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As shareholder vote on Forest City-Brookfield deal approaches, two tempered endorsements, more Al Ratner pushback

Two advisory firms have given shareholders the green light to sell shares in Forest City Realty Trust (FCRT) and thus approve the pending sale to Brookfield Asset Management, which was advanced by FCRT's board in a contentious 7-5 vote and has faced both board dissent and forceful criticism from a former co-chair and CEO.

Those advisors, one of them clearly lacking full-throated enthusiasm, could give institutional shareholders like the Vanguard Group backup for a "yes" vote on the merger. It's reminiscent, in an unrelated but not irrelevant context, of the minimal "rational basis" standard required for judges in New York State to uphold the actions of a state agency.

The special stockholder meeting to vote on the transaction is Thursday, Nov. 15, in the offices of the law firm LLP, in Cleveland, where Forest City is based. Even if the acquisition is approved, the deal won't close until the end of the year.

Ratner: a bad deal

That former CEO, Albert Ratner, argues that one of the advisory firms missed the mark, even as it acknowledged his concerns as valid. So he issued another press release, his third, making his case; he previously criticized the overall agreement, then argued that Forest City's Q3 results bolstered his analysis.

After all, to choose the simplest of his examples, while Brookfield offer is $25.35 a share, Ratner cogently argues that's presented deceptively, since the effective price is $24.99 per share, given that Forest City's dividend has been suspended for two quarters.

The founding Ratner family collectively owns about 10% of the shares and no longer controls Forest City via a two-class share structure. It's notable that only James Ratner, the current chairman, and Al Ratner, have publicly opposed the deal. They own about 2.46% and 1%, respectively.

What's in it for 90-year-old Al Ratner, long a corporate insider, now an outsider, launching a somewhat quixotic but deeply argued crusade with a flurry of press releases? Surely he doesn't need more money. Nor is he wedded to keeping Forest City properties, which could be liquidated, or, apparently, against marketing/selling the firm at some point.

"To be crystal clear, the question is not whether Forest City should be monetized," Ratner said in his most recent press release, "but whether Forest City shareholders should relinquish to Brookfield close to half of the intrinsic value of their shares for the sake of whatever incremental certainty Brookfield's expedient offer may provide. And the answer for me is clear: no."

Perhaps he'll say more someday, but my guess is that he just thinks it's an unwise and unfair deal. (That, ironically enough, was what those fighting his company on Atlantic Yards might have said. Then again, that project, however unfair to locals or taxpayers, turned out to be a bad deal for Forest City.)

Two advisors say "yes," cautiously

As Bloomberg reported 11/5/18, the firm Glass Lewis & Co called Brookfield's offer of $25.35 a share "a financially compelling exit point, including an attractive premium to the unaffected trading price of Forest City shares and a reasonable valuation relative to REIT peers."

Glass Lewis called the deal "favorable relative to the risks and uncertainties associated with the stand-alone alternative,” Bloomberg reported. Similarly, Institutional Shareholder Services (ISS) offered "cautionary support for this proposal... as it represents an opportunity crystallize value at a premium in a rising interest rate environment."

ISS's take

ISS, which spoke with both Forest City board/management and Al Ratner, suggested he "has raised valid concerns with the approval process and transaction terms, including that the board agreed in principle to the transaction approximately two months after eight of the 12 directors were seated, with the new directors generally voting in favor of the deal, and that the offer is below future NAV [net asset value] estimates prepared by management."

Despite the "unusual" divided board, and the "even more unusual" process in which CEO David LaRue changed his mind as board member to back the deal, and Ratner's "credible apprehensions," ISS concluded that "no definitive superior proposals surfaced" and "market and execution risks" jeopardized the ability to reap higher value from Forest City's properties.

"Moreover, it is worth noting that the CEO, who has over 30 years experience" with the company, backed the deal, ISS wrote, ignoring that LaRue's potential golden parachute gave him significant incentives that don't track that of shareholders.

Al Ratner on Forest City proxy statement

In a press release 11/8/18 (bottom), Al Ratner cited "several significant defects in the company's proxy statement," which thus misled shareholders facing a vote. For example, he wrote:
There is no disclosed evidence that the newly reconstituted Board spoke with potential buyers other than Brookfield, or looked into strategic alternatives such as refinancing existing properties or pre-marketing properties and contracting for their sale before the end of the "built-in gains" period, so that the sale of the properties could be completed, and the proceeds of sale distributed to shareholders, immediately upon the conclusion of that built-in gains period.
He also argued that the NAV estimates made by Forest City, also cited by ISS, did not incorporate a property-by-property valuation. Citing the value of such properties, plus the value of potential dividends, the press release states, "Mr. Ratner also notes that Chief Executive Officer David LaRue changed his vote to be in favor of the deal as it stood, despite this unrecognized increase in valuation."

One possible translation of that is: LaRue ignored the increased value because he wanted his deal.

Noting the significant, nearly seven-fold increase in net earnings for the first nine months of 2018, Ratner asked if the board knew that those earnings, which translate to $2.26 per share, would go to Brookfield, rather than current shareholders.

He also asked if the board had taken into account the $1.3 billion raised in asset dispositions, which have yet to be redeployed and deliver value.

"Forest City shareholders deserve adequate disclosures in the interest of ensuring full and fair value," Ratner said. "No matter how you slice it, there is a gaping chasm in valuation between the figures and framework depicted in the proxy and the true value of the company." That said, it remains unclear how and when that "true value" could be monetized.

Al Ratner on ISS's analysis

As to ISS's take, Ratner suggested that it didn't "account for the beneficial impact of inflation on the value of the company's real estate."

"As experienced real estate developers and investors know, when interest rates rise, there are fewer new builds and, consequently, fewer new properties become available," he said. "As a result, existing properties – such as those owned by the company – are able to command higher rents, which increases, rather than decreases, the value of those properties."

That's surely part of the equation. The board majority also warned, according to the proxy statement, of "increases in interest rates that could reduce the value of our dividend and increase the cost of debt and the cost to us of obtaining capital to fund future activities."

In other words, rising interest rates could help, or hurt, depending on the company's plans and tactics.

The bottom line, and an inattentive press

The bottom line, so far, seems that the hedge funds that sought a quick profit on Forest City shares can vote for it, and the institutional shareholders have cover to take their profits too, thus agreeing to the Brookfield takeover.

It's a remarkably under-covered story. The Forest City board drama--that unusual 7-5 vote, the CEO switcheroo--and the debatable financial analyses have generated only two substantial articles, in this blog and The (Cleveland) Plain Dealer.

The Wall Street Journal, for example, covered only Al Ratner's opposition--it got an exclusive look--but not the full story. Crain's Cleveland Business cited Al Ratner's posture. The Real Deal ran a squib.

The New York Times has ignored the story. Bloomberg News--ahead on the Brookfield deal as it percolated--only covered the Glass Lewis finding. Publications like Forbes, Fortune, and Institutional Investor--as far as I can tell--haven't touched it.

Such journalistic neglect, I suspect, is less deliberate than a function of editors and reporters already being swamped. Not so many years ago a story this rich would've gotten a lot more play.

Al Ratner Nov. 11, 2018 Press Release re Forest City and Brookfield by Norman Oder on Scribd