This story was originally published in August 2020.
The morning of July 20 was dry and sunny, perfect for taking in the grand metropolis of New York from its most celebrated vantage point.
After plowing $165 million into an extensive renovation of the Empire State Building’s observatory, Empire State Realty Trust had been forced by Covid to close it in March. With the city now coming back to life, the landlord had a lot riding on the reopening of the attraction, which pulled in $125 million last year.
But shortly after 10 a.m., photographers arrived at the tower and captured an empty lobby, souvenir shops undisturbed by tourists and just one other group making its way to the 86th-floor observation deck.
The photographers had been dispatched by Jonathan Litt, an activist investor who runs hedge fund Land & Buildings. “Opening day was a bust,” Litt tweeted a day later, sharing a slick slideshow with the photos set to music. “L&B photographers had the place to themselves.”
The move was classic Litt, who’s known for taking REITs to task with both granular financials and an activist’s bullhorn. With just $500 million in assets under management, Land & Buildings is tiny by hedge fund standards. But Litt, 56, has managed to become a prime foil for REIT bosses, waging campaigns to overhaul companies from retail investor Taubman Centers to developer Forest City Realty Trust to hospitality giant MGM Resorts. Make some noise and a tidy profit while you’re at it — that’s the Litt way.
“The activism is a strategy to buy discounted real estate, and have a strategy for unlocking value,” Litt said during an August interview with The Real Deal.
Since 2008, Land & Buildings has engaged in 30 campaigns, producing average returns of around 25 percent, the company said. If that seems high, that’s because it is — hedge funds returned 10 percent on average last year, according to research firm eVestment, with activist firms reporting returns just under 17 percent. On at least one deal, Land & Buildings claims it did even better: It pushed Liberty Property Trust to divest its office holdings and then sell itself to warehouse giant Prologis for $13 billion, which Litt said generated returns of 42 percent in just 15 months.
Now, with the pandemic asking existential questions of the city’s office market, Litt is busy building another war chest.
In March, his firm said it will deploy as much money as it can raise to target underperforming companies. When Morgan Stanley CEO James Gorman said in April that the pandemic proved the bank’s ability to operate with “no footprint,” Litt turned to his team and said, “That’s an issue.” BlackRock’s Larry Fink further fueled that instinct a few days later, saying “I don’t think any company’s going to go back to 100 percent of the workforce in the office.”
In May, the Wall Street Journal reported that Litt was shorting New York City office stocks, including Vornado Realty Trust, SL Green Realty and Empire State Realty Trust. In a six-page white paper, Litt warned of an “existential hurricane” making its way to the market and said ESRT would “bear the full brunt” of it.
Stats from the first half of the year seem to bear this out. Manhattan office leasing activity in the second quarter was the slowest since the Great Recession of 2009, Colliers data shows, with just under 3.2 million square feet of deals signed. And then there’s the WFH dilemma for landlords: What will remote work mean for long-term space demand and the value of office holdings in prime markets?
“The truth lies somewhere in between Armageddon and all green lights,” Litt tweeted on June 25. “It will be a painful re-adjustment.”
Or forever hold your silence
An activist investor is a particular financial animal, buying into underperforming companies and creating corporate discord to replace leadership and drive up share price. Since the 1980s, the likes of Carl Icahn, Kirk Kerkorian and Barry Rosenstein — then known by the far less flattering term “corporate raiders” — have made fortunes through the approach. But it’s only recently that this community has turned its attention to REITs.
Litt had an inside track. He rose through the ranks as a REIT analyst at Salomon Brothers, Paine Webber and Citigroup, where he was ranked a top analyst by Institutional Investor for several years running. In the 1990s, he met Vornado founder Steve Roth, just after Roth acquired a controlling interest in bankrupt retailer Alexander’s in a real estate play hailed as one of the most lucrative of its era.
“Watching him do that over and over again has been enormously valuable,” Litt told Bloomberg in June.
Even as an analyst, Litt displayed an activist streak.
In 2002, he became convinced that Peter Munk, the mining magnate who chaired Trizec Properties, was lining his own pockets. During an analyst call that summer, he told Munk to turn on the TV in time to see WorldCom executives being arrested for accounting fraud. He threatened to report Munk to Eliot Spitzer, the then-attorney general of New York who had styled himself the “Sheriff of Wall Street.”
In 2008, Litt went into business for himself with $50 million of seed money from his former Citigroup bosses. Among his first targets was BRE Properties, a San Francisco apartment REIT whose shares were trading at a big discount despite an enviable portfolio.
Litt pushed for a sale (even bidding $4 billion himself) before Essex Property Trust swooped in to buy BRE for $4.3 billion. When Essex’s shares surged, Land & Buildings earned 40 percent on its bet, according to Forbes.
“He has always represented the investors very effectively,” Sam Zell, the billionaire founder of Equity Group Investments and one of Litt’s mentors, told the Journal in 2014. “That’s what this industry needs, to hold people’s feet to the fire.”
A source who worked closely with Litt for years disputed the idea that he’s got the Midas touch.
“Excellent analysts rarely make great money managers,” the source said.
Litt’s big break came in 2015. He went after MGM Resorts, urging the gaming company to spin off its valuable Las Vegas real estate into a REIT. After a public spat, MGM formed MGM Growth Properties. In 2018, the entity sold the Bellagio to the Blackstone Group for $4.25 billion; last year, a JV including Blackstone bought the real estate of the MGM Grand and Mandalay Bay for $4.6 billion.
In 2016, Litt zeroed in on Forest City Realty Trust, an investment firm founded by the dynastic Ratner family. Litt saw the firm as a morass of debt, mismanagement and mismatched assets, and pushed for a sale. Instead, the REIT replaced its board and Litt sold his shares. But other activists picked up the fight, and in 2018 Brookfield Asset Management bought the company for $11.4 billion.
“Clearly, the involvement of multiple activist investors contributed significantly to the ultimate sale of the company,” a former executive at Forest City said. “But Jon was the first and the loudest.”
When Covid hit, the doomsday prophets were ready.
Legendary activist investor Carl Icahn revealed in mid-March that he had bet on credit-default swaps on assets backing mortgages for malls and corporate offices.
Noting that it was his “biggest position” by far, Icahn likened those mortgages to “selling insurance to someone who’s going to go to the electric chair in a couple of months.”
In July, Starwood Capital founder Barry Sternlicht predicted office buildings could lose 40 percent of their value and a third of hotels could go bankrupt.
In New York, the worst of the pandemic coincided with proxy season, the period between April and June when most public companies hold annual meetings. Mid-March is when investors typically decide whether to engage in a proxy fight or stand down.
Land & Buildings faced one such decision. In February, it acquired 1 percent of American Homes 4 Rent, a single-family rental REIT, and put forward a board candidate. But on March 23, Land & Buildings withdrew its nomination.
A cynic might say Litt knew better than to start a fight he couldn’t win. Yoel Kranz, a partner at Goodwin Procter who has defended REITs against Litt, called it a “gentlemanly” move.
Litt had previously profited off of the company. In 2015, he had bought shares in American Residential Properties, when the stock was stuck at around $17.
“It was pretty clear that we needed to either do a JV with somebody or an out-and-out sale,” recalled ARP founder Stephen Schmitz. Soon after Litt took a position, ARP struck a deal to be acquired by American Homes 4 Rent for $1.5 billion.
“He knew our stock was undervalued,” Schmitz said. “When we sold, he made out like a bandit.”
In a 2013 affidavit filed as part of divorce proceedings, Litt reported total assets of $13.9 million. Property records show he owned a $3 million home in Greenwich, Connecticut, which Zillow shows hit the market last year asking $5.95 million.
Schmitz described dealing with Litt as amicable, which is more than can be said about Litt’s battle with Taubman Centers.
Litt lost a proxy battle in 2017, won a board seat in 2018 and threatened a third proxy fight last year, when he said CEO Bobby Taubman bore “most of the responsibility for Taubman’s terrible track record.”
What Litt accomplished is up for debate. Some say he distracted Taubman and cost the mall operator millions. (In its latest annual report, Taubman disclosed $44.3 million in expenses related to shareholder activism between 2017 and 2019.) The stock currently stands near $38 per share, about where it was last year.
“Big picture, nothing changed,” said Alexander Goldfarb, a REIT analyst at Piper Sandler.
The source who worked with Litt said the former star analyst’s network meant that he was heard, but it’s unclear what impact he had.
“When he started pounding the table about doing x, y and z, they’d sometimes laugh and say, ‘You’re at best a 0.5 percent investor,’” the source recalled. “’You can’t do anything.’”
Litt hopes his latest battle with Big Office will be more consequential. New York-heavy office REITs have tumbled since the start of the year. As of Aug. 10, shares of ESRT were down 49.2 percent, SL Green and Vornado were down 40 percent, Columbia Property Trust 37.9 percent and Boston Properties down 31.4 percent.
“You can’t sugar coat how difficult [the] NYC office market will be in [the] coming years,” Litt tweeted on June 30. By July 21, he described the office market in “free fall.”
Though the market got a boost in early August, when Vornado announced Facebook had completed a much-speculated-about 730,000-square-foot lease at the Farley Building, the euphoria is likely to be fleeting. Facebook CEO Mark Zuckerberg has said half of his employees are likely to be remote within a decade, while Google, which has spent over $4 billion buying up prime space in Chelsea and hundreds of millions of dollars more on leases in Hudson Square, is letting its 200,000 employees work remotely until July 2021 and has hinted at greater openness to distributed work.
Moody’s Analytics predicts the value of U.S. office buildings will drop 17.2 percent in 2020.
“Losing one tenant that occupies 30 percent of your space might have a very big multiplier effect on your income that puts you underwater really quickly,” Moody’s economist Victor Calanog told the Journal this month.
But not all are as bearish. In a July 24 note, Michael Lewis of SunTrust Robinson Humphrey said it remains to be seen if office reductions become the norm “rather than the exception.” Piper Sandler’s Goldfarb said companies’ need to de-densify will offset any permanent shifts to remote work.
“When you put it all together, New York office will figure its way out,” Goldfarb said.
“They should be killing it”
When Litt spoke to TRD in early August over Zoom, he was in the thick of earnings-call season, estimating that he had listened to between 50 and 60 over three weeks.
“This was an extremely important earnings season, outside of, really, 2009,” he said, shoveling egg into his mouth between answers. “You’ve got to be on your game.”
In the early days of Covid, Litt said, his team put together a number of sector-specific plays. It first went after data center REITs and cell tower and single-family rental stocks. Litt said he’ll be looking at high-impact opportunities in hotels, office, gaming and senior housing REITs “as we’re starting to get a sense of how they’re playing out.”
As of June 30, Land & Buildings had equity investments in 22 REITs totaling $408.3 million, regulatory filings show. It had total gross investments of $772.1 million, according to its March 27 form ADV, which shows both long and short positions.
The hedge fund has three undisclosed activist positions, but only one public campaign being waged, against American Homes 4 Rent, which reported a 31.5 percent drop in net income in the second quarter.
“Their peers are killing it, and they should be killing it,” said Litt.
“What the pandemic will lay bare are the underperformers within peer groups,” said attorney Andrew Freedman, a partner at Olshan Frome Wolosky who has worked with Litt.
In 2019, there were a total of 10 activist campaigns against U.S. REITs, according to research firm Activist Insight. By July, Kranz, the attorney, was tracking 20 activist campaigns, 11 of which launched since April.
Much of the increased activity is coming from smaller players like Litt, who make up for what they lack in financial muscle with showmanship and media savvy.
Litt has a penchant for using white papers, videos and slick websites — such as SaveTaubman2020.com — to push his views. Litt often turns to Sloane & Company, a communications firm specializing in activist investing work. Its slogan: “We know what it takes to win.” (Subtlety is not Litt’s thing; as an analyst, he once sent red gumball machines to 700 clients and colleagues to warn them the commercial real estate bubble was going to pop.) He also engages a phalanx of photographers to snap revealing pictures at casinos and malls. This spring, while cycling the hills of Connecticut, he personally catalogued an influx of out-of-state license plates, in support of his call that suburban housing is hot.
“We’ve been riding here for 20 years, and it was a real noticeable uptick to see all these New York plates hanging out in Connecticut,” he told Bloomberg.
Paul Adornato, who worked for Litt at Paine Webber, called his former boss a “media master.”
“That’s how the game is won,” he said.
The Forest City executive said Litt was known internally as a “gadfly.”
“He’s an activist who’s willing to go very public, very early in the process,” the executive said. “He never really had a big position in our stock, and by the time the other, heavier-weight activists got involved, he was largely gone. So whether he played a role in raising the flag and getting people’s attention … I don’t know.”
“Activists aren’t coming in and buying 20 percent stakes,” Kranz said. “They don’t have to do that. Your weapons here are not absolute control by owning a lot of shares. Your weapons are your ability to disseminate information.”