Former Sell Side Analyst Who Moved to Investment Side Still Relishes Ability to Rumble With REIT Boardrooms
|Former Citigroup property investment analyst Jonathan Litt is managing director and global real estate strategist at Land and Buildings, a boutique hedge fund manager he founded in Stamford, CT.|
Despite leading the charge as an activist shareholder in the sale of BRE Properties to Essex Property Trusts (NYSE: ESS
), Jonathan Litt believes his greatest influence on the relatively staid REIT industry was the 14 years he spent as a sell-side analyst, including the real estate boom of the 2000s when Citigroup assembled one of the sector’s largest and most prestigious equity research teams.
As managing director and global real estate strategist, Litt was responsible for Citi’s global property investment strategy, coordinating a team of 44 research analysts in 16 countries. But in 2008 as the global property bubble swelled and ultimately popped during the Great Recession, Litt moved to the investment side to launch Land and Buildings, a boutique hedge fund manager based in Stamford, CT.
Litt has continued to have an outsize influence in the boardroom as an activist REIT investor from his Land and Buildings platform. While some REIT fund managers agitate for changes they believe will boost shareholder value, most prefer the traditional back-channel approach, keeping their suggestions and letters to REIT senior executives private.
By contrast, Litt isn't afraid to take his "do the right thing" message public, drawing on his sell-side analyst experience to issue proclamations calling out several REITs for what he sees as failing to act in the best interest of shareholders by pursuing flawed investment strategies or holding onto under-performing properties far longer than he thinks they should.
Among those who have drawn his ire are the aforementioned BRE Properties and more recently Mack-Cali Realty (NYSE: CLI
), Pennsylvania REIT (NYSE: PEI
) and Associated Estates Realty (NYSE: AEC
In October, Litt urged PREIT to sell off 17 noncore assets in order to boost valuation and increase its share price. At the time, PREIT declined, arguing that its portfolio quality is misunderstood and such a large-scale disposition would pose an execution risk that could ‘potentially destroy shareholder value."
"We appreciate Land & Buildings' ideas and agree that our portfolio quality is misunderstood," the REIT said in a letter released publicly. "We have continued to make progress in executing a transformation through strategic divestitures of non-core assets. However, we disagree with the implementation of a disposition program in a manner which would entail a tremendous amount of execution risk for the company and potentially destroy shareholder value."
Last week, PREIT announced a more modest plan to sell five shopping mall assets in Pennsylvania in 2015. Litt said in a letter to PREIT CEO Joseph F. Coradino that while Land & Building is pleased about the marketing for sale, "we believe it is unfortunately only a baby step towards maximizing value for shareholders."
"Time and time again we have seen real estate companies bleed out their lowest productivity assets over multiple years, only to see their shares languish during this process as earnings are diluted and the overhang persists," Litt wrote.
"Premier mall REITs Simon Property Group (NYSE: SPG
) and General Growth Properties (NYSE: GGP
) ‘ripped the Band-Aid off’ and disposed of their lower-quality malls in one fell swoop and in our view enjoy a premium valuation today to pre-sale valuation as a result."
Richmond Heights, OH-based apartment landlord Associated Estates announced board changes and a strategic review last month to fend off a proxy battle with Land and Buildings, which called for management changes and the potential sale of the company back in June.
CoStar News connected with Litt recently to discuss his shareholder activism role in the REIT space.
CoStar: You believe many companies have moved too slowly to dispose of their underperforming assets. Why?
In the 20-plus years I've been in the business, many companies started with a certain portfolio or acquired assets and then realized they would rather have better assets. Over a 3-to-5 or 10-year period, they sold down their lower quality assets. The problem with that is that they are diluting earnings growth by selling high-cap-rate assets and investing in low-cap rate assets. The best way to accomplish this, which we saw Simon Property Group and General Growth Properties do, is to take those lower-quality, higher yielding assets and hive them off into a separate company. The remaining company can then trade at the appropriate valuation and not have a discounted valuation because investors don't like the weak part of the portfolio. We're saying, just get it over with, sell the assets and move on.
What are some of the recurring themes in REIT governance and operations that make the space ripe for shareholder activism?
One of the remarkable things in today's investment climate is the challenge that investors who want to put money into real estate have in terms of the valuations of the property and not being able to find bargains. There are bargains in the public market, companies trading at 50% or 40% discount to their underlying asset values, for different reasons.
Those discounts in the public market may persist without real changes in the boardroom, and those changes can come in different ways. In the case of AEC, the management and board have been in place a long time, and they've been the worst-performing apartment REIT since their IPO and the stock is trading below its IPO price in 1993. It's time for real change.
Have REIT management teams had it cushy with investors?
The best management teams are rewarded with premium valuations. The worst management teams are penalized with dramatically discounted valuations relative to the underlying value of their assets -- to the point where they really don't have access to capital on a cost-effective basis. The institutional investors vote with their feet. It's pretty simple, really. The reason that they don’t have a good cost of capital is because the institutional investors aren't buying their stock. Investors that are looking for higher dividend yields, or they think a stock cheap and at some point, value will be realized, may attract investors. The reason companies get really cheap is because traditional REIT investors don't own the stock.
Why haven't there been more activist investors in REITs?
There have been non REIT dedicated activist investors in the sector from time to time. We think there will continue to be opportunities for Land and Buildings to find companies to buy at bargain prices, and we will work with management and boards to unlock that value.
What prompted you to leave Citi? As an analyst, was it your goal to play this kind of outsized role in how REITs do business?
I started on the investment side and did research for 14 years. I knew I wanted to get back to the investment side, which I did in 2008. I loved building the research franchise at Citi into the number one franchise on the Street and sustaining that over a long period of time. The thing that's most exciting about this business is building a durable, lasting franchise on the investment side and surrounding myself with bright capable people. If I do all that, I should make some money, but that's not what drives me day-in and day-out.
How is what you’re doing now at the hedge fund different than what you did as an analyst?
I don't see what we're doing here as very different from what we did on the sell side, except that we have more tools in the toolbox to effect change. We've always been very staunch advocates for the REIT industry. I've always felt very strongly that the changes made in the early 1990s that aligned management teams with shareholders were the reason we have a REIT industry. In situations where that becomes misaligned, which is the case in Associated Estates, we were when I was on the sell side -- and we continue to be here -- advocates for shareholders rights.
We have different tools in the toolbox, which is running slates, directors and being shareholders. I don't think anyone on the buy side is at all surprised when we're outspoken and trying to defend the REIT industry as best we can.