2 REITs That Have Activist Investors in a Tizzy

 | Feb 07, 2017 | 11:00 AM EST
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All of the talk yesterday was about the Super Bowl -- as one might expect after such an epic game. Unfortunately, far too much of the discussion was about the Super Bowl indicator, and expectations for the stock market to fall since New England emerged victorious.

It seems that the indicator has a spectacular record of predicting the market since the first game back in 1967. It is, at best, an interesting example of correlation not being causation, but I heard it repeated so many times yesterday that eventually turned the TV off and went back to reading 13D filings -- in search of activist campaigns with the potential for high returns.

One of the more interesting campaigns currently underway is at Taubman Centers (TCO) , one of the largest mall REITs. Jonathan Litt of Land and Buildings Management has made the REIT his latest activist target. Litt has been the most active REIT activist in the past couple of years, and he has had some successes so far.

Taubman owns 26 regional, super-regional and outlet shopping centers in the U.S. and Asia, and has one under development in China. In spite of the much-discussed death of shopping malls, the locations owned by the REIT are some of the best in the country, as measured by sales per square foot and average income in their immediate area. They own more malls on Greet Street Advisors' Top 100 list than any other REIT, according to a presentation by Litt.

In spite of this, the activist thinks the REIT is undervalued. He said in a letter to management in late January, "In our well-informed opinion, Taubman Centers is severely undervalued, as a result of abysmal corporate governance, a bloated cost structure, inferior operating margins and a lack of capital allocation discipline." Litt also highlighted the Taubman family voting control of the REIT, and super-majority voting requirements that give the family effective control of corporate matters, as reasons for the undervaluation.

List thinks that the REIT has a net asset value of about $106 a share, and fair value for Taubman Centers could be as high as $144 if steps were taken to reduce overhead and improve capital allocation. Today's share price is just $70, so if he can force change and is even close to right about the value of the properties owned by Taubman, then there is substantial upside in this REIT. Litt has also suggested that the company needs to adopt the attitude that the REIT is always for sale at the right price -- and a sale may be the best outcome if changes to unlock shareholder value are not taken in the near future.

I also saw in recent filings that Wintergreen Advisors is continuing to battle with Consolidated-Tomoka Land Company (CTO) . This fight has been going on since 2015, when Wintergreen sent a letter to the board of the real estate operator and developer suggesting that a strategic review be undertaken to find a sale of some or all the company's properties. The company did undertake a review process, but found that no sale was needed -- and that it could do things like changing the dividend payment from semi-annual to quarterly and buy back stock to increase the share price. Wintergreen did not agree, and has continued to wage war with management.

Wintergreen has also continued to buy stock in Consolidated-Tomoka, and currently own a little over 27% of the company. In spite of this, management refused to allow Wintergreen's nomination of four directors, citing a provision in the bylaws that requires ownership of record and not just beneficial ownership. The board claimed that Wintergreen's position in the stock was too large to sell without depressing the market and the hedge fund was just trying to force a quick liquidation or sale so it could exit its position without pushing down the share price.

As you can imagine, Wintergreen execs were not amused. They fired a letter back to the Consolidate board that said, "If our goal was to exit this investment at any cost, we would take CTO up on its repeated offers to buy back all or a large portion of our shares (which according to them we apparently do not own). However, we believe in the value of CTO and its underlying properties, and wish to maximize this value to the benefit of all shareholders. If CTO's Board and management acted with similar goals and in accordance with their fiduciary obligations, we would not be having this discussion."

Consolidated-Tomoka owns some fantastic properties that do appear to be undervalued at the current stock price. It owns approximately 10,500 acres in the Daytona Beach area, 32 single-tenant retail buildings located in Arizona, California, Colorado, Florida, Georgia, Illinois, Maryland, North Carolina, Texas and Washington, as well as eight multi-tenant properties located in Florida, including five self-developed properties located in Daytona Beach. It also owns the LPGA International Golf Club in Daytona, with four courses and a full-service food and beverage restaurant. A quick back-of-the-envelope analysis shows that the value of the properties could be $90 a share or more, well above the current stock price of around $54.50.

Wagering on a hard-fought activist campaign against a company with undervalued assets makes a lot more sense to me that betting on the Super Bowl's impact on stock prices, so I will keep reviewing the filings.

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