The Wall Street Journal-20080213-Real-Estate Finance- Activists Come Back to REITs- Investors See Opportunities In Stocks- Prolonged Tumble- More Shareholder Influence
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After months of volatility in real-estate investment trusts, activist investors have begun jumping into these stocks, agitating for change in a way that these companies haven't been forced to deal with for most of their history.
REITs weren't on activists' radar screens for years, thanks in part to five consecutive years of extraordinarily strong growth. However, since REITs' stock prices entered a prolonged tumble, operating weaknesses in companies became more exposed. That increased the likelihood that these weaker companies would face demands for change. The SNL REIT Equity Index has dropped 32% since Feb. 7, 2007, the cyclical peak.
"When returns are tougher to come by, like now, that's when you'll see activism," says Matt West, with Weiss Multi-Strategy Advisers LLC, a hedge fund that holds 6.5% of common shares in Maguire Properties, a Los Angeles REIT. Weiss doesn't describe itself as an activist investor firm.
Activists also are attracted to REITs because, thanks to the selloff in the sector, there is a discount between the prices where REITs are trading and the value of their underlying assets. This has created opportunities for investors who hope to push for changes.
Activism in the REIT world is challenging. Some REITs still have impediments designed to prevent hostile bids if management isn't on board. Investors are watching to see if activists can sweep in a new era in which REIT shareholders will have more influence on strategic decisions or whether well-entrenched executives will continue to have the upper hand.
Many REITs were once private, family-owned real-estate companies that couldn't get access to debt financing after the real-estate bust of the late 1980s. To survive, they turned to the equity markets in the 1990s and became publicly traded companies. But many had corporate structures designed to protect the founders, who often retained large shares in the companies. The boards' terms were often staggered, meaning not all of the directors are elected at the same time, making it difficult for investors to sweep them out. And boards were often stacked with family.
Given that history, the recent efforts of ROCA Real Estate Securities Fund LP, based in Newport Beach, Calif., will be telling. Harold Hofer, ROCA's chief executive, recently fired off letters to three small REITs demanding change.
ROCA sent the letters to Glimcher Realty Trust, Cedar Shopping Centers Inc. and One Liberty Properties Inc., all retail REITs, a sector that has been hit hard in the current downturn. ROCA wanted Glimcher to sell the lowest-quality malls to pare its debt and advised the other REITs to seek buyouts.
As Mr. Hofer sent the letters, Cedar showed signs of being receptive to a possible suitor. Its chief executive says he will present an overture by Inland American Real Estate Trust to his board.
The situation could prove far different with Glimcher. The company is still heavily influenced by the Glimcher family, which took the company public in 1994. The family owns 8% of its stock and keeps a staggered board. Founder Herbert Glimcher is chairman, and his son, Michael Glimcher, is chief executive.
"My guess is, in the case of Glimcher, they'll probably do nothing [in response to ROCA] because they don't have to," says Green Street Advisors analyst Jim Sullivan.
Glimcher representatives didn't return phone calls seeking comment.
Yet, there is reason to believe activists will be more successful than in the past. They have more weapons against entrenched management because REITs gave up some of their defenses against hostile activity after the Enron and World.com scandals led to universal calls for better governance.
Post Properties, an Atlanta-based apartment REIT, adopted a nonstaggered board during its 2003 proxy fight with its former chairman and founder, John Williams. Analysts believe it is no coincidence that Mr. Williams's recent offer to buy the company was made public just before the Jan. 25 to Feb. 24 period when nominations to the board are being accepted. A Chicago-based hedge fund already has nominated an alternative slate of directors to force the company to consider all offers.
Similarly, Maguire Properties, the Los Angeles office REIT that went public in 2003, has a nonstaggered board. Hedge funds jumped in last summer after traditional REIT investors sold off the stock, complaining of confusion from management and a relatively high debt load.
On Nov. 12, JMB Capital Partners Master Fund sent Robert Maguire III, the company's chairman and founder, a letter urging him to explore strategic alternatives -- including putting the company up for sale -- or JMB would propose an alternative slate of directors.
Later that month, Maguire considered switching to a staggered board but shelved the plan. Since that time, the board has announced that it would take formal bids for the company. Mr. Maguire has said he also expected to make a bid, along with partners.
