Brookfield’s $11.4bn Forest City take-private a ‘win-win’

The US REIT has suffered from problems including a poor return track record and nepotism, but after multiple failed bids, Brookfield is poised to accelerate development growth, analysts said.

Brookfield Asset Management is taking a diversified real estate investment trust private, months after it started bidding for the company, the firm said Tuesday.

The Toronto-based asset manager began talks to buy Forest City Realty Trust over the winter, PERE previously reported. The final deal is valued at $11.4 billion, according to Tuesday’s statement.

Capital for the take-private came from Brookfield’s latest opportunistic fund, Brookfield Strategic Real Estate Partners III, according to a source with knowledge of the deal. As of March, the firm had corralled $9 billion against a $10 billion target, PERE previously reported.

The take-private is “arguably a win-win” for both the buyer, which purchased Forest City at “an attractive price,” and the seller, analysts at Evercore ISI wrote in a Tuesday research note. The deal sees Brookfield add a portfolio comprising 6.3 million square feet of office space; 2.3 million square feet of life science assets – primarily in Cambridge, Massachusetts; 2.2 million square feet of retail space; 18,500 multifamily units; and five large-scale development projects in New York, San Francisco and Washington, DC, according to the announcement.

“There is significant embedded upside, in our view, from Forest City’s development and redevelopment opportunities for Brookfield,” Evercore’s Sheila McGrath and Wendy Ma wrote. “With Brookfield’s access to capital, perhaps the company will be able to more quickly accelerate development/redevelopment… We believe Brookfield recognizes the attractive opportunity and upside from Forest City’s platform.”

The analysts said they do not expect another bidder; Forest City undertook a long review process and few potential bidders can match Brookfield’s equity check. Furthermore, in conjunction with the deal, two activist investors that collectively own about 14 percent of Forest City’s shares agreed to support the take-private.

Lengthy review process

In September, Forest City’s management launched a strategic review process in response to pressure from activist investors. The process initially garnered interest from 50 parties, which 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. However, Forest City ultimately decided to remain independent at that time.

While Brookfield submitted multiple bids, Forest City originally 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 March statement, PERE reported. Evercore’s analysts said in a research note at the time that “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.”

A source familiar with the deal said that in Brookfield’s latest bid, the third-party consent contingency issue was resolved.

In February, Newport Beach, California-based Green Street Advisors wrote in a research note that Forest City, founded by the Ratner family in 1920, had myriad problems for a potential buyer to consider.

Forest City “has a poor long-term total return track record, hurt by a host of governance, balance sheet and capital allocation challenges,” Green Street wrote, noting that the REIT “has made strides in addressing some of those issues.” However, activists continue to cite “concerns about nepotistic governance [the founding Ratner family dominates the board and many management posts], poor operating results and bloated overhead.”

After the strategic review process, instead of selling, the REIT made changes that include adding more independent directors to its board and reducing the influence of the founding Ratner family. Nine directors have resigned, and new directors have joined that include Adam Metz, The Carlyle Group’s former 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.

Latest take-private

The deal, expected to close in the fourth quarter, is Brookfield’s second large take-private of the year. In March, its subsidiary, Brookfield Property Partners, agreed to acquire GGP, a Chicago-based retail REIT. 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.

Last week, GGP shareholders approved the deal, which adds 125 Class A malls to Brookfield’s portfolio. 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.

Overall, Brookfield manages $285 billion, including $159 billion in real estate, according to its website.