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Forest City Realty Trust rejects buyout offer, will reform governance, cutting Ratner family role; tighter leash for New York?

In a bit of a surprise, Forest City Realty Trust (FCRT), the parent of Forest City New York, announced today that its board had concluded its review of strategic alternatives, which could have resulted in a merger, buyout, or partial selloff.

But after considering multiple buyout offers, the most serious one with significant constraints, the board decided to enhance shareholder value--to narrow the gap between the stock price and the perceived asset value--via internal changes, notably a new board.

This means further reducing the role of the extended Ratner family, which in 2016 gave up a dual-class structure that left that founding family in control of both shares and board. Nine of 13 current directors have agreed to resign from the Board, and the Ratner family will have only two board designees, not four, and one of them must be an independent director (not family).

Current Chairman James Ratner, a family member, will be interim Chairman of the Board, but he will resign from the Chairmanship upon appointment of the new Chairman. Thus Forest City, which is on its first non-family CEO, David LaRue, will get its first non-family Chairman of the Board.

(In January 2017, Jonathan Litt of Land & Buildings criticized the board for having 11 of 13 directors as "Ratners or legacy Board members handpicked by the Ratners," and said the assets merited a $30 stock price. Today it closed at $21.27.)

Update: Michelle Jarboe of The (Cleveland) Plain Dealer commented:
On the sale front, the ultimate offer that Forest City considered had a lot of contingencies and complexities to it - and the proposed purchase price was less than the stock's 52-week high point. So it's not necessarily shocking that the board rejected the deal.
Forest City's REIT conversion two years ago puts limits on asset sales over the next three years. A sale discussion could be different a few years from now, after those constraints have burned off.
Also: National Real Estate Investor noted that Evercore ISI analysts had predicted that Forest City "is more likely to remain a publicly-traded entity," given the near-term "frictional costs related to the built-in gains tax on asset sales" and that, as of 1/5/18, "Forest City stock was trading at a discount of 16.63 percent, according to S&P Global Market Intelligence’s most recent consensus NAV [net asset value] estimate."

Impact in New York

What does this mean for Forest City New York, led by Bruce Ratner, who left the board in 2016 and has been criticized by hedge fund managers for significant losses on the Atlantic Yards/Pacific Park project in Brooklyn and the Ridge Hill retail complex in Yonkers? (Here's my long retrospective on Ratner and Forest City in The Bridge.)

Given criticisms of the family-controlled board for giving Ratner a long leash to pursue projects in the past, it's a reasonable bet that Forest City New York will have a shorter leash, with less latitude to pursue ground-up development, though it retains many cash cows.

Indeed, real estate analyst Paul Adornato commented, in response to my query, "As for Bruce Ratner and the New York office --that outcome was written long ago and not much influenced by events of the last year in my opinion. That is, large scale development would be phased out in favor of more REIT-like (lower risk and smaller scale) projects."

Board changes

Litt, who's been the toughest of the hedge fund critics, had slammed the board for its "allegiance to the Ratner family and has seemingly engaged in pervasive nepotism at the public shareholders' expense." Notably, the revised board will have seats not for Litt's firm but two funds with larger positions, Starboard Value, which owns about 3% of company shares, and Scopia Capital Management, which owns 8.3%. (Update: Litt's firm sold its stake in the third quarter of 2017.)

Adornato, who most recently worked for BMO Capital Markets, observed: "The board changes - giving activists more representation (Scopia and Starboard Value) and adding executives known for their shareholder-friendly leadership in times of crisis (Adam Metz)- may buy the company more time to deliver on long-promised improvements in efficiency and profitability. Ultimately the company faces increased scrutiny with more pressure to perform, and less entrenched family/legacy management, not a great place to be considering industry wide headwinds."

"I still think sale of the company is the likely outcome," he said, though it would be delayed.

The strategic review began last September, and led to news coverage of two potential transactions, one with Equity Commonwealth, the other with Brookfield Asset Management. 

The review was supposed to end yesterday, but instead the company issued a cryptic press release indicating that the window to add board members would extend a week, but not commenting on the strategic review. That led several observers, including me, to assume the strategic review also would last a week.

(Also see coverage from The Real Deal, Crain's Cleveland Business, and the Cleveland Plain Dealer.

The transaction that wasn't

In a letter to stockholders included in the press release, the company reported on its strategic review, with financial advisors led by Lazard together with Goldman Sachs. Those advisor communicated with over 50 potentially interested buyers at first; 18 parties executed confidentiality agreements.

An initial round of bidding led to seven non-binding preliminary indications of interest: five cash offers, plus two "structured, tax-efficient transactions." Then came a second round of bidding with six potentially interested partners/buyers.

After narrowing it down to three proposals, "the Board determined to pursue the non-binding proposal to acquire the Company for $26 per share in cash, which was submitted by a large financial investor with a strong track record of executing large, complex real estate and corporate transactions."

(Crain's Cleveland Business suggested that this offer was from Brookfield.)

After doing due diligence, the investor on March 7 offered $24.50 per share in cash, but under significant conditions, including: ending future dividend payments; obtaining certain joint venture partner consents; obtaining certain government consents; and Forest City completing an internal reorganization.

The board instead counter-offered a transaction at $25.50 per share in cash with dividends paid through closing, and no conditions with respect to third-party consents or completion of an internal reorganization. The potential buyer then offered $25 per share, but held fast on the dividend issue, and wanted to discuss the third-party consent issues.

Talks then broke down, so the board decided to focus on enhancing value, to add new directors and refresh the board.

"We expect to deliver strong returns to stockholders over time through (i) leveraging the Company's scale in core, high-barrier-to-entry markets, (ii) taking advantage of embedded growth from the development activities and accretive partner buyouts, (iii) continuing to focus on margin enhancement and (iv) returning additional capital to stockholders via dividend growth and share repurchases," wrote Board Chairman James A. Ratner and Lead Independent Director Scott S. Cowen

Share repurchase plan

Also, in an effort to enhance value, the board "approved an increase in the Company's existing $100 million share repurchase program to an aggregate total of $400 million."

This will allow the board "to take advantage of investment opportunities at times when the Board and Company management believe the market price of the common stock does not accurately reflect the underlying value of the Company; to indicate to investors the Company's confidence in its business; to enhance stockholder value; and to reduce dilution."