For many years the REIT industry largely flew below the activist radar due to the complexities of the REIT corporate structure and tax treatment; the fact that REITs are required to pay out 90% of their taxable income in dividends; a widely utilized cap on the percentage of share ownership permitted without Board approval (usually around 10%); and the perception that Maryland, where many REITs are incorporated, is more deferential than other states toward Boards facing hostile action. However, now that REIT investment visibility is high and some REITs are trading below NAV, these historical constraints no longer discourage activists from targeting the sector.
According to SharkRepellent.net, a corporate governance research firm, there were 26 REIT activist campaigns in 2015, compared to only six in 2011 and 12 in 2012. To date this year, there have been 13 REIT activist initiatives either announced and ongoing, or completed. Some of the prominent activists involved in recent REIT campaigns include Land & Buildings Investment Management, Rambleside Holdings, Snow Park Capital Partners, and Sessa Capital.
REIT activists are focused on maximizing shareholder value, and the usual triggers are price/NAV imbalances and/or “lazy” balance sheets with excess liquidity. By and large activists are agitating for more aggressive share repurchases, a merger or acquisition, or faster asset dispositions. They are also focused on governance challenges such as claims of misalignment between Board/management and shareholder interests; egregious termination fees to an external advisor in the event of change-of-control; or unfair restrictions on shareholders initiating by- law amendments.
As with most things in life, it is easier, more effective, and less costly to preempt an issue than to deal with its aftermath, and the same logic applies to activist attacks. The following are some top line ideas for both avoiding and preparing for a potential activist situation.
Know where you stand. Prepare and maintain valuation analysis so you know how your company is performing relative to peers and how your go-forward guidance and metrics stack up. Read sell-side research with a focus on commentary related to valuation, performance, guidance/metrics, and capital allocation strategy, and watch for shifts in sell-side sentiment, ratings and price targets. Track research on your competitors to see how they are being viewed relative to your company. Listen closely to the questions investors ask at meetings and the feedback you receive following all investor engagements. If you don’t have a really solid handle on how your company is being viewed by the Street, now might be an opportune time to consider a perception survey conducted by a neutral third-party.
Your best offense is a good defense. Take your IR program up a notch. Step back to revisit your investment message platform; make sure your investment thesis and messaging are compelling and understandable; clearly communicate your sustainable competitive advantages; and, most importantly, convey how you are creating value and shareholder returns. Then make sure that these critical messages are consistently and prominently incorporated into all investor communications – investor presentations, earnings call scripts, shareholder letters, IR website, SEC filings and proxy statements.
Develop a strategic investor targeting and meeting program with a focus on shoring up relationships with existing investors and educating new prospects. Take the time to build real relationships with your investors. If your investors don’t know you, haven’t seen you lately or don’t fully understand your strategy for value creation, it’s a lot easier for them to side with an activist, who has their own compelling value creation agenda.
Work with the sell-side to make sure they really understand your company and can effectively market your stock. Capitalize on the impending GICs re-classification to expand your shareholder base beyond REIT and real estate dedicated investors to include generalists who have a heightened interest in the REIT sector.
Consider adding media relations to your communications program as a way to build your profile among investors and analysts. At a minimum, focus on building relationships with a few key reporters who will know your company well and can tell your side of the story in the event of activist issues.
There is no substitute for preparation. Today, any solid investor relations program should include a vulnerability assessment and a plan for dealing with a potential activist attack. Put together a team of advisors who are experienced in dealing with activist campaigns. Make sure your Board is informed of the mounting activist activity in the REIT sector, is familiar with your plan and prepared in the event your company is a target. Formalize your Board/shareholder engagement protocol so that no director is caught off guard by a call from an activist. Prepare a quarterly IR Board report that includes your valuation analysis and a summary of current investor sentiment, so your Board has a clear picture on how Wall Street views your company relative to the peers and the sector.
Stay on top of market intelligence. Familiarize yourself with the names of the activists who are focused on the REIT sector, especially your sub-sector, and the types of issues they are raising. Now more than ever, it’s also important to know what is being said about your company in the press, in sell-side research reports, on the internet, in governance reports from ISS, Glass Lewis, etc. Pay attention to the investors who are requesting calls or one-on-one meetings, participating on earnings calls and requesting company information. Be on the lookout for names that are new, and review background information on any unfamiliar person or firm ahead of any call backs.
While REITs have enjoyed a relative safe harbor from the activist storm, most public companies will come under scrutiny at some point in their corporate life cycle. What’s important is that managements and Boards must be ready to respond to today’s dynamic investment environment. You must be clear eyed about your company’s strengths and weaknesses and be prepared to deliver a thoughtful and balanced view to your shareholders. The job of an activist is far more difficult when faced with a company that is self-aware and credible.