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FOREST CITY CONTINUED FROM PAGE 1
Experts say that even with plans to simplify its holdings to just two project types — apartments and office buildings — the real estate investment trust remains complicated. The company already has come a long way. In 2011, Forest City had properties and operations in eight product types, from residential land development to hotels and military housing. Technically, it’s still in the retail business, because its sale of regional malls and New York shopping centers is not completed, and it will be involved in the piece-by-piece transfer of federally assisted housing through the year. Moreover, the company is tough to value for Wall Street because the mixed-use story in 10 major metro markets that CEO David LaRue promotes for Forest City’s direction is a bit of an anomaly. While that is a plus in carving out a piece of turf for the company, it does not help it find a buyer. Most real estate investment trusts are pure plays — either office, apartment, data center or retail — and seek acquisitions in those property types. The National Association of Real Estate Investment Trust trade group lists 17 diversified REITs out of 171 REITs globally. The list of potential real estate investment trusts large enough to want a portfolio including both property types is short and augers for a private equity or hedge fund purchase.
ENERGY
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For example, Energy Focus’ newest product, RedCap, has batteries embedded in the tube as an emergency backup that eliminates the need for a separate battery pack. It’s set to be released at the end of this year. But there are also opportunities to embed sensors, controls and wireless connectivity into bulbs, which Tewksbury said Energy Focus will be working on going forward. He said the LED industry has big opportunities where it converges with building automation and the so-called Internet of Things — a term used to describe the large interconnected network of electronic devices that is revolutionizing how people interact with technology. Tewksbury made a point to nearly clear the company’s product roadmap after he joined, aside from the RedCap product. He hopes to see at least two new product introductions in 2018 and one per quarter starting in 2019. The company hasn’t given up on its military business, but it has been working to expand into commercial markets like education, health care and retail since before Tewksbury came on board. The company faces more competition for the Navy’s business today than it has in the past, including from companies outside the country. But even if it hadn’t, Energy Focus already had captured almost 50% of the sockets available in the U.S. Navy for its retrofit products, Tewksbury said. That makes it difficult to keep growing. In the second quarter of 2015, about 87% of the business was military, while 13% was commercial, Tewksbury said. Last quarter, 14% of the company’s business was in military, and 86% was commercial. To help generate growth, Tewksbury set out to change the way Energy Focus sells its products. The company had previously had a small number of direct sales people. Now, it still has that base, but it’s also
Beyond that, the nature of Forest City as a real estate developer prompts more issues for stock investors. McGrath notes that Forest City’s active development pipeline causes some investors to find it hard to value. The company is spending about $470 million on 10 projects that are under construction or planned for the next three years. An option might be for buyers with massive portfolios in either the apartment or office property portfolios to combine in a joint venture to buy Forest City, but that faces a big problem because of Forest City’s conversion to a real estate investment trust in 2016. “If anyone bought Forest City, they would have limited flexibility for selling assets for another three years,� McGrath said. Such sales would bring adverse tax consequences. And most buyers want to prune portfolios to keep just what they want as a way to put their own stamp on them. However, while three years is a long time for Wall Street, it’s not in terms of real estate cycles or for private equity funds with patient money. The least likely course is that investment bankers Lazard and Goldman Sachs will find an attractive company or set of assets Forest City to buy that might improve its fortunes. Primarily, that’s because over its history, Forest City generally has not been an acquirer. When it did buy, it typically targeted buildings or land that it could develop in massive projects. But if the last few years show
anything as Forest City has sold assets, lines of business and slashed staff, it has demonstrated repeatedly a willingness to do the unexpected to sharpen its game. The very idea it would sell the multitenant office building that houses its headquarters, Terminal Tower, and six other properties, or shed its substantial land development holdings for home builders, would have been unthinkable before the 2008 financial crisis. Some eye-popping strategies are afoot. For example, take New York REIT, launched in 2010 with the goal of unlocking unrealized value of Gotham properties. In January, New York REIT approved a plan to liquidate its portfolio of 3.4 million square feet of Manhattan and Brooklyn real estate — 83% of it office. Last Thursday, Sept. 14, New York REIT agreed to sell a 48% interest in 2-millionsquare-foot World Wide Plaza for $346 million to two New York-based property companies. Forest City’s briefings already have pointed to its eagerness to begin buying in its major markets after it nets an estimated $1.5 billion from the sale of most of its malls and shopping centers. Likewise, although the idea is out there, little weight is given to Forest City getting swallowed up in a monstrous real estate deal. One analyst, Jamie Feldman of Bank of America, issued a report suspending his rating for the company because Forest City opened the door
“We needed to scale our costs to be commensurate with revenue decline.� — Ted Tewksbury, Energy Focus Inc. chairman, CEO and president Energy Focus Inc.
using agencies to expand its reach. Agencies have existing relationships with potential customers for Energy Focus, and are able to offer those customers a portfolio of products and services, instead of Energy Focus’ standalone product offerings. Plus, it’s a cost-effective way to expand the company’s reach, as the agencies are commission-based. Of course, cutting costs is an important part of the turnaround plans, as well. “We needed to scale our costs to be commensurate with revenue decline,� Tewksbury said. Tewksbury put a plan in place to cut the company’s operating expenses by about $8 million, or nearly onethird, from 2016. He said the company is on track to hit that by the end of the year. The cuts came from all areas. Outside consulting and legal fees were trimmed, some less distinctive products were cut and activities that weren’t aligned with the new strategy, like audits, were stopped, Tewksbury said. Plus, headcount was cut from 130 employees in December 2016 to 90 employees today. Most of the employees whose jobs were cut weren’t local. Energy Focus shut down offices in New York, Maryland and Minnesota. Now, Energy Focus has the Solon facility, where some assembly work is done, and one in Taiwan. CFO Michael Port said the company also uses contract manufacturers in Asia for some of its work. Time will tell if these changes equal success for Energy Focus, but there were some small signs of change in
the most recent quarterly report. While net sales in the second quarter of 2017 dropped to $6 million, compared with $7.1 million in the second quarter of 2016, operating expenses also dropped significantly, according to a news release. Overall net loss decreased to $3.1 million in the quarter, compared to a net loss of $3.9 million at the same time last year. Tewksbury said his goal is to have Energy Focus reach profitability by mid-2018. “After that, you know, the sky’s the limit,� he said. The stock market didn’t show drastic change after the results were announced. The stock closed at $1.82 on Aug. 8 and at $2.01 on Aug. 9, the day of the quarterly results. On Sept. 14, the stock closed at $2.76. Oppenheimer & Co.’s most recent report, issued on Aug. 9, rates Energy Focus as a “perform� stock, which means the company expects Energy Focus to perform in line with the S&P 500 over the next 12 to 18 months. While the report said Oppenheimer is staying “on the sidelines� until revenue is more predictable and mentioned “inconsistent� military sales as a risk, it also pointed to strong growth potential for Energy Focus. “We believe EFOI has significant advantages in the commercial and military lighting sector due to the limited failure rate of its products over extended lifetimes, a focus of its products which allows for accelerated product cycles, and the benefit the company is getting by aggressively leveraging the LED supply chain via innovative product development,� the report said.