Brookfield Affiliate to Acquire Associated Estates for a Big Sum

By Barbra Murray, Contributing Editor

Jeffrey Friedman, Associated Estates Realty

It doesn’t typically garner the attention that AvalonBay or Equity Residential or other big-ticket multi-family REITs get, but Associated Estates Realty Corp. is undeniably turning heads this week. The apartment owner, developer and manager just announced that its Board of Directors has signed off on a definitive merger agreement that calls for the company to be acquired by a real estate fund managed by Brookfield Asset Management for $2.5 billion–in cash.

“Today’s announcement marks the beginning of a new chapter in the history of Associated Estates. The transaction will deliver compelling, immediate and certain value to all Associated Estates shareholders while also positioning our company to take advantage of exciting growth opportunities,” Jeffrey Friedman, chairman & CEO of  Associated Estates, wrote in a letter to employees dated April 22.

The numbers are notable. Brookfield will pay $28.75 per share for all outstanding shares of Associated Estates common stock, marking a 17 percent premium to the closing price the day before the agreement. The global alternative asset manager also included the assumption of existing debt in the offer.

News of the pending merger comes four months after Associated Estates announced that it had called on Citigroup Global Markets Inc. to serve as a financial advisor as the company commenced a review of its business for the purpose of pursuing opportunities to further maximize shareholder value. Associated Estates’ Board arrived at the decision to merge with Brookfield following a comprehensive analysis of its strategy and assets, as well as the consideration of a list of potential buyers.

“The BAM offer today really validates the value in this firm that simply wasn’t being accounted for in the public markets,” John R. Benda, senior equity research analyst with broker-dealer National Securities Corp., told Commercial Property Executive. “It was a combination of not valuing the embedded equity in the real estate–and by that I’m speaking about the purchase price of the assets at acquisition date–and what the assets are worth today.”

Associated Estates has been actively repositioning its portfolio into a pure Class A collection over the last several years, an effort that is in its final stages. The REIT’s group of apartment communities, which contains only one property from its holdings at the time of its 1993 IPO, encompasses more than 15,000 residential units at 56 properties in 10 states. The total includes two pending acquisitions and five under-development communities, one of which is the $220 million project at 350 8th St. in San Francisco.

The deal with Brookfield, however, has implications beyond Associated Estates’ doors. It’s indicative of a realization that is afoot in the industry: more young professionals are renting, not just because homeownership is not easily tangible these days, but because they simply prefer to rent. They have their reasons.

As Benda pointed out, more and more Americans are going through the university system, and in terms of residential accommodations, they like what they’re getting. “Universities offer students gyms, they offer them lounges, they offer them pools in some instances. They offer them the community lifestyle, and what these guys like AEC, Preferred Apartment Communities and others offer to residents is a lifestyle,” he said. Benda added that today’s graduates also favor the urban, walkable, green living that apartment communities typically provide. And then there’s the freedom of easy relocation that comes with renting. “The population is saying we are choosing multifamily housing as a lifestyle choice. The stigma of renting versus owning is gone,” he said.

And with the understanding that renting is increasingly becoming a preferred residential option for an important sector of the population, Benda predicts that more offers like the one Brookfield made Associated Estates will soon follow. “This premium, in my view, is just one of many to come, and investors are soon going to realize the value of other names in the space like Preferred Apartment Communities, like BlueRock Residential Growth, like Independence Realty Trust and all the smaller REITs that are under-covered by analysts,” he said. “The value in names with a market capitalization of $5 billion or less is tremendous. And this premium AEC received totally reflects the value of these portfolios and the value that a lot of people are missing.”

Associated Estates must obtain the approval of shareholders to move forward with the deal but if all goes as planned, the transaction will likely close in the second half of 2015.