Activist Investors Have a New Favorite Target: REITs
Activist investors like Carl C. Icahn and William A. Ackman know how to rattle the cages of Corporate America’s chief executives. These so-called corporate raiders have long been storming onto boards in the broader market, threatening proxy fights and demanding that management make changes, from spinning off divisions to putting an entire blue-chip company on the block. But recently such activists have started shaking up real estate investment trusts.
Last year, there were 26 activist campaigns against REITs, according to SharkRepellent.net, a corporate governance research firm and unit of FactSet. That compares with six in 2011 and 12 in 2012.
“This is a relatively new phenomena,” said Michael Lewis, director of REIT equity research at SunTrust Robinson Humphrey.
Equity REITs own pools of properties, ranging from apartment buildings to shopping malls, which are packaged up as vehicles for investment. Under REIT rules, companies avoid paying corporate taxes by distributing at least 90 percent of their income as dividends to shareholders. Some REITs are public, while others are nontraded private REITs. Some major retailers and restaurants, like Sears and Darden Restaurants, have adopted the REIT strategy by spinning off their properties into separately traded REITs to raise cash.
When Gregory Cohen, an activist investor and founder of Rambleside Holdings, first bought shares in New York REIT in May 2015, he saw enormous potential. New York REIT owned some highly coveted office properties in Manhattan, including Worldwide Plaza on Eighth Avenue in Midtown; 1440 Broadway in Times Square, whose tenants include Macy’s and FedEx; and the Twitter headquarters building on West 17th Street, which is 99 percent leased. Yet, its shares traded “at least 30 percent below” the value of the underlying real estate, he said.
Mr. Cohen thought the company’s management needed a nudge, or maybe a push, to unlock that value, preferably through a sale of the company, whose equity market cap is now about $1.5 billion.
“They owned the right assets in the right market at the right time,” said Mr. Cohen. “But the New York City real estate market won’t stay hot forever.”
Mr. Cohen thought it was time to act, so Rambleside and another firm, Sorin Capital Management, fired off open letters to the board last June, and in the months that followed, more activist investors piled into the fray, including Land and Buildings, led by Jonathan Litt.
The investors criticized the company over its share price, conflicts with its external adviser and management decisions. The ouster of its chief executive, Nicholas Schorsch, who sat on the boards of the REIT and the advisory firm, propelled activists further. They requested big changes and, ultimately, a sale.
Under pressure, New York REIT sold off four noncore properties for $75.7 million to focus solely on higher-quality properties in Manhattan, and added two independent board members. It also resumed a search for a buyer, which it had started in October 2014, months after going public, and had abandoned in May 2015.
Its stock price surged on the takeover chatter, and by December, there was talk of a possible deal to sell. The shares rose to a high of $11.90 in December, from a low of $8.87 in May. Two weeks ago, New York REIT announced a plan to merge with JBP Companies, based outside Washington, but New York REIT’s stock has fallen back to $9 a share again.
Mr. Cohen, who bought into New York REIT in mid-2015 when its stock price was at about $9, sold his stake in October and November at more than $11 a share and collected dividends as well, netting about a 25 percent return for his six-month investment. “I thought it was close enough to fair value,” he said. “And we didn’t want to hold it because of the risk that a transaction wasn’t consummated.”
New York REIT declined to comment.
In the past, many activists have avoided the REIT sector because of its smaller size. REITs also have a reputation for being ruled by chief executives more concerned about building empires than stock prices, and reluctant to sell their companies.
But analysts expect that turbulence from activist investors will continue this year. At least seven new campaigns began in the first four months of 2016.
“REIT activism will become more frequent and more mainstream” in 2016, Adam Emmerich, a partner at Wachtell, Lipton, Rosen & Katz, said in an interview last month.
Mr. Cohen, who spent five years at the private equity firm Cerberus Capital Management before forming Rambleside in 2012, said he usually homes in on companies that are trading 30 to 50 percent below their net asset value. His latest target, Ashford Hospitality Trust, is trading at a 75 percent discount to net asset value, he said.
“We’re just not afraid or intimidated to go after companies that are acting in an inappropriate way,” Mr. Cohen said. “I put my money where my mouth is.”
One of the biggest activists in the real estate arena is Mr. Litt, a former managing director at Citigroup. He founded the hedge fund Land and Buildings in 2008 and played roles in the sale of BRE Properties to Essex Property Trust in a $6.2 billion deal in 2014 and MGM Resorts’ decision to spin off some of its real estate into a REIT last year.
Mr. Litt has also been agitating at Mack-Cali Realty, where he is now a board member, and NorthStar Asset Management.
“Rarely is our first solution a sale of the company,” said Mr. Litt. “We always try to fix it first, and if you can’t fix it, then consider a sale.”
Not all activist investors’ campaigns are successful, of course.
Efforts to force the mall owner Macerich into a shotgun marriage with the Simon Property Group last year failed, despite pushes by Mr. Litt and Orange Capital for Macerich to accept Simon’s hostile takeover offer. Macerich dug in its heels, refusing to meet with Simon to try to negotiate a deal and even adopting a poison pill defense. Today, Macerich remains independent. Its chief executive declined to comment.
Rising activism was a hot topic at a recent REIT conference in New York, with some experts applauding the efforts and others vilifying them.
“If your scorecard is bad, then you can expect to get harassed by the likes of us or the likes of guys who want to poke you to create some value,” Theodore Bigman, a managing director at Morgan Stanley Investment Management, said at the conference.
Sherry Rexroad, co-global chief investment officer at BlackRock, said at the conference that as a long-term investor, she did not see an upside to public campaigns.
“I much prefer to engage with management teams and boards than to publicly splash how I feel about a company in the news,” Ms. Rexroad said.
The tide has also turned for such investors, as they no longer need a large ownership stake to force a company’s hand. Last year, Starboard Value managed to replace Darden Restaurants’ entire 12-member board and persuade it to spin off some of its properties into a REIT, even though it held less than 10 percent of the company’s shares. Mr. Cohen moved into New York REIT with a stake of less than 1 percent.
Mr. Litt said if campaigns were supported by the broader investor base, “it’s the merits of what you’re proposing” that counts, not the stake.
Sometimes behind-the-scenes phone calls and letters are enough to bring about changes. When they are not, Mr. Bigman said, activist investors may help force changes.
“Maybe it shakes them up and gets other boards a little nervous,” he said. “I do think it’s benefiting the industry as a whole.”