The latest target for activist investors? REITs

Corporate raiders like Carl Icahn and Nelson Peltz made CEOs’ pulses race in the 1980s, when they were providing inspiration for the “Wall Street” movie character Gordon Gekko.

Back then, however, just a sliver of the equity market was focused on the real estate industry. Fast forward a few decades and those raiders, now known more generously as “activist investors,” are flexing their muscles at a time when real estate investment trusts represent a substantial part of the financial sandbox they play in.

Despite corporate structures and governance rules that many see as board friendly, activists are setting their sights on REITs in the latest wave of proactive investment on Wall Street.

“REITs had for a long time been viewed as a category of company that, as an asset class, was considered either takeover-proof or takeover-hardened,” said Richard Brand, an attorney with the law firm Cadwalader, Wickersham & Taft who has advised companies defending themselves from activism and activist hedge funds, including Bill Ackman’s Pershing Square Capital Management.

Ackman, Icahn and Peltz are well-known names among a cadre on Wall Street who will buy large stakes in a publicly traded company, then move to have a say in how that company is managed in the name of “maximizing shareholder value.” Often, they do this by demanding a seat or seats on the company’s board.

One reason REITs were thought immune to such takeovers is that the structure requires larger returns to shareholders in exchange for special tax considerations.

“The reality is that shareholders can gain influence and achieve board representation on REITs,” Brand added, and pointed to the hedge fund Corvex Management’s early 2013 takeover of CommonWealth REIT as a watershed moment that opened investors — and board members’ — eyes.

“I think that was a key turning point in the way people thought about REITs and the vulnerability of REITs,” he said.

On the rise

In 1989, there were 120 publicly traded REITs in the United States with a combined market capitalization of $11.7 billion, according to data from REIT.com. The sector reached its pre-recession peak capitalization of $438.1 billion for 183 publicly traded REITs in 2006.

At the end of last year, more than 200 REITs had a staggering market cap of $907.4 billion.

And as the REIT sector expanded, so too did investor activism. In 2010, investors initiated just two activist campaigns in the sector, according to information compiled by the research firm Activist Insight. That number grew to 14 actions in 2013 and 18 last year, a figure that is on track to be surpassed this year.

The results are a bit of a mixed bag. Of the 56 REIT-related campaigns that Activist Insight identified since 2010, roughly 38 percent were either wholly or partially successful.

While relatively few REITs focus solely on New York City, one of the most recent high-profile campaigns hit close to home.

In June, Sorin Capital Management called for New York REIT to cut ties with its embattled parent company and sell off some of its assets. Sorin, which owns 1.9 percent of New York REIT, made the move following the fall of founder Nicholas Schorsch, who exited the board in December amid a scandal over accounting inaccuracies at New York REIT’s parent company, American Realty Capital Properties (see related story on page 54).

New York REIT responded by announcing William Kahane, a co-founder of American Realty Capital, was stepping down as executive chairman, though he would stay on as a board member. The REIT also said it was launching a $150 million share buyback and was looking into selling some non-core assets, two other popular actions that activists frequently seek.

Greg Cohen’s family-run investment firm Rambleside Holdings supported Sorin’s call for New York REIT to sell off some assets. Cohen said he looks to Carl Icahn’s call for higher dividends and massive stock buybacks at Apple, where the infamous investor’s ownership stake equals less than one percent of the tech giant’s $750 billion market capitalization, as proof that investors can have a large voice.

“It’s staggering when a guy like Carl Icahn can go and get his voice heard at Apple,” Cohen said. “It’s telling that that didn’t used to happen,” he added, noting that if a company as successful as Apple can use some shaking up, there are plenty in the real estate sector that could as well. “In REITland, there’s a lot of REITs that should not be public.”

Big players

Corvex Management, whose CEO Keith Meister was a protégé of Icahn’s, and the Related Companies opened eyes in 2013, when they ousted the seven-member board at CommonWealth REIT (later renamed Equity Commonwealth) and installed billionaire investor Sam Zell as chairman.

Corvex and Related, which owned a combined 8.8 percent of the REIT’s stock, claimed that the company president had a conflict of interest by owning a piece of the management firm that ran the REIT.

It was not Meister’s only foray into the REIT sector. In 2012, Corvex bought a 4.43-percent stake in the private prison operator Corrections Corporation of America and, along with another investor, successfully pushed the company to convert to a REIT.

For companies of a certain size, the structure makes sense, because it allows them to save on taxes and increase payouts to investors.

Late last year, Corvex disclosed a 7.1-percent stake in American Realty Capital and in February penned an open letter calling for the REIT’s board to be completely replaced. Two board members have since resigned, Leslie Michaelson and former Pennsylvania Governor Edward Rendell, and businessman Mark Ordan was subsequently named an independent board member. The company will hold its annual meeting on Sept. 29.

Meister said at a conference in June that American Realty had done “all the right things to repair itself,” and that it needed to reestablish a dividend.

Jonathan Litt is another investor shaking up the REIT sector. In the past six years, Litt’s Land and Buildings hedge fund launched no fewer than six activist campaigns, with varying degrees of success.

In April, the fund nominated four new members to the board at Macerich, which owns shopping centers throughout the country, including the nearly 1-million-square-foot Queens Center mall, after the company rejected a $16.8 billion takeover bid from Simon Property Group, the country’s largest REIT.

Litt’s open letter to Macerich Chairman and CEO Art Coppola calling for governance changes was partially successful. In May, investors eliminated the stockholder rights plan — the so-called “poison pill” put in place to prevent Simon Property’s hostile takeover — and announced it would nominate two new independent directors, though Litt had wanted four.

Litt said he usually works quietly with management, but in cases where he meets resistance, he will deploy the tactics used by some of the more publicity-friendly investors.

“We work mostly behind the scenes, but in select cases, we’ll be more public if [management is] not responding to unlock that value,” he said.

Not all activist campaigns are successful, of course. A trio of pension funds has twice tried unsuccessfully to shake up leadership at Vornado Realty Trust.

In 2013, the Central Laborer’s Pension Fund, the Connecticut Retirement Plans and Trust Funds and the United Brotherhood of Carpenters Pension Fund filed proposals that would give investors a greater voice. They included switching to the majority vote standard and having an independent chairman, a direct play to remove CEO Steven Roth from his dual role as chairman, which he stepped into when Michael Fascitelli resigned in early 2013.

Connecticut State Treasurer Denise Nappier said that, as a matter of practice, she felt there is weak protection against conflicts of interest when a CEO serves as chair.

“In the case of Vornado, you have to ask, ‘Whose side is the board on?’ because for four of the past five years now, Vornado has failed to nominate an independent chair despite a majority of its shareholders voting for such a change,” she wrote in an email.

Vornado’s board voted down all three measures in 2013, and once again last year when they were reintroduced. None of the three investors filed proposals this year.