In a matter of days, Brookfield Asset Management emerged the winner for one mega-deal and saw another take-private fall through, after months of negotiations with two real estate investment trusts.
On Friday, Forest City Realty Trust, a Cleveland, Ohio-based REIT with a portfolio valued at $8.2 billion, said it decided to ultimately reject Brookfield’s takeover bid and stay public. On Monday, however, Toronto- and New York-based alternative asset manager said it inked a deal to buy the remainder of retail-focused GGP in a deal valuing the REIT at $15.3 billion.
Brookfield’s losing bid
In September, Forest City’s management launched a strategic review process in response to pressure from activist investors. The process, which publicly ended Friday, initially garnered interest from 50 parties, which then narrowed to 18 that signed confidentiality agreements and subsequently reduced to seven that submitted non-binding indications of interest. Eventually, the board reviewed two full-company acquisition proposals and pursued the non-binding proposal by a bidder understood to be Brookfield.
While Brookfield submitted multiple bids, Forest City rejected its final offer because the would-be buyer “was not willing to eliminate some portion of the third party consent contingency,” according to the REIT’s Friday statement.
Evercore ISI analysts said in a research note, “the contingencies included obtaining third-party consents from JV partners and certain government consents, which could have taken substantial time, which would have added to the deal risk.”
Instead of selling, Forest City is making changes that include adding more independent directors to its board and reducing the influence of the founding Ratner family. While nine directors have resigned, new directors include Adam Metz, The Carlyle Group’s head of international real estate, and Michelle Felman, a former executive at GE Capital’s now-defunct real estate division and current trustee at Partners Group.
Phil Owens, managing director of Newport Beach, California-based Green Street’s advisory group, told PERE that Forest City is unlikely to be taken private in its current form, now that the strategic review process has ended.
“However, you could see a scenario where the company is sold off in segments based on geographic and/or property verticals,” he said. “Rather than looking for a unicorn to take out this large, complex, development-heavy company, you could have many more, qualified interested parties jockeying for a more ‘bite-sized’ piece that falls comfortably into their wheelhouse.”
He added that Forest City’s decision to stay public is not a sign that take-privates are done for the wider REIT market.
“It is a sign that the buyer pool for large, complex companies, whose value-creation strategies appear risky, may not achieve the kind of valuation premiums in the market that management teams expect,” Owens said. “As we sit here today, there are quite a few high-quality public companies with clearly-communicated value-creation strategies that are trading at valuations that make them potentially more attractive take-out targets than Forest City.”
Brookfield found one such takeout target in GGP, which its subsidiary Brookfield Property Partners agreed to acquire on Monday. Chicago-based GGP rejected BPP’s first bid in November, but chief executive Bruce Flatt was unfazed by the initial rejection.
“There will be lots of stories between now and when the process ends. I think they’ll see it as a fair offer,” he said in a Bloomberg Television interview in December. “These are long, long processes… if they want to do something different, they’ll do something different, but I think at the end of the day it all makes sense.”
That process culminated Monday, when BPP said it would buy the 66 percent of GGP that it did not own in a cash-and-stock deal valuing the REIT at $15.3 billion.
As PERE previously reported, the deal will be syndicated, with the $9.25 billion cash portion of the transaction funded with $4 billion from joint venture partners and a fully-committed acquisition facility that “will be repaid over time through additional asset sales and asset-level financings,” according to a Brookfield presentation.
The deal, which adds 125 Class A malls to Brookfield’s portfolio, is expected to close in the third quarter of 2018. GGP shareholders must approve the takeover, which Green Street analysts said in a Monday research note they will likely do, because mall REITs are trading at “sizable discounts” to their private counterparts.
“It is difficult to conclude that shareholders are better off rejecting and waiting for a better offer down the line,” the note said.
Brookfield manages $285 billion overall and $155 billion in real estate, according to its website.