Hostile Takeovers in the REIT Sector

The Rise of Activist Campaigns on the Public Real Estate Industry

By VynedJ - Own work, CC BY 4.0, https://commons.wikimedia.org/w/index.php?curid=149979063

In recent years, REITs have surprisingly become a large target for activist investors. Once believed by many to be nearly impenetrable, hostile takeovers in the REIT sector have increased dramatically over the past decade. As can be seen in the following graph, REITs have become more exposed to activist investing than they were since they first popularized in the early 90’s.

REITs once enjoyed relative safety from hostile takeovers due to the unique way in which their entities are structured. For instance, most REITs are registered in the state of Maryland which carries corporate laws that typically favors management teams over outside investors. REITs are also mandated by government regulations to have five or fewer investors owning 50% or more of their entities. This then typically makes it difficult for an activist investor to take control of a REIT and corral other shareholders to follow suit.

Due to the need to gain a much larger percentage of company control as opposed to other public entities, activism in REITs has become rather of a niche. There are select hedge funds that specialize in this domain and have garnered strikingly high returns for their investors including Land & Buildings Investment Management, Sorin Capital Management and Rambleside Holdings. The managers that operate these funds have seemingly been in the real estate industry for decades and also have the necessary relationships to persuade other REIT shareholders. This has certainly of course been more effective than Hedge Funds that only dabble in REITs from time to time.

Jonathan Litt of Land & Buildings boasts a long and successful career in real estate finance and securities. His fund has outperformed the market by posting 17.2% net annualized returns since it started activist investing in the second quarter of 2012. L&B has led some high profile campaigns over the years including ones against Liberty Property Trust and Taubman Centers. Litt like many activists believes REITs have mistakenly enjoyed immense shelter from public scrutiny over the years due to their immense regulatory protections. They argue REITs lack the proper governance and compensation plans that most other public companies are accustomed to.

But some REITs are pushing back against activist attempts and are utilizing a common strategy referred to as the “Poison Pill”. These REITs attempt to make their shares unfavorable by decreasing the value of an acquisition for the activist placing the bid. They do this by either acquiring a large asset or by diluting their shares on the open market. This was as such the case with Macerich Co. when they issued a statement citing they would allow shareholders to buy shares at half their value if any party acquired 10 % or more of the company. This then quickly diverted Simon Property Group from completing their $14.39 billion hostile bid.

During the last 10 years, the United States has of course enjoyed an immense bull run. In the early part of the run, many investors ignored REITs for the high returns boasted in the S&P Market as was as in the private markets. Due to the flock of capital, many activists felt that some shares of REITs were not trading at fair market value in comparison to the properties in their portfolio. So activists like Litt took up sizeable positions in their companies and forced them to sell either their whole company or select properties in their portfolio to help return cash to their shareholders.

However, with recent talks of a looming recession and an escalating trade war between the United States and China, REITs have once again gained popularity amongst investors seeking a safe haven. REITs are now trading at significantly high multiples which has made it increasingly difficult for activist investors to take advantage of any price gaps between intrinsic and market values. As illustrated in the above graph, the number of activist campaigns on REITs has strikingly gone down significantly as investors have shifted their portfolio strategies.