Llenrock Group

About the Author Llenrock Group

Llenrock Group is a real estate advisory and investment banking firm built on relationships and focused on results. With our unique 360° view and a panorama of services, we bring exceptional levels of experience, responsiveness and creativity to the marketplace. Founded by real estate professionals, our strength lies in the breadth and depth of our relationships — and our expertise. Through our subsidiaries, Llenrock Advisors and Llenrock Realty Partners, we offer a full spectrum of services, including investment sales, direct investment and structured finance. And because we have years of experience in real estate operations, acquisitions and deal structuring, we’re able to do more than just respond to our clients’ challenges — we anticipate them.

Forest City: What Can We Expect From Its REIT Conversion?

The big news from the REIT world last week has been the announcement that core market developer/landlord Forest City Enterprises (NYSE: FCE.A) announced its intention to join the REIT sector’s ranks. Though it’s based in Cleveland, Ohio — not a gateway market by any stretch of the imagination — the nearly 100-year-old company now known as Forest City Enterprises is extremely active in some of the country’s most competitive and valuable markets: New York City (Manhattan and Brooklyn), Boston, San Francisco, Washington D.C., Dallas, Denver and Los Angeles. What do these markets have in common? Strong fundamentals, population growth, powerful economic drivers (finance, technology, government, energy, etc.) and a strong track record for price growth. According to the company’s website, Forest City is involved in all major aspects of the real estate business — it’s a developer, operator, and owner of a variety of residential, mixed-use, and commercial assets including such high-profile properties as Brooklyn’s Pacific Park (neé Hudson Yards), home of the recently developed Barclay’s Center (built by Forest City’s NYC subsidiary, Forest City Ratner). Other major assets include San Francisco’s million-and-a-half SF Westfield San Fancsico Centre (JV) and Brooklyn’s Atlantic Terminal Mall.

So that’s the big-picture assessment of the diversified real estate company; it’s a big national player with a presence in some very high-barrier real estate markets. The company’s entire portfolio is valued at nearly $9B, reportsNational Real Estate Investor Online.

According to the article linked above, the company aims to begin its life as a REIT in the 2016 tax year. The reasoning behind REIT conversion pretty much go without saying: for any growth-minded company, REIT conversion offers a great opportunity for tax-efficiency and a broader fundraising strategy (thanks to said tax efficiency). But NREI asks if now is the right time for REIT conversion:

REITs have had a strong run in the past few years, as commercial real estate became increasingly more attractive to high net worth investors and institutional investors alike, but may Forest City be a bit late to the party? REIT.com, a site run by the National Association of Real Estate Investment Trusts (NAREIT), predicts that overall REIT performance in 2015 will be strong, but will fall short of 2014’s levels.

It’s true that the REIT sector’s post-recession growth has not enjoyed a non-stop upward movement; the Fed’s tapering talk in 2013 put a slight damper on REIT equities around mid-year, thanks to investors’ skittishness concerning interest rates. Still, REITs’ values and investment have trended upward for the past half a decade (more or less) as stability- and return-minded investors sought alternatives for their capital.

It’s really hard to gauge how well-positioned Forest City is to convert to and grow as a REIT. Upon hearing the company’s announcement, I immediately came up with a few questions:

  • Will all of the company’s myriad holdings and subsidiaries be folded into the new REIT?
  • Will its geographical strategy change?
  • Will its appetite for various asset classes broaden/shrink?
  • How will the restructuring affect its leadership?

These questions will likely be answered to some degree in coming months, as its conversion process moves forward and related regulatory documents become available. Purely speculating, I suggest its geographical focus will remain constant: the company knows its current markets well (take, for instance, Bruce Ratner’s close-bordering-on-sleazy level of political connectedness in NYC), and its experience and relationships in these markets are not quickly replicated in other markets, where fundamentals and political environments are different.

Some analysts predict the company’s emphasis of ground-up development, arguably its most speculative line of business, will be overshadowed by its interest in preexisting core assets, which come with a certain level of value-assurance (and often come with existing corporate leases). Likely the company will exercise a greater level of caution as a public REIT, since it will have to align its goals with and appeal to a new group of investors once the REIT conversion takes effect.

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