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Forest City Considering Potential M&A Options, Other Alternatives for Boosting Asset Value

Operating, Strategic, Financial and Structural Options Under Consideration
September 11, 2017
The board of directors at Cleveland-based Forest City Realty Trust Inc. (NYSE: FCEA) isn't waiting around to get a letter from an activist investor asking what they're doing to boost shareholder value.

This morning, the REIT announced that its board commenced a process to conduct areview of strategic options together with management and in consultation with financial and legal advisors to include such options as an accelerated and enhanced operating plan, structural alternatives for the REIT’s assets, and potential merger, acquisition or sale.

"The board believes thoroughly evaluating all alternatives, while simultaneously continuing to execute on our current strategies and supporting our associates in doing so, are the appropriate steps to assess how best to unlock stockholder value," said James A. Ratner, non-executive chairman of the board.

Investors greeted the news by bidding up Forest City’s stock price about 60 cents a share to $26.25/share, which would be a new 52-week high. The REIT’s stock has traded as low as $17.79/share in the past year.

“Over the last several years, we have made substantial progress transforming Forest City by focusing on core urban markets and products, reducing complexity, paying down debt, driving operational excellence and enhancing our corporate governance structure,” Ratner said.

This summer, Forest City lined up a deal to sell full control of 11 regional malls valued at about $4 billion to Sydney, Australia-based QIC Global Real Estate.

Separately, Forest City it also reached an agreement to sell its stake in its New York City retail portfolio to its JV partner, Madison International Realty.

That would essential leave the REIT a roughly $4 billion of office and multifamily properties.

"We continuously monitor the changing market dynamics we face in the real estate investment marketplace,” David J. LaRue, Forest City president and CEO, said when announcing second quarter earnings last month. “We also recognize that we have been, and continue to be, in an extended economic cycle and must continue to exercise prudent and disciplined capital allocation to new development.”

Meanwhile, REIT analysts have applauded the changes Forest City has made recently.

"We like the new and improved Forest City," Michael Bilerman, lead REIT analyst for Citi Research after the firm recently reported good quarterly results and improving core trends.

"Showing margin and leverage improvement and on track to meet future goals. Bringing Board members to meet investors with management, listening to feedback, and making changes as a result. Providing FY FFO guidance for the first time ever, and reaffirming FY SS NOI guidance," were among the positives cited by the Citi analyst in a recent report.

In addition, Bilerman noted Forest City has reduced its risk profile by lowering its cap on development from 10% to 7.5% of asset value. The retail property sales to QIC and Madison are expected to close by year-end, and the REIT's management plans to further reduce leverage to 6.5x and double the dividend by 2019.

The REIT also made changes to its corporate governance, adding independent board members and the dissolving its former A/B share structure.

For the six months ended June 30, 2017, the Cleveland-based company had net earnings of $97.7 million compared with net earnings of $270.6 million for the six months ended June 30, 2016. The company attributed the decline primarily due to dispositions and joint ventures that did not recur in 2017.

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