New targets? REITs may want to prepare for battle with activist investors
Shareholder activism was a major topic of conversation at the 20th annual NYU REIT symposium held at the Pierre Hotel on Wednesday. "This is not the era of the staggered board," said Samuel Zell, the chairman of Equity Group Investments. "This is not the era of 'just say no.' " Zell said he was "disappointed" in the board of Macerich Co., which rejected a $17 billion unsolicited offer from Simon Property Group Inc. earlier in April. He also predicted that the Simon-Macerich story is not yet over.
Zell comments capped a day that began with another bold prediction from Michael Kirby, the chairman and director of research at Green Street Advisors in Long Beach, Calif., a real estate research and advisory firm. "We're just getting going" with activism in the REIT sector, he said at the NYU confab. Kirby argued that many management teams have been in place for too long and have gotten complacent. Activism will spur a much-needed round of M&A-driven consolidation, he predicted.
Barry Sternlicht, the founder, chairman and CEO of Starwood Capital Group, offered a contrary view. He mentioned with approval Laurence Fink's recent critique of shareholder activism. Sternlicht, a longtime member of the board of directors at Estee Lauder Cos., said that the company was able to make a significant investment in China only because the Lauder family controls the vote at the company and therefore could ignore vocal shareholders interested only in short-term performance.
Shareholder activism has been late in coming to the REIT sector because most REITs are organized under the corporate law of Maryland, which gives boards and managements exceptionally broad leeway to combat hostile bids and unruly shareholders. But, said Steven Seidman, a partner at Willkie Farr & Gallagher LLP in New York and co-chair of its corporate and financial services department, "There are so many well-versed, thoughtful institutional investors who have had investments in these REITs for so many years that they have a lot of influence. The REIT world is distinctly different from other industries as most know each other and have for years. And those activists are often right there in the mix."
Being targeted by the activists is one more sign of the remarkable growth of REITs. As Robin Panovka, conference co-chair and a partner at Wachtell, Lipton, Rosen & Katz, noted in his opening remarks, REITs were an afterthought two decades ago. In 1995, there were 178 equity REITs with an average market capitalization of $280 million, the largest of which had a market capitalization of $1.6 billion; today, there are 177 REITs with an average market cap of $4.8 billion. The S&P 500 did not include a single REIT in 1995; now the index features 21, the same number that have a market cap of $10 billion or more.
Many of the panelists see another generation of growth ahead. By 2035, REITs might account for a tenth of the S&P 500, Panovka hypothesized. Throughout the day, panelists discussed the opportunities and pitfalls of investing overseas. Deborah Cafaro, CEO of Ventas Inc., said she sees the prospect of funding investment in Europe with very low interest euro-denominated bonds as very enticing. That would solve the problem of currency risk, which other commenters identified as the greatest challenge to investing overseas. Investors in vehicles other than REITs were apt to be more aggressive. Zell mentioned the appeal of Mexico and Colombia. Jonathan Gray, the global head of real estate at Blackstone Group LP, said he is looking at Spain and Italy.
