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Brookfield's $11.4 Billion Forest City Deal Boosts Its Position as No. 2 U.S. Commercial Property Owner

Cleveland-Based Forest City's Portfolio Includes Apartments, Offices and Retail Space
July 31, 2018
(Pictured) Forest City Realty's 1.6 million-square-foot Galleria at Sunset in Henderson, Nevada.

The purchase by Toronto-based Brookfield Asset Management of developer Forest City Realty Trust in an $11.4 billion deal bolsters Brookfield's position as the second-largest owner of U.S. commercial real estate by value with the addition of Forest City's multifamily, office and retail properties.

The portfolio of Cleveland-based Forest City, a real estate investment trust, includes 6.3 million square feet of office space, 2.3 million square feet of life science buildings mostly in biotech stronghold Cambridge, MA, 2.2 million square feet of retail space and 18,500 multifamily units. Its holdings also include five large development projects in the New York area, San Francisco and Washington, D.C.

The deal announced Tuesday comes as Brookfield is closing and digesting the $15 billion takeover of Chicago-based mall owner GGP Inc. Brookfield, with $285 billion in assets under management invested in real estate, renewable power, infrastructure and private equity, has an "unlimited" appetite for U.S. commercial property, said Mark Rothschild, a Toronto-based analyst with Canaccord Genuity.

"They are going after everything -- student housing, self-storage, manufactured housing, a ton of retail, resorts in the United Kingdom,” Rothschild said.

Brookfield already has a massive real estate footprint in Canada, and Paul Finkbeiner, president of GWL Realty Advisors, which has about $13 billion in assets under management, said going abroad has been the only way for Brookfield to bulk up.

Brookfield is the seventh-largest owner of U.S. commercial property by square footage, with 209 million square feet across 1,187 properties, according to a CoStar analysis, as well as the second-largest by value at $55.6 billion. Only Walmart Inc. has a higher combined value of owned properties at $93.5 billion. Walmart also leads in total area, with 664.7 million square feet across its 4,516 owned properties.

Brookfield can absorb two major acquisitions in stride in part because Forest City's assets are a good match for Brookfield, according to Matt Kopsky, REIT analyst for Edward Jones.

"This pairing makes sense," Kopsky said. "They are both conglomerates, which makes it easier for Brookfield to absorb Forest City," Kopsky said.

Kopsky described this year's burst in mergers and acquisitions activity as "a positive sign" for "commercial real estate in general." He expects more real estate company acquisitions because "there’s a lot of private capital on the sidelines still. Interest rates remain very low, making an all-cash transaction like this pencil out."

The share prices of many publicly traded real estate investment trusts, especially those owning large concentrations of downtown office and retail property, are trading at large discounts to their valuations by private market buyers such as New York-based Blackstone Group, Kopsky said.

"That’s prompting giant private-equity companies like Blackstone and alternative asset managers like Brookfield to swoop in. It’s amazing how active both Brookfield and Blackstone have been this year," Kopsky said. "Brookfield sees value in the Forest City and GGP deals, given their large discounts to net asset value and the cost synergies achieved from absorbing both."

While Forest City decided after a review it would be better to spurn mergers and remain a standalone company, pressure from investors to improve returns prompted nine of its 13 board members to resign last spring.

"It is not surprising to see a deal, given the new board of directors," he said.

Heidi Learner, chief economist at Savills Studley, doesn't think that the scale of firms of such as Blackstone or Brookfield weighs negatively on the market -- nor does it weigh positively.

"The larger the firm, the more they are going to show up in deals," although that doesn't mean the two giant firms control the market, Learner added.

"M&A activity has been strong throughout this market cycle and while they have been players they have not been the only players," she said.

Brookfield plans to pay $25.35 in cash per share and assume debt in a deal valuing Forest City at 26.6 percent more than its closing share price on June 15, when they were reported to be in merger talks. The Forest City board has recommended the transaction, which is expected to close in the fourth quarter. Affiliates of Starboard Value LP and Scopia Capital Management LP, which own about 14 percent of Forest City’s outstanding shares, agreed to vote their shares in favor of the merger. The deal requires approval of Forest City’s stockholders.

It’s the latest transaction in a year that has seen the largest flurry of commercial real estate mergers and acquisitions activity since 2007, the height of the previous real estate boom. In March, Brookfield’s real estate arm agreed to take GGP private in a deal valued at about $15 billion after initial talks fell through with Forest City.

Education Realty Trust, one of the nation's largest developers, owners and managers of collegiate housing communities, acquired an affiliate of Greystar Real Estate Partners, in an all-cash transaction valued at $4.6 billion, including debt.

LaSalle Hotel Properties last month rejected a fourth revised offer from Pebblebrook Hotel Trust and said it will move forward with a merger with affiliates of Blackstone Group.

Staff writers Mark Heschmeyer, Garry Marr and Kyle Haggerty contributed to this story.

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