Jeffrey Friedman of Associated Estates Realty Corp. 
Andrew Spear/Aurora Select Jeffrey Friedman of Associated Estates Realty Corp. 

If things go as scheduled with Brookfield Asset Management’s planned acquisition of Cleveland-based REIT Associated Estates, the public markets will have one less REIT. And apartment REIT analysts will lose their favorite whipping boy—AEC CEO Jeffrey Friedman.

Friedman has been at the helm of AEC since 1975, when, at the age of 24, he took over the firm from his father-in-law and company founder Carl Milstein (who ended up serving prison time in the late 1970s for offering illegal gratuities to a federal housing official). In 1993, a number of private real estate firms were going public. Associated Estates (then the dominant apartment owner in Cleveland and Akron, Ohio) joined them.

Public life was an uphill battle, as Friedman admitted to Multifamily Executive in 2010. AEC’s aging Rust Belt portfolio (average age of 19 years in 1993) burdened the REIT in the late '90s, but so did some questionable moves.

In 1998, the company paid $306.3 million—made up of $118.1 million in stock, $182.1 million in variance debt, and $6.1 million in various liabilities assumed in stock—for MIG Realty Advisors, a pension fund adviser with 13 properties. At the time the agreement was signed, AEC’s stock price was near an all-time high. But by the time shareholders approved the deal, the stock price had fallen. Wall Street hit Friedman hard for not using an investment bank on the deal, and he was dinged again for locking in rates too soon on the acquisitions.

Around that time, the company’s share price began a steady decline—bottoming out at $5.29 per share in March 2003 (though after the Great Recession, it fell to $4.87 in February 2009). Its portfolio was plagued by a lot of affordable properties that investors just didn’t understand.

Collectively, these issues led to a major perception and public relations problem for Friedman. “Wall Street has a long memory,” he said in a 2010 interview. “It takes a long time to build up credibility and a short time to lose it.”

In the 2000s Friedman undertook a plan to remake his portfolio. At the time, investors (spooked by pricing on the coasts, much like they are now) were paying a premium for Midwestern assets. That gave AEC an opportunity to exit some areas before the market collapsed in 2008.

Still, in some respects, the company’s markets and size take a backseat to concerns about Friedman himself. The company had a lot of insiders on its board and Friedman had business relationships with his two sons, working with Matthew, a broker with Marcus & Millichap, to sell deals and making his son Jason head of construction.

“All of these things can make certain investors uncomfortable,” Green Street’s Andrew McCulloch told Multifamily Executive in 2010. “From a public investment standpoint, you want these guys to be pretty squeaky clean, if they can be, from any conflicts of interest.”

The Activist Challenge
Finally, last fall, all these issues came to a boil when Land and Buildings, led by longtime sell-side analyst Jonathan Litt, pressed for a new board at AEC. Litt was a formidable opponent, with a new board led by former Archstone CEO Scot Sellers

According to some observers, a well-timed letter from Litt eventually led to the sale of BRE Properties. And, more recently, his agitation led to major changes (including a board spot for Litt himself) at Edison, N.J.-based REIT Mack-Cali Realty Corp. 

As the war of press releases continued through the winter and into the spring, AEC made concessions—bringing in former Equity Residential CEO Doug Crocker and co-founder of Green Street Advisors and former CEO of Oak Hill REIT Management Jon Fosheim and promising a strategic review and governance changes.

But Litt continued to press for change as the proxy vote for his slate of directors drew closer. That’s when AEC “found a white knight in the form of Brookfield Asset Management (BAM),” as Green Street Advisors phrased it in a research note. On April 22, AEC announced its sale to BAM for $2.5 billion in an all-cash transaction. 

Brookfield has been an active buyer since the beginning of 2012. In fact, if the AEC deal comes to fruition, it will be only BAM's fourth-largest deal in that timespan, according to Real Capital Analytics. Green Street wrote that it appeared that AEC would be placed in a fund managed by BAM, which announced a $1.1 billion equity offering the Monday before the deal, rather than in Brookfield’s listed Brookfield Property Partners (BPY). 

A Win-Win-Win-Win?
Both Green Street and Ryan Meliker, managing director of equity research, REITs, and lodging for New York-based MLV & Co., like the deal.

“We believe this deal is extremely attractive at this price, and pending approval, the sale represents a 17.4% premium above our second-quarter 2015 NAV estimate and implies a forward cap rate of 5.8%,” Meliker wrote. “Given this elevated NAV premium, we would not expect any higher bids before closing.”

Green Street sees the sale as a victory for everyone involved. “For the two sides of the proxy battle, the transaction appears to be a win-win: AEC CEO Friedman wrote his own conclusion and Land and Buildings declared victory,” Green Street wrote. “More importantly, the transaction provides closure for shareholders who have witnessed AEC’s [approximately] 200-basis-point average annual underperformance over Friedman’s 20-plus-year tenure as CEO." 

Not surprisingly, Land and Buildings put out a statement saying that it “applauds” AEC’s decision.

“We are encouraged that the board of Associated Estates has chosen to enter into this transaction, which we believe is an outstanding outcome for all shareholders,” Land and Buildings wrote. “Our goal at AEC was always to unlock the substantial discount the company has traded at relative to net asset value, and we are confident that this has now been achieved.”

And, the activist investor took a bit of a victory lap, as well. “We are pleased to have played an important role in maximizing value for shareholders of AEC, and believe today’s announcement clearly reflects that Associated Estates’ board recognized that there was a need to act to address the persistent valuation discount,” Land and Buildings said.

Apartment owners as a whole, and REIT shareholders, could be considered winners as well. “The transaction carries slightly favorable implications for apartment valuations, serves as a reminder of the healthy appetite for U.S. apartment assets, and represents a victory for REIT shareholders at the dawn of a new era of activism,” Green Street wrote.

And if reports of Dallas-based Loan Star Funds' interest in Home Properties is true, it may be the last apartment REIT to go on the block. 

“Conditions for REIT M&A have improved lately,” Green Street wrote before the rumors about Home hit the press. “Despite three transactions in the last two years, the apartment sector remains ripe for M&A, due to the combination of large discounts and numerous willing buyers. In light of the heightened level of activism present in the REIT space today, takeout odds are best thought of as ‘corporate events’ also including activist-catalyzed improvement.”