We've seen a rise in Real Estate Investment Trust activism over the past few years, with smaller REITs or those with less-than-stellar management attacked by outside shareholders who want to see the underlying properties' value realized.
One of the best activists has been Jonathan Litt of Land & Buildings Investment Management. Litt scored several victories last year, including the sale of American Residential Properties (ARPI) and Associated Estates Realty.
These solid wins helped drive Litt's fund to a 24% gain for 2015, a time when many other activists were foundering. In fact, Land & Buildings Investment Management has averaged 17% annual returns since 2012, with the firm's activist positions topping 35% on a gross annualized basis, according to Forbes.
That's moved Land & Buildings Investment Management to near the top of the list of firms whose 13D and 13F filings I follow. Fortunately, Litt likes to write and talk about his stock picks, which makes it easy to track what he's doing.
Rather than conduct closed-door meetings with management, Litt sends (and makes public) letters that outline the problems he sees and how he recommends fixing them. These "fixes" often involve an outright sale of the company, which can lead to nice profits for investors who glam on to investment moves.
I went through Litt's portfolio recently and found a few gems worth considering:
First Potomac Realty Trust (FPO)
This Washington, D.C.-area REIT is in a perfect market segment. Booms and busts come and go, but Washington is somewhat exempt when it comes to real estate. The federal government obviously needs a lot of office space, and so do all of the foundations, lobbyists, contractors and others who do business with Uncle Sam.
In a letter to FPO in October, Litt computed the REIT's net asset value at $16 a share, so there's decent upside given the stock's current price of around $10. He noted in his letter that "recent transactions are well above the implied valuation of the stock, suggesting strong investor demand for their properties. Same-store occupancy is strong, with leased percent up to 91.8% as the portfolio is of higher quality than we believe investors perceive."
Land & Building wants First Potomac to stop acquiring property and sell some holdings instead. Litt thinks the firm should use the proceeds to buy back stock, deleverage the balance sheet and pay off high-cost preferred shares. And if that doesn't unlock value, he thinks First Potomac should consider selling itself.
If we glam on to his investment in FPO, we'll get a 5.6% dividend yield while we wait for the market to fully realize the REIT's value.
CBRE Group (CBG)
Litt also likes CBRE Group, the giant real estate brokerage-and-investment firm.
In a July 15 rundown of his top picks for 2015 (which you can download here), Litt noted that CBRE is growing via acquisition and aggressive hiring. He also said institutional investors are underallocated to real estate, which should help drive continued earnings growth for the firm.
"CBRE Group stands to be among the largest beneficiaries of the continuing global real estate upcycle as well as is uniquely positioned to capitalize on the powerful secular trend toward property management outsourcing," the activist wrote.
CBG was trading at $38 a share when he wrote that, but has fallen to near $30 today. So, we can get a much-better entry point than Litt did. But he bought more of the stock as the market declined, as his third-quarter 13F filing disclosed a 121% increase in his CBG position.
Felcor Lodging (FCH)
The 13F also shows that Litt was buying shares of Felcor Lodging in the third quarter.
This is an old favorite of mine. I hit a home run with FCH when I bought it back in 2009 and sold it a couple of years later for a 3x return. But the stock has since drifted back down and might be worth attention again.
Management has done a solid job of disposing of non-core hotels and redeploying the cash into the firm's core urban and resort markets. FCH has also refinanced some of high-cost debt and repurchased costly preferred stock over the past couple of years.
I'm a big fan of what the firm is doing and will do some homework this weekend to update my information about what's going on there.
The Bottom Line
There aren't many REIT-focused activists on Wall Street, but Land & Building Investment Management is one of the best of the few that are out there. I'll be keeping a close eye on Litt's activities going forward.