Activist investors have a message for retailers and restaurant chains: Spin off your property into a real estate investment trust, or we’ll take over your board and force you to. Activists say that spinning off or selling properties can boost a company’s stock price and reward investors who would otherwise miss a chance to benefit from record real estate values. Creating a REIT can also provide cash for companies looking to make an acquisition or other strategic move. Under pressure from hedge funds, Darden Restaurants has agreed to spin off property into a REIT, then lease the buildings back.
Some companies and shareholders consider this a bad idea. They say REITs holding property from just one retailer may not be the superior investments their proponents make them out to be. “The investors that are screaming for this are more short-term-focused activists that just want management teams to buy back stock with the proceeds and drive up the stock,” says Joshua Schachter, senior money manager at Snow Capital Management, which owns Macy’s shares. “I don’t think, as a long-term investor, it’s something I would want my companies doing a whole lot of.” After a hedge fund said Ethan Allen Interiors should pursue a REIT or sale-leaseback strategy, the company said on Aug. 27 that doing so “would impose a burden of significant lease expenses” that would damage its finances and restrict its operating flexibility.
REITs are publicly traded companies that own property or mortgages. Their income isn’t taxed, provided they pass almost all of it along to shareholders. Pershing Square Capital Management founder Bill Ackman was the first activist to encourage a large retailer to set up a REIT: In 2008 he pushed Target to spin off properties he figured could fetch $5.1 billion. Target refused, and Ackman’s bid for seats on the retailer’s board failed.