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Does Forest City’s Portfolio Pruning Signal Something Deeper?

Does Forest City’s Portfolio Pruning Signal Something Deeper?

Despite the challenges of adapting to an omni-channel world, retail REITs seem to be doing fairly well in strengthening the positioning of their malls and shopping centers. In some cases, however, they are pivoting away from the high-risk sector.

On Aug. 23, Cleveland, Ohio-based diversified REIT Forest City Realty Trust announced that it will explore alternative strategies for its regional mall properties. "Our intent is to exit that business to the great extent," Forest City CEO David LaRue said during the company conference call. It is believed that the REIT will invest proceeds from the sale of its malls into office and apartment properties instead.

If this strategy is undertaken, Forest City is positioning itself away from a heavy investment in the retail sector. The reason might have to do with the fact that the company only recently gained publicly-traded REIT status and is likely trying to become more attractive to investors.

“One thing to consider is that they have turned themselves into a REIT. The analysts at the investment banks like to see companies with focused businesses,” says Jim Costello, senior vice president with New York City-based research firm Real Capital Analytics (RCA). “Forest City stripped away some of their less productive business lines, which should make them more focused.”

In a bi-furcated retail real estate market, where only the strongest malls are doing well, company executives may also feel now is a good time to make an exit.

“The recent announcement to divest of certain regional malls is an indication that these malls have been impacted by stronger/ healthier malls in their respective markets,” says Don MacLellan, senior managing partner at Irvine, Calif-based real estate investment advisory firm Faris Lee Investments.

Forest City’s malls are not exactly struggling. Britton Costa, director of U.S. REITs at credit ratings agency Fitch Ratings, calls them “fairly productive,” with tenant sales of more than $550 per sq. ft. and comparable net operating income (NOI) growth in the low- to mid-single digits over the past few years (5.5 percent year-to-date for the whole retail portfolio).

“Productive regional malls should garner interest from a wide variety of capital sources,” Britton notes. “All of the traditional players have been active, including REITs, private equity, sovereign wealth funds, insurance companies and pension funds and we expect this will be true for this portfolio.”

In the past 12 months, the top buyers for regional malls in the U.S. have been Canadian asset manager Brookfield, private equity firm the Blackstone Group and PGIM Real Estate, according to Costello.

“A lot of these transactions were tied up in portfolio deals as there are a lot of capital sources in the global markets looking for hard assets where they can park their capital,” he says. The question is: “Will it all go to one of these kinds of investors in one big deal or will they sell off the assets one at a time?”

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