After starting out in the land development business 60 years ago, Forest City Enterprises Inc. will reposition or divest its land holdings and is actively reviewing alternatives to do so.
Instead, Forest City is launching a new, four-year strategic plan that will focus its business on its core rental products - apartments, office and retail - in its core markets of New York, Washington DC, Boston, Dallas, Los Angeles, San Francisco and Denver. Not included in that list of core markets is Forest City's home base, Cleveland, OH.
The land business buys and sells raw land, develops subdivisions and sells lots to homebuilders. Forest City's land portfolio consists of approximately 35 active projects primarily located in the Southwestern U.S., Texas, the Carolinas and Ohio. As of the end of the third quarter, Forest City listed its value at around $340 million.
As a result of this decision, Forest City expects to recognize a non-cash impairment charge of $150 million to $165 million on those assets.
Anticipated cash proceeds from executing the repositioning will be used to pay down debt and selectively activate new development.
"The land business is where the company started in real estate, and it has traditionally been a profitable contributor to our results," said David J. LaRue, Forest City president and CEO. "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."
"Despite this decision, we believe strongly in the communities where we have land development projects," he said. "These high-quality projects are creating vibrant new neighborhoods for the communities in which they are located. We will continue to meet our obligations related to these projects, and we expect that any strategic alternatives will fully preserve the vision for each community."
LaRue said the company would consider selling of the holdings as whole portfolio sale, regional portfolio sale or individual sales. The plan is to have the reposition completed by the end of the year, although he added, "this will not be a fire sale."
Not included in the land sales will be Forest City's holdings in Central Station in Chicago, Stapleton in Denver and Atlantic Yards in New York.
Over the past year, Forest City's continuing focus on core products and markets has been demonstrated through the sale of two of the company's remaining hotels, the Ritz-Carlton Cleveland and the Charleston Marriott in Charleston, WV. Both were non-core products in legacy markets for the company.
In addition, the company plans to divest its specialty retail centers in non-core markets in cases where Forest City can achieve what it called "appropriate market value." As this strategy is executed, the company intends to refocus its retail portfolio around its major regional malls and anchored lifestyle centers, as well as its New York urban retail properties.
Aside from its land holdings, LaRue said about 75% plus of its real estate assets is sitting in its core markets. That leaves 25% sitting on the table that could potentially come up for consideration of disposition or joint venturing.
With the disposition of assets, Forest City will first focus on continuing to improve its balance sheet. The company intends to use proceeds from land sales and asset dispositions to both pay down debt and selectively activate new development, primarily in core markets and with existing entitlements.
The company employed this strategy during 2011, when it sold five properties and entered into a joint venture on 15 others. These transactions generated net proceeds of $281 million while removing $392 million of debt from the company's pro-rata balance sheet. During the same time period, Forest City invested to commence development of new projects, primarily in multifamily, in the company's core markets of Washington, 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," said LaRue. "The announcement of these new strategic actions reflects our continuing commitment to drive value for our stakeholders. We will continue to hold ourselves accountable to meet these expectations."
Charles Ratner, chairman of Forest City, has made similar strategic decisions in the past, moving the firm out of the home center retail business, the lumber wholesale business and, most recently, the assisted living segment of multifamily.
"This type of change -- pruning our portfolio from time to time in order to focus on future opportunities -- is who we are as a company," Ratner said.
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