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Forest City responds to hedge fund's critique, calls it hasty and counterproductive (but ignores some specifics)

Yesterday, Forest City Realty Trust issued both a public statement and a (public) message to employees in response to the harsh letter from the hedge fund Land & Buildings.

The statement noted that Land & Buildings had less than 1% of shares--a previous report said 1% and said the hedge fund had not engaged with the company before submitting a notice of intent to nominate members of the board of directors. Forest City noted that its "governance enhancements... were well received by shareholders"--indeed, the largest outside shareholder approved--and said it was "executing on a strategic plan" to improve performance.

Forest City, however, did not address charges of nepotism, the accusation that its G&A (general & administrative) costs were out of line, and the charge that Forest City Ratner, the New York subsidiary, was responsible for significant underperformance.

As noted by the Plain Dealer, Forest City's shares went up yesterday by 1.6%. That's more than Vanguard's REIT index, which went up .77%.

The statement:
Forest City is committed to acting in the best interests of the Company and its shareholders and values feedback from all shareholders. Following discussions with and input from the Company’s largest shareholders, the Board and management team took significant steps to enhance the Company’s corporate governance by entering into agreements to declassify its common equity, appoint two new independent directors and adopt a majority voting standard for the election of directors.
Following Forest City’s press release announcing these corporate governance changes on December 6, 2016, including a proposal to eliminate the Company’s dual-class share structure, Land & Buildings purchased less than 1% of Forest City’s outstanding Class A Common Stock and submitted a notice of its intent to nominate three individuals for the election of Class A Directors to the Forest City Board of Directors at the Company’s 2017 Annual Meeting, the last day that shareholders could legally submit proposals to the Company. Land & Buildings made no attempt to engage with management on this issue prior to the submission of their candidates and requested priority and approval rights over other shareholders.
After their submission, Company management met with Land & Buildings to discuss their proposed candidates and Land & Buildings indicated that although their candidates were qualified, that there were a number of other industry executives they believed to be better candidates than their own nominees. Land & Buildings provided a list of 11 additional potential board candidates. Consistent with our fiduciary duties and as communicated in our numerous conversations with the firm’s Founder and CIO, Jonathan Litt, Land & Buildings’ formal and informal nominees will be vetted and considered in the search process for two new, independent directors.
We are surprised that after working with our shareholders and announcing our governance enhancements, which were well received by shareholders, and prior to learning who Forest City’s new independent director nominees will be, Land & Buildings would choose this counterproductive path. Forest City has articulated and is executing on a strategic plan to build a strong sustainable capital structure, focus on core markets and products, and achieve operational excellence. Moving forward, Forest City will continue to make decisions and take actions that are in the best interests of the Company’s shareholders. The Company looks forward to continuing its open, constructive dialogue with shareholders as it executes its strategic plan to create shareholder value.
As previously announced on December 6, 2016, Forest City entered into an agreement to eliminate the Company’s dual-class share structure and also announced a number of other corporate governance enhancements and Board changes. As part of these Board changes, Bruce C. Ratner has stepped down from the Board. In addition, Stan Ross has decided not to stand for re-election at the Company’s 2017 Annual Meeting. The Company intends to fill these two board vacancies with new, independent directors and has retained Ferguson Partners Ltd. to lead the search for highly qualified candidates.
The Company also announced the retirement of Charles Ratner from the Company and as Executive Chairman of the Forest City Board, and the appointment of James A. Ratner as non-executive Chairman of the Forest City Board, succeeding Charles Ratner as of year-end 2016. Following these actions, the Board will be comprised of thirteen directors, eight of whom will be independent, one of whom will be the President and Chief Executive Officer, and four of whom will be members of the founding family, the Company’s largest non-institutional shareholder. Furthermore, the Company announced plans to implement a majority voting standard in the election of directors following the 2017 Annual Meeting.
The message to employees:
As some associates may be aware, yesterday an activist shareholder, Land & Buildings Investment Management LLC, which only recently became a Forest City shareholder, issued a press release critical of the company’s board and management, and calling for the company to take a range of actions - beyond those that we have already taken or announced as part of our ongoing strategic transformation.
Associates are well aware of the many significant steps the company has taken - thanks to your hard work and dedication - over the last several years as we have executed on our strategy to focus on core markets and products, build a strong capital structure and pursue operational excellence. In addition, we have improved the transparency of our financial disclosure and enhanced our governance practices, including plans to eliminate our dual-class stock structure and appoint two new independent board members, effective with a shareholder vote at our 2017 Annual Meeting later this spring.
The broad range of our strategic and governance actions over the past several years have been favorably received by many investors, including a number of our largest and longest-tenured shareholders. For that reason, we were surprised that Land & Buildings would choose to take such a negative, and, we believe, counterproductive stance.
I want to assure associates that the entire board and senior leadership team believe the actions we have taken and continue to take as a company, have put Forest City on a positive growth path for the future that will continue to enhance value for all the company’s stakeholders, including associates.
While the Land & Buildings press release and any subsequent communication on this matter are likely to generate media coverage, I urge you not to let it be a distraction from the vital day-to-day work of continuing to execute our strategies, serve tenants and residents, and support fellow associates. We have a core team of senior staff and advisors focused on addressing this issue and will update the broader associate base if and when developments merit.
As always, thank you for your commitment to the continued success of Forest City.