The Real Deal New York

Brookfield has agreed to buy Forest City. Now what?

REIT will go private pending shareholder vote
By Kathryn Brenzel and Rich Bockmann | August 01, 2018 08:37AM

From left: Brian Kingston of Brookfield, David LaRue of Forest City, and 8 Spruce Street

When talks with prospective suitors fell apart, Forest City Realty temporarily abandoned the idea of a sale. But just four months later, the real estate investment trust came back to the negotiation table with fewer business entanglements and a similar price. This time the pair cut a deal: On Tuesday, Brookfield Asset Management announced it would buy the REIT for $6.8 billion.

The price per share — $25.35 — is slightly higher than the amount last floated in March, and is 10 percent higher than the share price on Monday. It’s also a 26.6 percent increase from Forest City’s closing price in June, when Bloomberg reported that talks between Brookfield and the REIT had recommenced.

Much still remains unclear about the deal in terms of what it will mean for the REIT’s leadership and its New York City operations. The deal — valued at $11.4 billion when taking debt into account — will take Forest City private just a little over two years after the company became a publicly-traded REIT. Jeff Linton, spokesperson for Forest City, said it’s too early to say whether or not the sale will lead to the closure or downsizing of any of the REIT’s operations. Forest City’s conversion into a private entity owned by Brookfield still ultimately depends on shareholder approval.

“Serious integration, where we would have any visibility to structural or other changes, is not likely to begin until after an affirmative shareholder vote,” he said in an email.

A few things have changed since Forest City announced that it wouldn’t pursue a sale in March. The REIT officially closed on the sale of most of its remaining interest in the megadevelopment, Pacific Park, to partner Greenland USA. A joint venture between Forest City and Madison International Realty acquired National Real Estate Advisors’ 49 percent stake at 80 DeKalb, a 365-unit apartment building. Prior to the acquisition, Forest City owned the remaining 51 percent stake. The company also sold 461 Dean Street, the last property it wholly owned in the Pacific Park development.

Forest City noted in March that part of the reason why a deal didn’t go through was that the buyer conditioned a $25-per-share-sale on certain joint venture partners agreeing to a change of control. It’s not clear if the activities of the past four months played a role in the latest deal. In a report released by Evercore on Tuesday, the investment bank and advisory firm notes that while Forest City “made great strides deleveraging the balance sheet and reducing overhead” its share prices still remained low. Waiting for the market to realize the company’s “embedded opportunities” might’ve posed too many “unknowns and risks.”

“Forest City’s embedded development, its joint ventures and its preference for secured debt would put off some bidders, but Brookfield is a very experienced developer, similar to Forest City,” the report states. “With Brookfield’s access to capital, perhaps the company will be able to more quickly accelerate development/redevelopment.”

Paul Adornato, a longtime REIT analyst who has followed Forest City, said the deal is a relative boon for shareholders. He noted that the company’s stocks have traded 20 to 30 percent lower than the REIT’s estimated net asset value (NAV). Brookfield’s offer still represents an 11 percent discount on Forest City’s current NAV, but it would’ve been difficult for the REIT to close that gap.

“For many reasons it couldn’t ever fit in neatly with the rest of the REIT universe,” he said. “Its assets are focused on large-scale, urban, mixed-use development, which is difficult to value.”

The company also had ongoing issues with shedding debt and had, until very recently, been largely controlled by members of the Ratner family — a common enough arrangement for development firms but something of an anomaly among other REITs.

In New York City, the company owns (or has a majority stake) in 4.8 million square feet of office space, according to its latest annual filing with the Securities Exchange Commission. The company is part owner of four apartment buildings in the city, with a total of 1,891 units, and also of 879 units in new development projects. Its most well-known properties include 8 Spruce Street, the Frank Gehry-designed rental tower, and the New York Times building.

Sheila McGrath, a REIT analyst who covers subsidiary Brookfield Property Partners for Evercore ISI, said it’s unlikely Brookfield will look to sell any Forest City properties for a few years. Following its conversion to a REIT in 2016, the company is subject to a gains-tax on asset sales through the end of 2020.

“You’re not allowed to sell assets out of it for two-and-a-half years,” McGrath said.

Brookfield, meanwhile, has seemingly been buying everything in sight in New York in 2018. The company this year has made major moves on the development front, signing a contract in April to buy one of the biggest private development sites in the Bronx for $165 million, and agreeing to co-develop two more rental towers at Greenpoint Landing in Brooklyn.

The firm is reportedly planning to invest up to $700 million in the Kushner Companies’ troubled 666 Fifth Avenue trophy tower in a major redevelopment play, and is in talks to buy a stake in the 1,400-unit Waterside Plaza multifamily complex in Kips Bay for $600 million. Last week, Chicago-based shopping mall giant General Growth Properties voted to accept Brookfield’s $15 billion buyout offer.

Brookfield’s parent company, the Toronto-based global money manager Brookfield Asset Management, is working on raising its latest flagship real estate fund. The $10 billion investment vehicle is BAM’s largest real estate fund to date, and expected to be the biggest real estate fund to close this year.