The announcement that Brookfield Asset Management Inc. will acquire Forest City Realty Trust Inc. through a real estate investment fund—a deal considered a long time in the making—was viewed by industry observers as a positive move for both companies.
The all-cash transaction is valued at $11.4 billion, or $25.35 per share of Forest City’s outstanding shares of common stock and inclusive of its proportionate share of debt. This price is a 26.6 percent premium over Forest City’s closing price of $20.03 per share on June 15, the day before a Bloomberg article revealed that Brookfield and Forest City were in talks. The deal, recommended by Forest City’s board of directors, is set to close in the fourth quarter.
The price is attractive, analysts say. It’s also a bump over a previously reported offer from Brookfield earlier this year that observers at the time figured would be too low for Forest City.
Forest City has consistently traded at a discount to its net asset value (NAV). Its stock was trading at a discount of 19.2 percent as of July 30, according to S&P Global Market Intelligence’s most recent consensus NAV estimate. The SNL U.S. Equity REIT Index was trading at a market-cap-weighted discount of 4.7 percent.
“I think, given the complexity and history of Forest City, there are only very few potential buyers out there,” says Paul Adornato, a veteran REIT analyst. “So, it’s somewhat of a relief that they were able to reach a deal that was I think fair for Forest City.”
Analysts at Evercore ISI in a note called the transaction a “win-win.” Forest City shareholders will see an immediate cash premium, and Brookfield will benefit from Forest City’s development and redevelopment projects. Brookfield’s access to capital could accelerate these moves, they added.
Forest City converted to a REIT a couple of years ago, which meant the company became subject to a built-in gains tax, effectively prohibiting immediate asset sales, that will end in two-and-a-half years, the Evercore analysts wrote. “That said, we expect the board considered there are a lot of unknowns and risks of a 2.5- year period and at the current share price at a meaningful discount to NAV Forest City was inhibited from raising common equity to fund acceleration of opportunities,” they wrote.
The tax, along with other factors, such as Forest City’s joint ventures and its geographic footprint, helped limit the buyer pool and get Brookfield the attractive price, the analysts noted.
Forest City declined to comment, and Brookfield did not respond to a request for comment. In the press release announcing the takeover, Forest City CEO David LaRue said the REIT has transformed over the last several years and is pleased that Brookfield recognizes its efforts to strengthen its business. “We believe that this transaction will deliver an immediate cash premium to stockholders for their investment and represents the best path forward for our company and our stockholders,” he said.
“Forest City has created a high-quality portfolio of operating and development assets over its 100-year history. We look forward to creating further value in these great assets on behalf of our limited partners,” said Brookfield Property Group CEO Brian Kingston in the statement.
Last September, Forest City announced it would undertake a strategic review to maximize shareholder value amid activist pressure. (Jonathan Litt, the activist investor, did not respond to a request for comment on Brookfield’s offer.) In March, after nearly six months of review, Forest City said the process was over and it would remain a standalone company. In that statement, the REIT said it received numerous bids, but rejected a finalist, described as a “large financial investor.” The company opted instead to reconstitute its board, boosting the number of independent directors and reducing the influence of the Ratner family, the REIT’s founders.
Prior to the board changing, an acquisition of Forest City was off the table, Adornato says. But the REIT “went from a family-controlled entity to one that included activist investors on the board, so that’s probably very important to this happening,” he notes.
Meanwhile, Brookfield, an alternative asset manager, has been in acquisition mode. Aside from the Forest City transaction, Brookfield earlier this year moved to buy mall REIT GGP, Inc. Brookfield also recently announced it is selling its stake in a portfolio of office and multifamily properties in Manhattan, Bloomberg reported. Proceeds from the sale are expected to be around $1.4 billion. By the end of the year or early 2019, it will sell an additional stake for total proceeds of $1.8 billion.
In the Forest City deal, Brookfield has a competitive advantage as a large-scale owner and operator of different types of assets around the globe, says Ann Dai, director in the equity research group at Keefe, Bruyette & Woods. Securing financing also isn’t a big concern for the company. “They have core real estate funds, private equity-style funds—all of these different pools of capital that they’ve amassed, where it becomes much easier to go out and do an acquisition and not have to worry about where the financing is going to come from,” Dai says.
Forest City, a Cleveland-based REIT, holds iconic properties in major cities, including The New York Times building in Manhattan, and through a joint venture is developing the mixed-use project Pacific Park Brooklyn. Its mix of retail, multifamily and core assets also aligns with Brookfield’s expertise and asset profile, Dai says. “It makes them a much more natural buyer than a single-asset REIT or somebody else,” she adds.