When a suitor calls: The calculus behind Brookfield’s Forest City play

In April, an activist investor called on Forest City Realty Trust to consider settling down with a new owner. A few months later, a major suitor came knocking: Brookfield Asset Management, a Toronto-based private equity firm overseeing $265 billion in assets.

News of deal talks came in the wake of other major changes at Forest City. MaryAnne Gilmartin, the face of the real estate investment trust’s New York City operations, stepped down as CEO to form her own development company. Forest City also sold off nearly all of its stake in Pacific Park, bringing Greenland USA’s interest in the mega-development up to 95 percent. Forest City also laid off roughly 20 staffers in its Brooklyn office.

Since becoming a real estate investment trust in January 2016, Forest City has largely focused on slimming down its exposure to ground-up development and consolidating its portfolio. Meanwhile, Brookfield — which has its own megaproject with the 7-million-square-foot Manhattan West development — has been in buying mode, focusing on shopping centers that come with valuable real estate. The company recently unsuccessfully bid $14.8 billion for the remaining shares of General Growth Properties, one of the largest publicly traded mall owners in the U.S. Discussions are reportedly ongoing.

In some ways, now’s a prime time for private equity firms to scoop up publicly traded companies. Brad Case, an economist with the National Association of Real Estate Investment Trusts, said REITs were undervalued in 2017, despite outperforming small-value stocks — a segment of the market to which they are often compared. For Forest City shareholders, a deal could mean getting a premium on their current stocks — or it could mean a disappointing cashout.

“If I buy a REIT, I’m buying high-quality real estate at a discount,” Case said, speaking about REITs in general. “Any offer that’s at current market values is a lowball offer. Why would a REIT accept a lowball offer?”

Striking while the stocks are not-so hot

In the past year, Forest City’s stock prices ranged roughly between $21.50 to $26.30. The company’s stock has consistently traded lower than the REIT’s estimated net asset value (NAV). A report released this week by BMO Capital Markets put NAV at $28.69 a share. According to Bloomberg, Brookfield’s offer isn’t much higher than $6.4 billion — or roughly $23.95 per share.

“Brookfield certainly has the size and the investment appetite to acquire Forest City,” said Paul Adornato, a long-time REIT analyst who’s followed Forest City. “Brookfield, of course, is not going to lead with their best and final offer.”

Buying Forest City’s assets en masse requires a sophisticated investor, one that can handle a diverse set of properties that are scattered across the country. Adornato said some other bidders in the same league as Brookfield may come forward — like Blackstone Group, for instance — as well as, perhaps, some teams of companies seeking to divvy up the assets into more palatable portfolios.

“I think they probably want to sell the company in bulk,” said Michael Ashner, CEO of Winthrop Realty Trust. “It’s whatever they think will can get the highest price.”

Representatives for Forest City and Brookfield declined to comment.

The stock market — though particularly volatile of late — seems primed for a surge in merger activity, Ashner said. Case said it’s not surprising that bids for REITs are being made, but many of these overtures are likely to be rejected. Such was the case with Brookfield’s $14.8 billion — $23 per share — bid for the 66 percent of GGP that it doesn’t already own. GGP declined the offer, but Brookfield executives told Bloomberg in December that they expected negotiations would result in a deal. Adornato said he expects the price for Forest City to go up as well.

A farewell to development arms?

Since its founding 1985, Forest City New York (formerly Forest City Ratner Companies) has developed 16.7 million square feet across 42 residential, office, retail, hotel, sports and entertainment projects. Among the most notable of these projects are the Barclays Center, New York by Gehry at 8 Spruce Street, MetroTech Center and the New York Times Building.

In recent years, the company’s taken several steps that could ease a future acquisition, such as gradually decreasing its involvement in the 22-acre mixed-use megaproject known as Pacific Park and unloading the rest of its stake in a 12-building retail portfolio in the city. The Ratner family — descendants of the company’s founders — also backed away from the company. In December 2016, cousins Bruce and Charles Ratner resigned from the company’s board, and the REIT scrapped a dual-share structure that gave the Ratner family voting control. In September, the company acknowledged that it was considering a merger or sale of its assets.

Jeff Linton, a spokesperson for Forest City, said New York City remains one of the company’s “core markets,” alongside Los Angeles, San Francisco, Boston, Denver, Dallas and Washington, D.C.

“We have moderated our overall development level, but remain committed to development opportunities that allow flexibility to activate entitlement when market conditions are right,” Linton said in a statement. “Our current development ratio of approximately 6 percent of total assets still represents nearly half a billion dollars of active development opportunities enterprise-wide.”

But one Manhattan-based real estate executive noted that the recent changes to the company — selling off most of its Pacific Park stake and shrinking its development team — have further erased the company’s identity as a major developer in the city.

“They are basically unwinding their position in New York,” he said. “This is further confirmation that the empire that Bruce built is being disassembled.”