In May, a few months after its conversion to a real estate investment trust, Forest City Enterprises briefed investors on moves it had taken to strengthen its balance sheet.
Its presentation was titled, “Forest City: A New REIT 95 Years in the Making.” And while Bruce Ratner, the scion who founded local division Forest City Ratner in the 1980s and ran it up until three years ago, didn’t quite put it in terms of centuries, he did say becoming a REIT had been on his wishlist.
“Some of us felt for the longest time that we should be a REIT,” he told The Real Deal during an interview this month at FCR’s MetroTech headquarters in Downtown Brooklyn. And as he drew out the word “longest,” Ratner elicited a knowing laugh from MaryAnne Gilmartin, his successor and current CEO sitting across from him.
“I felt that way,” Ratner said to her, “and you know I made it clear I thought we should be a REIT for years.”
Forest City [TRDataCustom] has been a publicly traded C-Corp company since the 1960s. But after a wave of REIT conversions in the 1990’s transformed so many large real estate investment and development firms, it stood as an anomaly. Aside from Brookfield Property Partners, Ratner said, he was hard-pressed to find a public real estate company that wasn’t a REIT.
Being “out of the REIT box,” as he put it, limited the company’s exposure in the public markets. But now, in order to work as a REIT, Forest City would have to narrow its scope. As the parent company in Cleveland prepared for the transition, FCR saw significant churn: some of it planned, some that came by surprise.
FCR generated net operating income of about $227 million in 2015, investor documents show, up slightly from $218.8 million in 2014 and representing about 37 percent of Forest City’s total NOI. But over the past year, it also cut about 15 percent of its workforce. Some jobs such as accounting, human resources and information technology were consolidated in Cleveland, but other departures were less welcome. FCR lost its longtime chief operating officer and general counsel, for example, as well as its head of retail. There’s been significant turnover in the company’s vaunted construction department, a change that observers feel indicates FCR will shy away from ground-up development as a REIT.
It’s a perception Gilmartin takes issue with. FCR she said, is now “nice and nimble,” yet maintains what made it one of the biggest builders in the city.
“It’s my view and Bruce’s view that we have a secret sauce in our business… the stuff that makes us particularly strong in this market and around the country,” she said. “And the quest has been to preserve the secret sauce, you know, the stuff we do that represents a business that has really high barriers to entry.”
To Develop, or not to Develop
FCR’s assets total about $11 billion and include projects that formed its legacy as one of the city’s most ambitious developers: MetroTech in Brooklyn, the Frank Gehry-Designed 8 Spruce Street and the New York Times Building at 620 Eighth Avenue.
Gilmartin and Ratner say FCR has no intention of becoming less of a developer, and is actually doing more than ever before. Its pipeline includes 1,800 units of housing at Pacific Park, formerly known as Atlantic Yards, as well as a pair of buildings at the Cornell Tech campus on Roosevelt Island and the redevelopment of the Nassau Coliseum on Long Island.
But the firm has also disposed of development sites such as 625 Fulton Street, which it sold to Rabsky Group for $158 million, and is shopping stakes in two condo projects and an office project at Pacific Park. On the acquisition side, it has focused on cash-flow assets, such as a rental property at 500 Sterling Place.
Gilmartin said the company will put about 10 percent of its assets each year into development, about the same ratio she says it’s been at since coming out of the Great Recession.
By her reckoning, that’s about $1 billion of development annually. “And that’s not a small number, because that’s an annual number, and when we take partners, that’s just our share,” she said. “So we feel that the bandwidth we have within the REIT structure is a good bandwidth. And then this question about development. Do REITs develop? And yes, they do. Avalon develops. Boston Properties develops and Vornado develops.”
Churn rate
FCR now has about 110 full-time employees, 23 fewer than it did last year, the company said.
In January, David Berliner, who joined FCR in 1989 and rose to become COO, left with little fanfare. His responsibilities were spread out among existing employees, both in New York and Cleveland. Sources said Berliner, who ran the company’s arts program, is transitioning out of real estate.
“David had been at the company for 25 years,” Gilmartin said. “He has a passion for other things including art and the art world and he’s made a good living and decided he wants to make a major change. It’s hard because he’s like family, and it’s exciting.”
Berliner couldn’t be reached for comment.
In June, director of retail Kathryn Welch left after more than 30 years with the company. Welch’s focus was on retail development projects like the Ridge Hill Mall in Westchester, the type of non-core projects FCR is moving away from.
And in the last year, at least three longtime members of the company’s construction group with more than 50 years of experience among them have departed for other positions.
Linda Chiarelli, who served as senior vice president and deputy to head of construction Bob Sanna, left in January to head up capital projects at New York University. While at FCR, Chiarelli oversaw construction of the Barclays Center – the company sold its minority stake in the stadium last year – and spearheaded the Nassau Coliseum project.
Chiarelli told TRD she took the job because it was a “wonderful opportunity to expand beyond just construction,” and said the move had nothing to do with the volume of development at Forest City. Her replacement, Alexis Lenza, joined the firm in February after working at Turner Construction and SHoP Architects.
That same month, 15-year FCR veteran Michael Leone took a project manager position at the Related Companies, working with tenants on the company’s 10 Hudson Yards office tower. There, he joined former FCR vice president Joe Rechichi, who left in 2014 after a long tenure with the company to head up construction of the 1.7 million-square-foot tower.
In April, Scott Stutman, a top manager who had been with the company 21 years and worked on the New York Times Building and 330 Jay Street, joined Lend Lease as director of development operations. He was replaced by Robert Musco, who came from Cornell University’s Weill Medical College.
Ratner said he wasn’t surprised that seasoned pros were being picked off. Sanna has no plans to retire anytime soon, so it made sense for ambitious construction executives to look elsewhere in order to move up.
“To hold on to construction people today the way we have is actually amazing,” he said.
But the change at FCR isn’t just limited to the construction side. In early 2015, executive vice president Melissa Burch, who oversaw all aspects of the Forest City’s development division after Gilmartin became CEO, was recruited by Lend Lease to build the construction giant’s development arm.
“Part of the reason why lean and mean is great is because the people here want to build, they want to work and they want to grow,” Gilmartin said. “The point really is that you’ve gotta be able to feed the talent. And the talent wants the opportunity.”
“You come here to excel and you are what you build,” she added. “And you don’t come to Forest City to be mediocre.”