A Trio of Turnaround REITs Attracting Activists

04/27/2018 5:00 am EST

Focus: REITS

George Putnam

Editor, The Turnaround Letter

As the market worries about overpriced technology and industrial stocks, one group that has already corrected into undervalued territory is real estate investment trusts, or REITs, explains George Putnam, editor of The Turnaround Letter.

Several forces have weighed on REIT shares recently. First: rising interest rates, partly because REITs carry higher amounts of debt which becomes more expensive, and partly because rising rates make bonds relatively more attractive.

Another burden: concerns over rising property supply that could hurt rental income. Changing consumer behavior is also affecting retail-oriented REITs, and any concerns about slowing economic growth could further hurt REIT performance.

We list below our selection of a diverse group of  REITs that have fallen out of favor. Each has some company-specific issue that we believe will be overcome, along with an attractive dividend yield to collect while waiting.

The Macerich Company (MAC) is a high-quality retail mall owner, with properties in densely-populated coastal hub and gateway cities like Washington, D.C. and the New York metro region. Its malls tilt toward high-end, trendy specialty stores like Apple and Tesla.

These traits have allowed its space to remain 95% occupied with steady rent increases over the past ten years. Investors’ worries about retail malls in general, and Macerich’s exposure (albeit shrinking) to Sears, JC Penney and Macy’s stores specifically, have pushed down the company’s shares by 33% from its $88 high a few years ago.

Perhaps sensing opportunity, activists including savvy hedge fund Third Point have accumulated shares. In another possible harbinger of things to come, top executives recently inserted a generous severance payment in their contracts that can be invoked in the case of a buyout.

QTS Realty Trust (QTS) owns 25 data center facilities in the United States, Canada, Europe and Asia that provide the housing, power and security for other companies’ computer and network equipment.

Despite renting into a high-demand market, QTS shares have severely lagged its peers since its 2013 initial public offering, particularly since February when it reported weak results and outlook leading to a 23% one-day plunge.

While the company has announced a strategic shift toward some promising specialty niches, along with a sizeable cost-cutting program, management has lost considerable credibility.

Activists are starting to circle, mounting an effort to oust the chairman at the May 3 annual meeting. Better leadership and execution could bring a 40% boost to the share price from increased profits and a higher multiple.

Founded in 1950 by legendary developer A. Alfred Taubman, Taubman Centers (TCO)  has 27 regional, super-regional and outlet malls in the United States, Puerto Rico and Asia. Its malls are among the highest quality and are located in affluent metro communities.

As a result, they have average sales per square foot of over $800. Despite this outstanding portfolio, Taubman’s sub-par operating performance, relatively high expense base, entrenched management and one-off investments in South Korea and China have left its shares to trade at a significant discount to its underlying asset value, which is estimated at nearly $100/share.

Activist and REIT specialist Land & Buildings is leading the charge for major changes that could unlock this value. The strong-willed activist Elliott Management also holds a 4.8% stake.

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