiary, Forest City Ratner, as contributing by far the worst performance.

The Stamford-based hedge fund, Land and Buildings Investment Management, revealed that it had unsuccessfully pushed for Forest City to open up its board and otherwise take measures to boost the stock price. It said that last month's decisions to remove control by the extended Ratner family, thus collapsing the two-class stock structure and recasting the board to formally end family control, were insufficient.

Land and Buildings publicly released its statement as a letter (also at bottom) to shareholders. The Cleveland Plain Dealer reported that Forest City did not comment as of yesterday afternoon.  The Plain Dealer suggested that Land and Buildings owned about 1% of the company's stock.

Note that the hedge fund with a reported 7.4% stake, Scopia Capital Management, is apparently content with the measures already taken after it pushed for the end of family control.

Changes insufficient

"For the first time in my 25 years of following Forest City Realty Trust, I believe that the Company is now investable," wrote the Land and Buildings' founder, Jonathan Litt. But "[s]hareholders should not be fooled into thinking the reclassification into a single class of stock will by itself fix Forest City’s problems going forward."

He argued that, despite Forest City’s "enviable" real estate, the firm is "substantially undervalued," with "at least 40% upside to a net asset value of $30-plus."

Forest City's net operating income margins are well below that of peers. "G&A [general and administrative] expenses are bloated, in our view, because Forest City is poorly run, inefficiently structured and a dubious source of income for countless Ratners and other insiders," Litt wrote.

$2.3B of impairments

Perhaps the harshest passage is this:
"Forest City shareholders have endured $2.3 billion of impairments over the past decade (Figure 2), which is equal to nearly 40% of the Company’s current equity market capitalization, as management, led by numerous Ratner family members, has repeatedly destroyed value through development. No one has been held accountable for the losses and the Company maintains over $800 million of construction in progress despite the abysmal track record.
The "vast majority" of some $1.8 million in accounting losses--an impairment is "the difference between the property’s fair value and its carrying value"--over the past four years have come out of Forest City Ratner, in New York, Litt wrote. He cited $743 million in failed investments regarding Pacific Park Brooklyn and B2 (aka 461 Dean), as well as $399 million related to the Ridge Hill mall in Yonkers.
Let me see if I can do the math: the B2 impairment was $146 million, while Atlantic Yards/Pacific Park impairments were $299.3 million and $242.4 million, all before taxes (which lowered the hit). That adds up to $687.7 million, not $743 million, which means either I'm missing something or the the hedge fund is overinclusive.

(This raises a question. Ridge Hill is an even more blatant example of the Culture of Cheating than Atlantic Yards/Pacific Park. Wasn't the point of cheating to make money?)

"The investment in the Brooklyn Nets and the construction of the Barclays Center in Brooklyn was another billion-dollar distraction that did not benefit Class A holders of Forest City, in our view," Litt wrote. He didn't call it a loss. Obviously, Forest City believes (or believed) that the arena and team were needed to leverage what former Chairman Chuck Ratner called "a great piece of real estate."

Little suggested that Forest City "should continue to lower leverage and scale back its external growth ambitions." Indeed, that's likely why Greenland Forest City Partners has sought new investors for three building sites in Pacific Park.

Poor shareholder return

"FCE/A’s total shareholder return has consistently underperformed peers by a significant margin over short, medium, and long-term time horizons as the Company suffered and continues to suffer from numerous operational, capital allocation and, in particular, corporate governance deficiencies," wrote Litt, calling recent "half-measures to modernize and improve... deeply insufficient."

He said that it was "outrageous" for the Ratner family to get $120 million to give up their controlling shares. "To add insult to injury, in 2015, millions were paid to the ten members of the Ratner family that will likely remain on the payroll despite the family’s only ~12% ownership of the Company’s Class A shares (following the Class B share buyout)," he wrote.

He blamed the board for permitting pervasive nepotism, with Bruce Ratner as perhaps the biggest beneficiary of "feed[ing] at the FCE/A shareholder trough":
i. In 2016, while Bruce Ratner was a director and employee of the Company, he and/or his private entities earned an $11 million development fee from the Company on Westchester’s Ridge Hill (a regional mall property which suffered $399 million of impairments), more than $6 million for tax indemnification on the Fulton property sale and $450,000 in annual salary.
ii. Over the last ten years he or entities he controls have received from the Company 3.9 million units, or ~$80 million, in relation to 30 properties sold to the Company, $121 million for interests in the New York Times Building and Metro Tech office buildings, and tax indemnification payments by the Company.
iii. Bruce continues to have economic interests in property which the Company must fund on his behalf.
iv. Despite the glaring conflicts of interest and outrageous payments, Bruce will continue to be an employee of the firm, earning a salary, being eligible for discretionary bonuses and we fear being incentivized to build potentially non-economic Company developments for his personal entities’ gain.
v. Bruce leases luxury apartments at the Company’s fashionable 8 Spruce Street apartment development.
(Emphasis added)

Note that I'm not sure what they mean by Ratner's "private entities"--surely not Forest City Ratner, but a personal holding company?

Note that it's unclear, for example, whether Ratner is leasing luxury apartments at a significant discount.

The letter also cited nepotism "beyond the Ratner Clan," with the brother of CEO David LaRue holding an executive position and the sister of CFO Bob O'Brien doing contract work for the company.

Getting the pushback

"Shortly after Forest City announced the elimination of the Ratners’ golden shares, we established a significant position in FCE/A, as it appeared investible for the first time in over 25 years," Litt wrote, saying Forest City rejected its bid to to propose the two new directors. (With 1% of shares, why would they hold sway.)

Forest City also refused to add "up to an additional three new directors to the Board at the next annual meeting, as the two new directors will be outgunned by the eleven continuing Ratners/legacy Board members."

Land and Building also accused Forest City of refusing "to permanently opt out of the Maryland Unsolicited Takeover Act (MUTA), so the Board cannot unilaterally decide to stagger the Board." As the Plain Dealer noted, that helps defend against hostile takeovers.

So some of this is a very aggressive hedge fund that wants to leverage some profits. But some of the harsh charges may stick--in other words, why have there seemingly been no consequences for Forest City's underperformance? Does family ownership and control militate against that?

Land and Buildings Press Release 1-30-17 on Forest City Realty Trust by Norman Oder on Scribd

Comments

Popular posts from this blog

Forest City acknowledges unspecified delays in Pacific Park, cites $300 million "impairment" in project value; what about affordable housing pledge?

Updated Monday Nov. 7 am: Note follow-up coverage of stock price drop and investor conference call and pending questions.

Pacific Park Brooklyn is seriously delayed, Forest City Realty Trust said yesterday in a news release, which further acknowledged that the project has caused a $300 million impairment, or write-down of the asset, as the expected revenues no longer exceed the carrying cost.

The Cleveland-based developer, parent of Brooklyn-based Forest City Ratner, which is a 30% investor in Pacific Park along with 70% partner/overseer Greenland USA, blamed the "significant impairment" on an oversupply of market-rate apartments, the uncertain fate of the 421-a tax break, and a continued increase in construction costs.

While the delay essentially confirms the obvious, given that two major buildings have not launched despite plans to do so, it raises significant questions about the future of the project, including:
if market-rate construction is delayed, will the affordable h…

Revising official figures, new report reveals Nets averaged just 11,622 home fans last season, Islanders drew 11,200 (and have option to leave in 2018)

The Brooklyn Nets drew an average of only 11,622 fans per home game in their most recent (and lousy) season, more than 23% below the announced official attendance figure, and little more than 65% of the Barclays Center's capacity.

The New York Islanders also drew some 19.4% below announced attendance, or 11,200 fans per home game.

The surprising numbers were disclosed in a consultant's report attached to the Preliminary Official Statement for the refinancing of some $462 million in tax-exempt bonds for the Barclays Center (plus another $20 million in taxable bonds). The refinancing should lower costs to Mikhail Prokhorov, owner of the arena operating company, by and average of $3.4 million a year through 2044 in paying off arena construction.

According to official figures, the Brooklyn Nets attendance averaged 17,187 in the debut season, 2012-13, 17,251 in 2013-14, 17,037 in 2014-15, and 15,125 in the most recent season, 2015-16. For hoops, the arena holds 17,732.

But official…

At 550 Vanderbilt, big chunk of apartments pitched to Chinese buyers as "international units"

One key to sales at the 550 Vanderbilt condo is the connection to China, thanks to Shanghai-based developer Greenland Holdings.

It's the parent of Greenland USA, which as part of Greenland Forest City Partners owns 70% of Pacific Park (except 461 Dean and the arena).

And sales in China may help explain how the developer was able to claim early momentum.
"Since 550 Vanderbilt launched pre-sales in June [2015], more than 80 residences have gone into contract, representing over 30% of the building’s 278 total residences," the developer said in a 9/25/15 press release announcing the opening of a sales gallery in Brooklyn. "The strong response from the marketplace indicates the high level of demand for well-designed new luxury homes in Brooklyn..."

Maybe. Or maybe it just meant a decent initial pipeline to Chinese buyers.

As lawyer Jay Neveloff, who represents Forest City, told the Real Deal in 2015, a project involving a Chinese firm "creates a huge market for…

Is Barclays Center dumping the Islanders, or are they renegotiating? Evidence varies (bond doc, cash receipts); NHL attendance biggest variable

The Internet has been abuzz since Bloomberg's Scott Soshnick reported 1/30/17, using an overly conclusory headline, that Brooklyn’s Barclays Center Is Dumping the Islanders.

That would end an unusual arrangement in which the arena agrees to pay the team a fixed sum (minus certain expenses), in exchange for keeping tickets, suite, and sponsorship revenue.

The arena would earn more without the hockey team, according to Bloomberg, which cited “a financial projection shared with potential investors showed the Islanders won’t contribute any revenue after the 2018-19 season--a clear signal that the team won’t play there, the people said."

That "signal," however, is hardly definitive, as are the media leaks about a prospective new arena in Queens, as shown in the screenshot below from Newsday. Both sides are surely pushing for advantage, if not bluffing.

Consider: the arena and the Islanders can't even formally begin their opt-out talks until after this season. The disc…

Skanska says it "expected to assemble a properly designed modular building, not engage in an iterative R&D experiment"

On 12/10/16, I noted that FastCo.Design's Prefab's Moment of Reckoning article dialed back the gush on the 461 Dean modular tower compared to the publication's previous coverage.

Still, I noted that the article relied on developer Forest City Ratner and architect SHoP to put the best possible spin on what was clearly a failure. From the article: At the project's outset, it took the factory (managed by Skanska at the time) two to three weeks to build a module. By the end, under FCRC's management, the builders cut that down to six days. "The project took a little longer than expected and cost a little bit more than expected because we started the project with the wrong contractor," [Forest City's Adam] Greene says.Skanska jabs back
Well, Forest City's estranged partner Skanska later weighed in--not sure whether they weren't asked or just missed a deadline--and their article was updated 12/13/16. Here's Skanska's statement, which shows th…

Not just logistics: bypassing Brooklyn for DNC 2016 also saved on optics (role of Russian oligarch, Shanghai government)

Surely the logistical challenges of holding a national presidential nominating convention in Brooklyn were the main (and stated) reasons for the Democratic National Committee's choice of Philadelphia.

And, as I wrote in NY Slant, the huge security cordon in Philadelphia would have been impossible in Brooklyn.

But consider also the optics. As I wrote in my 1/21/15 op-ed in the Times arguing that the choice of Brooklyn was a bad idea:
The arena also raises ethically sticky questions for the Democrats. While the Barclays Center is owned primarily by Forest City Ratner, 45 percent of it is owned by the Russian billionaire Mikhail D. Prokhorov (who also owns 80 percent of the Brooklyn Nets). Mr. Prokhorov has a necessarily cordial relationship with Russia’s president, Vladimir V. Putin — though he has been critical of Mr. Putin in the past, last year, at the Russian president’s request, he tried to transfer ownership of the Nets to one of his Moscow-based companies. An oligarch-owned a…