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Brookfield's Forest City Buy Just The Latest In Undervalued Asset Shopping Spree

Brookfield’s latest multibillion-dollar acquisition is another bet that its size and expertise can unlock value a previous owner was unable to achieve.

8 Spruce St. in Lower Manhattan, also known as New York by Gehry, was developed by Forest City and is now owned by Brookfield.

Brookfield Asset Management has reached an agreement to buy Forest City Realty Trust, with plans to pay an estimated $6.8B for the Cleveland-based REIT, excluding debt. 

The deal, which is expected to close in the fourth quarter, is an all-cash transaction for $25.35/share, and is valued at $11.4B with debt factored in. The agreement was reached nearly a year after Forest City first announced it was actively searching for a merger or acquisition — and just four months after it announced a deal was off the table.

“Brookfield has exhibited patience with their acquisitions … They are not afraid [to buy] properties [that are] out of favor and take them private and operate them privately for their investors,” said REIT analyst Paul Adornato, a former managing director with BMO Capital Markets who followed Forest City for several years. “They have experience in these geographies that is urban areas, and they’re not afraid to weather the current storms for the good of the long term.”

In buying Forest City, Brookfield will add 18,500 multifamily units and 10.8M SF of office, life science and retail space to its expansive portfolio.

Forest City’s best-known assets include University Park at MIT, a 2.3M SF development next to the Massachusetts Institute of Technology campus, the Frank Gehry-designed rental tower at 8 Spruce St. in Lower Manhattan and the New York Times building at 620 Eighth Ave. in Midtown. It also is developing The Yards in Washington, D.C., a 48-acre megaproject next to Nationals Park.

In New York City, it owns either all or significant portions of 4.8M SF of offices and more than 2,000 apartment units, The Real Deal reports. Many consider Forest City’s properties a sturdy investment, Adornato said, but there are few buyers who could have taken it on.

Forest City, under Bruce Ratner, was once one of the most prolific, daring figures in developing New York’s outer boroughs, but it has shed assets and not pursued new projects in recent years.

The New York Times' headquarters at 620 Eighth Ave. as of September 2017

“There were too many unusual items compared to a typical acquisition. There’s the joint ventures, the emphasis on urban, large-scale, mixed-use,” he said. “Most real estate people believe it is a great, unique portfolio — but most investors like simple.”

It is hardly the first time Brookfield has gone against the grain. Last week, the Canadian equity giant officially took full ownership of the second-largest U.S. mall owner, GGP, with the Chicago-based company approving the $15B offer from Brookfield Property Partners, the real estate arm of Brookfield Asset Management.

Traditional malls and retail are under stress, and Brookfield plans to inject capital into the assets. In April, Brookfield Property Partners acquired seven retail stores on Bleecker Street in the West Village, an area that has been plagued by vacancies, with plans to use them as an experimental testing ground for retail concepts.

Brookfield is also deep in talks to invest $700M with Kushner Cos. in the redevelopment of that firm’s embattled office tower at 666 Fifth Ave., Chairman Ric Clark confirmed in May.

“Forest City, under Bruce Ratner, was historically one of the most innovative developers in New York, blazing the trail for developers, especially in the outer boroughs,” RXR Realty Executive Vice President Seth Pinsky, a former New York economic development leader, told Bisnow Wednesday. “Unfortunately, in recent years, often for reasons beyond their control, the company ran into economic challenges on some of its flagship projects, including Pacific Park.”

HFF CEO Mark Gibson interviewing Brookfield Property Group Chairman Ric Clark at a Georgetown University event.

In January, the REIT sold all but 5% of its stake in the Pacific Park megaproject in Brooklyn to its partner, China’s Greenland USA. That same month, Forest City New York CEO MaryAnne Gilmartin left the company to found her own development firm, L&L MAG. Gilmartin declined to comment on the acquisition.

It is not yet clear what Brookfield is planning for the Forest City portfolio, and the sale is still subject to shareholder approval.

Analysts noted that any sale of assets will be subject to significant tax implications from when it became a REIT in 2016.

“They could sell assets but there's all the tax leakage … they could do it, but it would be onerous,” said Evercore ISI Senior Managing Director Sheila McGrath, who covers Brookfield Property Partners.

Forest City still owns MetroTech in Downtown Brooklyn, a landmark office project for the borough. Brookfield recently entered the borough with plans to build more than 1,000 apartments in Greenpoint.

“At a time when very few people were willing to test the hypothesis, Forest City proved that there were development opportunities in the outer boroughs — especially in Brooklyn,” Pinksy said. “The loss of Forest City’s innovative approach is unfortunate for the market, but the good news is that there are now a number of real estate players who are pursuing the model with great success.”