The broad-based REIT indexes were relatively flat last week, which was in tandem with the broader based indices.

But the biggest talking point has been the two recent activist campaigns launched on Ashford Hospitality Trust (AHT) by Cygnus Capital Inc. as well as Apartment Investment Management Company (AIV) by Land & Buildings LLC.

Is AIV throwing caution to the wind with AIR?

On 14 September, AIV announced that it was to separate its business into two, separate and distinct, publicly traded companies, Apartment Income REIT (AIR) and Aimco.  AIR is a newly formed, self-managed real estate investment trust that that AIV has espoused a simple and transparent way to invest in the multi-family sector: ownership with public market liquidity of a diversified portfolio of apartment communities, with low financial leverage, limited execution risk, best-in-class operations, and sector low management costs.  Aimco stated it is retaining its growing business of developing and redeveloping apartment communities while also pursuing other accretive transactions.

Synergistic or opportunistic?

Land & Buildings, a renowned real estate activist lead by Jon Litt, came out against this transaction, commenting that it could hurt shareholder value as well as the fact that shareholders do not get a chance to vote on the proposed spinoff.

As most will attest, it is important for shareholder activists to speak up and keep public company executives and their board of directors accountable and working in the best interests of the shareholders. However, other spinoffs within the REIT industry have occurred, but with shareholder approval. These include, but are not limited to:

• SRC: Spirit Realty Trust spun off its ShopKo assets as SMTA;
• DDR: spun off the Retail Value Investors platform; and
• SPG: Simon Property Group spun off Washington Prime Group.

So why is shareholder approval not required for this spinoff? After all, shareholders have invested in one company – one investment and operating strategy.

If this is as strategic as AIV espouses, then it should be able to effectively articulate a value proposition, right?  The aforementioned companies were able to communicate a strategic plan for the spinoffs that would make sense for existing and future shareholders, and many of their projections came to fruition – and with shareholder approval.  For Spirit Realty (SRC) they were able to delineate between their core Net Lease strategy and a somewhat separate strategy that surrounded their ShopKo assets. Perhaps AIV could take a page out of SRC’s playbook?

There’s blood in the water and the activists are circling

The story on Ashford Hospitality (AHT) is cause for concern as this is a company taking on another activist campaign and facing an imminent delisting. Yes, the lodging and hospitality industry has been hit hard over the last seven months due to major headwinds as a result of the covid-19 pandemic. Adding paraffin to the fire was the controversy surrounding the PPP loans and its founder, Monty Bennett, whose companies have been under scrutiny, so it seems natural that the activists waited patiently for an opportunity to strike. 

Will the activist, Cygnus Capital, win the battle against Ashford Hospitality?

There are a couple of head scratchers:

1. The company is trying to convert its preferred stock into equity.
2. The lack of transparency around rent collections – many REITs have reported their rent collections during the pandemic, yet AHT remains silent.

As famed investor Warren Buffett says, “when the tide goes out, you see who isn’t wearing clothes”

Perhaps that is the situation that has resulted in the Simon Property Group (SPG) and Taubman Centers (TCO) court hearing, coming up in a few weeks. Taubman seemed like a great buy when the economy was on a tear, but the tell is when the music stops, and those leases are put to a stress test such as a pandemic resulting in an economic downturn. Nothing exposes the strength of a tenant base like a pandemic.

Analysts continue to speculate that the court hearing could lead to a potential discussion to renegotiate the transaction. After all, these assets are going to perform in a whole new normal, right? The situation has not curtailed SPG’s opportunistic buying. It has gone on a buying spree with its partners this year, acquiring multiple retailers for its prime real estate. David Simon, Sam Zell, Steve Schwartzman: these seasoned REIT/real estate executives have overcome and actually found opportunity in the face of adversity many times over – we believe they are well positioned to rinse and repeat this time around. 

Takeaways: operating under a new normal and interdependence

REITs, even those with well-covered dividends, consistent cash flows and strong balance sheets continue to struggle to find solid footing in the current environment. Some of the grocery anchored REITs have benefited from the pandemic as more people have been forced to eat in versus out since March of this year. This is a stark comparison to how the hospitality and retail REITs are faring in the same environment. Not to mention the offices sector, which by all accounts is changed forever.

However, over the long term, they are all interdependent on one another, and it stands to reason that the entire industry will benefit when everyone is doing at least marginally well.  This is just the fiscal capital component of the equation – the human capital component is most likely what is keeping most CEOs up at night, worrying over questions like the following:

• What safety precautions do we need to put into place? 
• How many employees could/should work remotely?
• How many people can we have in the office at one time? 
• What if someone gets sick? 
• How does this impact our health insurance premiums?

REIT earnings season is in full gear.  Here are some of the questions and themes that we are asking across the REIT universe that are of particular interest to REIT investors:

• How will REITs perform under a potentially different administration?
• Are the headwinds around rent collection getting stronger?
• Will this be survival of the fittest?  
• Some of these REITs traditionally provide financial and operating guidance for the coming year – how many of them will refrain? 

So far, approximately 20+ REITs have reported their Q3 2020 financial and operating results. As we listen to these calls, several prevailing themes emerged. The financial community is concerned about the impact of the election and on the many regulatory changes out there, such as 1031 Exchange Repeal and Prop 15.  Of course, a lot of focus was on the impact on tenant vacancies, credit risk, retention and rent collections amid the covid pandemic. Overall, management teams are cautiously optimistic, stating that there are inherent headwinds, but the strength of their operating platforms and solid balance sheets are key. Some companies have also seen opportunity in the face of adversity and finding external growth opportunities that have led to increased and narrowing ranges in 2020 guidance. However, by and large, everyone who would typically provide 2021 guidance has deferred this to next quarter.

So, who has the secret sauce to differentiate themselves during these challenging times?