Brookfield Asset Management to Acquire Forest City

BrookfieldBrookfield Asset Management announced it plans to purchase real estate developer Forest City Realty Trust for $11.4 billion, The Wall Street Journal reports.

The Toronto-based commercial real estate owner will pay $25.35 per share for Forest City, which owns 18,500 apartments and more than 10 million square feet of office, retail and life sciences space. The price represents a 26.6% price premium from Forest City’s closing price on June 15. Forest City’s $11.4 billion valuation includes debt.

Brookfield, which currently has $155 billion of real estate assets under management, had been interested in acquiring Forest City for a while, according to company chief executive Brian Kingston. Forest City currently owns properties in New York and San Francisco along with a number of development projects Brookfield wants to gain control of, Kingston said. Many of the projects are “transit oriented” and mixed use with apartments, retail and office, Mr. Kingston said. “It’s exactly in our sweet spot.” The companies discussed a deal earlier in the year, but Brookfield’s $25 per share bid was turned down. The new bid is not only 35 cents a share more, but it did away with some of the contingencies Brookfield initially wanted, according to Evercore ISI analyst Sheila McGrath.

Real estate investment trust (REIT) acquisitions have become a trend this year because their shares are trading at a discount to the value of the properties that they own. Other deals like this one include Greystar Real Estate Partners acquiring student housing developer Education Realty Trust Incc and Blackstone Group LP’s plans to buy Gramercy Property Trust.

Meanwhile, GGP, Inc. shareholders approved Brookfield’s acquisition of a two-thirds stake in the company it did not already own. “We haven’t seen this level of takeout possibilities since 2006,” said Cedrik Lachance, an analyst with Green Street Advisors. “It’s just a matter of time before we see more deals.”

Recently, Forest City has faced pressure from shareholders that wanted the real estate trust to change its structure, balance sheet and management. The company responded to the pressure by eliminating its two-tiered stock structure and converting to a REIT. When the moves did not work quickly enough for dissident shareholders, the company announced a year ago it was studying strategic options, which in Wall Street terms meant putting itself up for sale.

The Brookfield deal has garnered the approval of shareholders, including Starboard Value LP and Scopia Capital Management, LP affiliates, which own about 14% of Forest City’s  outstanding shares. Brookfield’s purchase of Forest City comes at a time that a bull market in commercial property is into its ninth year. As interest rates go up, a lot of investors have expressed concern that a decline could be on the way. Although Kingston acknowledged bull markets don’t last forever, he also pointed out that Forest City’s properties are in great locations and are high quality. Plus, a lot of Forest city’s properties are geared towards tenants involved in businesses like scientific research that aren’t as prone to a recession like financial services are.

“These are the kinds of assets you want to hold through the cycle,” he said.

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