By Konrad Putzier
Last week’s open letter by Marcato to the management of American Realty Capital Properties (ARCP) has rekindled a simmering debate over the merits and dangers of investor activism in REITs.
Marcato, an investment firm that owns 2.4 percent of ARCP’s shares, criticized the REIT for “engaging in too many transformative transactions too quickly” — in effect urging it to change its strategy.
ARCP has acquired properties for more than $15 billion in the past two years and recently took over the rival REIT, Cole Real Estate Investments, for $7.3 billion.
While some observers and REIT managers see this kind of investor activism as disruptive, others argue that it makes REITs more accountable and efficient.
The debate has become more important in recent years, as a growing number of formerly private real estate companies are turned into REITs — often for tax purposes.
In a more dramatic case of investor activism, Sam Zell, Corvex Management and The Related Companies ousted the management of CommonWealth REIT in March, claiming underperformance and conflict of interest.
“(Investor activism) tends to be constructive because activists’ interests are fully aligned with shareholders,” said Dirk Aulabaugh, senior director at research and advisory firm Green Street Advisors. “Activism doesn’t usually happen with companies that have performed well,” he added. At the NYU REIT Symposium in March, Green Street Advisors’ CEO
Michael Kirby made a similar argument. “I think activism in REIT space is great,” he said at a panel discussion.
“Allowing shareholders to kick out the board is a very constructive thing.”
Kirby argued that REITs have far more stockholders with specialist knowledge than most other public companies, making it very likely investor activism is based on legitimate concerns.
But others, like Debra Cafaro, CEO of the S&P 500-REIT Ventas, are more critical. “Shareholders don’t run corporations — that’s very destructive,” she said at the NYU panel. “Everyone has a role, and the role of shareholders is not to run companies.”
“There’s nothing wrong with a little healthy activism and competition, but it can get out of hand,” Cafaro added.
One problem with investor activism, according to Cafaro, is that activists may not always have a REIT’s best interest at heart. She explained that activist investors can sell their shares at any time, which means their short-term interests might clash with the more long-term plans of a REIT’s management and some of its other investors.
Moreover, just like managements, activist investors can make bad decisions.
If a REIT is performing poorly and its management proves unwilling to change course, the case for investor activism may be straightforward. But there are often differing opinions on a REIT’s performance, and misguided activism could upend a successful strategy and send its shares tumbling.
The Marcato case shows how difficult it can be to judge performance: while several analysts agree with its criticism, others have sided with the ARCP management or remained on the sidelines.
At press time, the REIT’s stock price had fallen close to a 52-week low.
In a statement, the company said, “ARCP welcomes open communications with its stockholders and values their input toward the shared goal of enhancing value. Our Board of Directors and management team regularly review the Company’s strategic priorities and opportunities, including deleveraging, capital allocation, and assess a variety of strategic options. We are committed to driving value for all ARCP stockholders and will continue to take actions to achieve this important objective.”