Before we head off into the weekend and everyone's focus turns to turkey and football, I have one more 13F filing I want to cover.
I have paid attention to Jonathan Litt of Land and Buildings Management when he undertakes an activist campaign, but until now he was not on my regular 13F list. Given the success he had using an activist approach with real estate investment trusts I think we need to change that, and today I want to review his buying and selling back in the third quarter. Many REITs have fallen in the last couple month s, so we may be able to buy his favorite stocks for less than he paid.
For those not familiar with Litt, he is a former analyst at Citigroup who struck out on his own in 2008. His hedge fund has launched several aggressive and loud activist campaigns and it has paid off for shareholders so far. It is no secret that I am a huge fan of REITs, and using his filings to help spot potentially undervalued long-term investment prospects strikes me a good idea.
Litt continues to be a buyer of FelCor Lodging Trust (FCH) . In a presentation back in January Litt valued FCH at $10.50 a share, and given the strong commercial real estate market and active lodging merger-and-acquisition environment that figure probably should be a little higher today.
Litt suggested that the hotel operator sell some hotels and use the cash to rebuild its balance sheet and buy back stock. FelCor has been doing exactly that in 2016, and in the most recent quarter it bought 477,000 of its shares at an average price of $6.33 per share. Land and Buildings Management now owns almost 6.4% of the REIT and I suspect it will continue to push the board to do what's necessary to unlock shareholder value. The shares yield right now is 3.38%, so we do collect some cash while waiting for the stock price to improve.
Litt more than doubled his stake in NorthStar Asset Management (NSAM) . He thinks the REIT and its shareholders are being shortchanged in the coming three-way merger with Colony Capital (CLNY) and NorthStar Realty (NRF) .
In mid-October Litt sent a letter to his fellow NorthStar Asset shareholders saying that NSAM "is the Crown Jewel of the proposed Colony NorthStar tri-party merger, in our view. The value assigned in the exchange ratio in the merger agreement for NSAM amounts to about $2.4 billion, well below our estimate of the value we determined for NSAM in our January letter in the mid $3 billion range."
As a Colony shareholder I am a big fan of the deal and think Litt is going to have a tough time winning this one. It is worth owning the shares to back into the new Colony NorthStar, and if Litt gets a little better price, so much the better. The shares yield 4.27% right now, but estimates for the post-merger REIT are for a payout of about 8%.
Land and Buildings Management more than tripled its holding in Taubman Centers (TCO) in the quarter and is engaging in an activist campaign with the REIT's management. Litt recently sent a letter to the shopping center REIT's board in which he said, "There is a tremendous opportunity to reverse decades of poor stewardship, which could allow the stock to reach its net asset value of $106 per share, or approximately 50% upside from current levels. We estimate fair value is closer to $144 per share, or approximately 100% upside from current levels, which is achievable through improved operations and margins, superior capital allocation and shareholder-friendly corporate governance enhancements. "
Litt also attacked the board for poor corporate governance, saying in the letter that Taubman "has earned the dubious distinction of owning the worst corporate governance score among all REITs from the pre-eminent REIT research firm Green Street Advisors. Considering that the REIT industry is known for egregious corporate governance practices broadly, so for Taubman to be the industry leader in poor governance is truly a feat."
I think Litt has a pretty good chance of achieving some success in this campaign. Taubman has been the worst performer of the mall REITs this year and investors have expressed concerns about its expansion into markets such as South Korea, Puerto Rico and China, where it has no experience.
Most individual investors do not own enough REITs. Using the filings of Land and Buildings Management can help us find undervalued real estate companies with a catalyst for higher returns.
