A hedge fund looks to stop a big real estate owner from breaking up

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• Business: Apartment Investment and Management Co. is a REIT that focuses on the ownership, management, redevelopment, and development of apartment communities in some of the largest US markets. It has two primary businesses: (i) AIR, which is a stabilized apartment investment vehicle with quality assets and a national footprint and comprises approximately 90% of AIV’s total business, and (ii) Aimco, which includes complicated development deals and some less attractive portfolio assets, comprising approximately 10% of AIV.
• Stock Market Value: $5.3 billion ($33.39 per share)

• Percentage Ownership:  1.39%
• Average Cost: $34.50
• Activist Commentary: Land & Buildings is a real estate focused long-short hedge fund that will try to engage with management on a friendly basis when they see deep value. They invest in real estate in the public markets and select corporate engagements. Their positions are often under the threshold, and they are prepared to nominate directors and have received board seats at Brookdale Senior Living, Felcor Lodging Trust, Life Storage, Macerich, Mack-Cali and Taubman Centers.

On September 22, Land & Buildings sent a letter to the company’s board expressing its concerns with the company’s September 14 announcement that it plans to separate its business into two, separate and distinct, publicly traded companies, Apartment Income REIT (“AIR”) and Aimco, through a reverse spin-off. Land & Buildings believes that the proposed transaction will not close the company’s substantial discount to net asset value and is an attempt by management and the board to rid themselves of a decades-long poor track record rather than address the fundamental issues challenging the company. They noted that management and the board appear to be rushing completion of the spin-off before shareholders would have the opportunity to express their views on this issue or elect board members to better represent shareholder interests. Land & Buildings called on the company to put the spin-off to a shareholder vote and if they refuse to do so, Land & Buildings stated that it will not hesitate to call a special meeting of shareholders to conduct an advisory vote on the transaction. Further, Land & Buildings noted that it is prepared to file preliminary proxy materials with the SEC on Sept. 28 seeking requests to call a special meeting if the board does not agree to put the proposed spin-off to a vote by that time. 

Land & Buildings’ initial overture was made in response to the company’s announcement to separate these two business lines into two separate publicly traded companies. At about $33 per share, the company trades well below its NAV of approximately $58 per share and the board believes this spin-off is a way to close that gap. However, Land & Buildings disagrees. Clearly its debt level has something to do with it as does the complexity of its assets and businesses. But after such a prolonged period of underperformance, one has to look at management as a potential problem.

Terry Considine has been the company’s chairman and CEO since its IPO in 1994 and since that time the company has underperformed its Proxy Apartment Peer Average by  a negative 914%. Additionally, the company has traded at a substantial discount to its own NAV estimate as well as sell-side estimates of NAV over a trailing five year period, and the company has returned negative 35.21%, negative 25.99% and negative 8.79% over the past 1, 3 and 5 year periods, while the S&P 500 has returned 10.41%, 32.03% and 70.05%, respectively. Splitting into two companies will do little to nothing to solve these problems as  Considine is expected to be chairman of both companies, which are expected to continue to do business with each other. Moreover, the transaction will result in a material tax event for the company likely to exceed 10% of its total market cap.

Land & Buildings believes many shareholders agree with them and is calling for the board to put the spin-off to a shareholder vote, which the company has no obligation to do and likely will not do. In that case, Land & Buildings’ recourse is to get the support of a total of 25% of shares to call a special meeting of shareholders to put the transaction to a vote. However, the stark reality of the situation is that if the AIV Board is willing to eschew good corporate governance and delay a special meeting, it can accomplish the spin-off before any shareholder vote is consummated. However, they should look to Darden Restaurants (DRI) as a cautionary tale. The Darden board ignored the clear will of stockholders when divesting the Red Lobster business resulting in the imminent replacement of the entire board and CEO.

If the AIV board executes the spin-off without a shareholder vote or in the face of a negative shareholder vote, and the NAV gap is not closed from the transaction, Land & Buildings will have even more ammunition for its activist campaign and more evidence that its theories are correct and will likely press forward with an activist campaign at the newly formed AIR company. If Land & Buildings is able to get the company to pause and listen to them or if they ultimately launch an activist campaign at AIR, they would likely be pushing to reconstitute the board, change management, de-lever and reduce operational complexity. If that does not close the valuation gap, they would push for a sale of the company, and it is interesting to note that Blackstone is currently a shareholder and could be a potential acquirer if it comes to that. 

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.