Land and Buildings Investment Management issued an open letter yesterday to its fellow shareholders of Forest City Realty Trust, a publicly traded real estate owner and manager.
The letter, signed by Land and Buildings founder and chief investment officer Jonathan Litt, was issued in response to Forest City’s decision in December 2016 to eliminate its dual-class share structure and implement a majority voting standard following the company’s next annual meeting, among other board and corporate-governance changes. Bruce C. Ratner, Forest City’s executive vice president, has stepped down from the board, and board member Stan Ross will not stand for re-election, creating two board vacancies. In addition, former board chairman Charles Ratner has retired from the company and the board, to be replaced by James A. Ratner, Forest City’s president and CEO.
“For the first time in my 25 years of following Forest City Realty Trust … I believe the company is now investable,” said Litt in the beginning of his letter. “Forest City is committing to no longer be a family-controlled company seemingly run for the benefit of the Ratner family minority shareholders. … [But] shareholders should not be fooled into thinking the reclassification into a single class of stock will by itself fix Forest City’s problems going forward.”
Litt considers Forest City’s portfolio of Class A coastal apartments and New York City office and laboratory space to be high-quality investments. The company’s stock has a current consensus net asset value (NAV) of approximately $28 per share, which Litt believes has at least a 40% upside, to a NAV of over $30. He considers the company’s property to be undervalued due to “the poor performance of Forest City management,” a point he illustrates by comparing same-store NOI margins of comparable properties to those of Forest City properties. In the apartment sector alone, Forest City’s 58.4% same-store NOI margins are 11.3% lower than the peer average.
Litt also points out that Forest City shareholders have experienced $2.3 billion in impairments since 2007, equal to nearly 40% of the firm’s current equity market capitalization. Litt attributes these figures to the company’s ambitious development projects.
Finally, on a trailing three-year basis, Litt notes that Forest City’s shareholder returns are 47% lower than the proxy peer average. On a trailing 20-year basis, they are 482% lower than the proxy peer average.
Land and Buildings' Contention
At the root of Forest City's "abject underperformance," says Litt, is “a tangled web of nepotism and self-dealing” tied to the positions held by the Ratner family, the founding family of Forest City Realty Trust, and its appointees. Four of the remaining board members are Ratner family members, and seven were personally picked by the Ratners. Ten additional Ratner family members are also on the company’s payroll, and two other employees are immediate family members of executives outside the family. In addition, Litt notes in his letter that about $120 million, or a 31% premium, will be paid to the Ratner family in exchange for their controlling shares during the dual-class share structure elimination process.
Litt’s proposed solution to these problems is provided in two calls to action for Forest City and its shareholders. The first call to action asks Forest City’s independent directors to call a special meeting of the shareholders following the Forest City annual meeting this May, wherein the entire 13-person board of directors will be put to a shareholder vote and shareholders given an opportunity to nominate alternate candidates. The second call to action calls on Forest City to create a committee of independent board members to “evaluate all available strategic options to maximize shareholder value.”
Land and Buildings made its investment in Forest City just after the announcement of the elimination of the dual-class share structure, which was two days before the deadline for the submission of new director candidates. Land and Buildings submitted three Class A nominees and discussed its concerns about the board member selection process with Forest City during a meeting on Dec. 14. Land and Buildings’ suggestions for the selection process, which included direct nomination of Land and Buildings candidates and the expansion of the board of directors, had been rejected as of Jan. 6.
“The board at Forest City can run, but they cannot hide,” said Litt. “If shareholders approve the reclassification, the day after the 2017 Annual Meeting, the entire 13-person board becomes annually elected by a single class of public shareholders. We believe shareholders must be significantly represented on the board and will do what it takes to see it done.”
Forest City Responds
Today, Jan. 31, Forest City Realty Trust issued a press release in response to the letter from Land and Buildings. According to the release, Land and Buildings had purchased less than 1% of Forest City’s existing Class A common stock following Forest City’s corporate-governance and share-structure change announcement.
In response to the issue of the time window between the press release and the board member nomination deadline, Forest City said that “Land and 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.”
In Forest City management’s meeting with Land and Buildings, the investment manager put forth 11 more informal nominees for the board of directors. In the release, Forest City affirmed its commitment to vet and consider both the formal and informal nominees for the two vacant independent director positions.
“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 and Buildings would choose this counterproductive path,” Forest City said.
The company closed its release by stating its commitment to continuing “open, constructive” dialogue with shareholders in order to execute its strategic plan to create shareholder value.
Litt is no stranger to controversy involving his aggressive investor stance. His actions helped push the sale of Associated Estates, bought by Brookfield Asset Management in 2015, and some industry observers credit Land and Buildings with forcing the sale of BRE Properties, purchased by Essex Property Trust in 2013.
