Forest City shifts focus to core markets, selling land portfolio

Rolling out a four-year strategic plan, Forest City Enterprises Inc. will shed assets to focus on core rental products-multifamily, office and retail-in New York, Washington, D.C., Boston, Dallas, Los Angeles, San Francisco and Denver. The play will drive the sale of its land portfolio for 35 active projects.

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David J. LaRue, president and CEO of the Cleveland-based company, said the push will lay “a foundation for accelerated value creation.” The disclosure is aimed at increasing transparency and aiding investors in assessing Forest City’s valuation.

Forest City’s land business buys and sells raw land, develops subdivisions and sells lots to homebuilders. The to-be-sold portfolio targets projects in the Southwest, Texas, Carolinas and Ohio.

In a press release, Forest City’s management said it will recognize a non-cash impairment charge of $150 million to $165 million, pre-tax for the quarter that ended Jan. 31. Proceeds from the repositioning will be used to reduce debt and selectively jumpstart development.

“The land business is where the company started in real estate, and it has traditionally been a profitable contributor to our results,” LaRue said. “However, it tends to be highly cyclical and is fundamentally different from our core rental properties business, which will be our primary focus going forward.”

LaRue said the imminent sales aren’t a reflection of its confidence in the communities. “We believe strongly in the communities where we have land development projects,” he said, adding that it will meet its obligations to the projects. “We expect that any strategic alternatives will fully preserve the vision for each community.”

Forest City also is eyeing disposition of specialty retail centers in non-core markets, pending the realization of appropriate market value. Going forward, the retail focus will be major regional malls, anchored lifestyle centers and New York urban retail properties.

In 2011, Forest City netted $281 million from dispositions and slashed $392 million of debt as a prelude to the implementation of the just-announced four-year strategic plan. Meanwhile, the company continued to develop, primarily multifamily projects, in D.C., Denver and Dallas.

“Our track record of successful projects in core markets demonstrates both our adaptability and capability to respond to changing market conditions,” LaRue said.

Forest City also introduced a schedule of net asset value components as part of its quarterly and annual supplement packages. In tandem with the repositioning news, Forest City reduced the size of its 15-member board to 13. The reduction take effect in June.

The company’s future board will be primarily independent directors. James A. Ratner and Joan K. Shafran, two non-independent directors, will complete their terms through June and will not be re-nominated. Ratner will continue as EVP of Forest City and chairman and CEO of its commercial group, the largest business unit.

“Forest City has a rich culture and a history of growth and adapting to change,” Ratner said. “The actions we are taking demonstrate our commitment to that legacy and to continuing to improve, evolve and grow.”

Author: Daniel J. Sernovitz, Washington Business Journal