While many public investment sectors have a history of activism, the REIT space hasn't been one of them.

Christopher Beauchamp

In the REIT world, investors generally eschew the bold press release announcing a slate of new shareholders or advocating for dispositions, opting instead for a smaller, more intimate and courteous setting in which to voice their displeasure.

"Most investors in REIT-land are not activists," says Alexander D. Goldfarb, managing director at Sandler O'Neill + Partners. "At NAREIT or events like that, people share their views of what should and should not be done with management."

That's the way it traditionally worked, anyway. But in 2013, when Land and Buildings—an upstart hedge fund led by former Citigroup head of global property investment Jonathan Litt—made a play for BRE Properties, REIT CEOs suddenly had to add "activist investor" to their list of concerns.

"There hasn't really been much activism in the REIT space," says Dave Bragg, a managing director with research firm Green Street Advisors. "That allows him to find numerous targets that make a lot of sense. These are companies that have historically lagged their peers due to inferior management."

Litt hasn't had any difficulties finding laggards. After Palo Alto, Calif.–based Essex Property Trust bought BRE last spring, Litt pinpointed more targets. In 2014, he pushed for changes at a trio of companies: Pennsylvania REIT (PREIT), a smaller REIT based in Philadelphia; Edison, N.J.–based Mack-Cali Realty Corp.; and, in a move that caught the attention of the multifamily business, Associated Estates Corp. (AEC), headquartered in Richmond Heights, Ohio.

In November, Litt proposed a fully new, high-­powered slate of directors for AEC, including former Archstone CEO Scot Sellers, former Archstone European president Dana Hamilton, and former Gables CEO Marcus Bromley.

With that group, some REIT observers think Litt may have as much as a 90% chance of winning. But as he advocates for change at these REITs, Litt also raises questions about his motives: Is he an opportunist just seeking the spotlight? A small investor trying to gain control of established companies without spending the billions necessary to actually buy their assets? Or is he a steward of shareholder value just looking to improve the REITs' performance while making his investors a nice return in the process?

The answer depends on whom you ask. But one thing is certain: In just a couple of years, Jonathan Litt has made REIT watching a lot more interesting.

The Origins of an Activist

Before Litt was putting together powerhouse boards and becoming an influential voice, he got his start with a real estate operator—as an analyst at BrookHill Properties back in the '80s, when the firm was buying shopping centers on the East Coast. "I did mostly acquisitions," Litt says.

But the early '90s real estate crash changed his course.

"I looked around and said, ‘I think that changes that are happening in the REIT space make the ­REITs a better way to invest in real estate than private entities,' " Litt says. "I thought there was a very strong alignment of interest between management and shareholders."

That alignment of interest has been a guiding principle for Litt over more than two decades now. He worked for European Investors, picking REIT stocks, and then he moved to the sell side at Citigroup, where he became managing director and senior global real estate analyst responsible for global property investment strategy. That's where Litt cemented his reputation as a hard-nosed analyst who would challenge the biggest CEOs.

But, sometimes, he might have taken those criticisms too far. In 2002, Peter Munk, a Canadian real estate titan, filed a $33 million defamation lawsuit at Citigroup for alleged defamatory comments that Litt made about the governance at Munk's Trizec Properties, which led to a decline in stock prices. The suit was settled when Citigroup donated money to the Peter Munk Cardiac Centre, a cardiac unit at a hospital in Toronto, according to the Financial Times.

Mainly, though, Litt earned a reputation of being very good at his job. Both Institutional Investor magazine and financial-services information and consulting firm Greenwich Associates honored him as a top analyst between 1995 and 2008. He was approached to start his own fund in 2005.

"Because I was worried about the bubble, I thought it wouldn't be the best time for me to start a business investing in real estate," Litt says. "I'd rather wait until the bubble breaks and jump out and do it. In my view, the bubble broke in the summer of 2007."

Litt and Citigroup vice president Craig Melcher jumped from the sell side to the buy side in January 2008 when the duo started the hedge fund Land and Buildings. That transition gives him a little bit more standing with management teams.

"It's one thing to have a sell-sider write a note about company performance and ways for companies to improve," Goldfarb says. "It's another thing to have someone who invests capital and can approach the situation from a shareholder's perspective."

Opening Salvos

After tangling with Las Vegas Sands Corp., which is backed by billionaire GOP donor Sheldon Adelson, Litt fired a broadside in the apartment space July 31, 2013, when, hours before an earnings call, he sent a scathing letter to BRE's board detailing the REIT's underperformance and criticizing it for not accepting an offer to buy the company for $60 a share.

Litt felt BRE was underperforming and unable to drive rent, occupancies, or NOI effectively, even after the company adopted a revenue management system. Litt certainly wasn't alone in his criticism.

San Francisco–based BRE had long been questioned by analysts for underperforming and exhibiting an inability to change, especially compared with Essex, an investor darling based about 30 miles to the south, in Palo Alto. While analysts applauded Litt's message, some doubted that his small hedge fund could pull off the purchase of a multibillion-dollar REIT. So did BRE, which said Litt's fund didn't have the capital capacity or track record to nail the deal.

"There were a number of investors upset with BRE for a year and a half," says Rod Petrik, a real estate research analyst at Baltimore-based Stifel Nicolaus and Co.

Litt's gambit did, at least, help bring BRE's issues out into the open before Essex eventually bought it, for $4.5 billion, in 2013.

"At BRE, many other factors played into the decision to eventually sell the company," Bragg says. "Jon deserves credit for raising awareness of BRE management's historical track record, which was inferior relative to its peers and, especially, West Coast–focused Essex."

But others shy away from giving Litt too much credit, saying he was more a supporting actor in that drama, not a leading man.

"While I know he likes to take a lot credit for activist stories, I'm not sure you can give him that credit," says Ryan Meliker, managing director of equity research, REITs, and lodging for New York–based MLV & Co.

With BRE behind him after the Essex purchase, Litt focused on PREIT and Mack-Cali, an office REIT that moved into Northeast multifamily after purchasing New Jersey apartment operator Roseland Partners. Mack Cali had long been an underperformer with its shares consistently trading at the largest discount to unlevered asset value (UAV) among office REITs and among the largest discounts across all property types, according to Green Street. The firm attributed these problems to "consistently weak fundamentals in its largest office markets as well as missteps on capital allocation and strategy, critical issues that rest with the CEO."

After Litt targeted Mack-Cali, the REIT created a board spot for him with the understanding that "Litt agreed to standstill provisions that restrict him from engaging in proxy solicitations," according to Bloomberg. In November,. the company announced a management transition plan, with CEO Mitchell Hersh stepping down in May 2015.

But even as he moved onto the board, Litt continued to function as an analyst. While sitting on the board at Mack-Cali, Litt put the firm on his "must own" list in the third quarter (he didn't mention it in his fourth quarter report). In the report, he acknowledged the board's openness to listen to ideas to close what he saw as a 40% value between the company's assets and stock was a main reason he was optimistic moving forward. "Settling with the company and working with management and the board on a friendly basis will likely prove the optimal way for us to maximize shareholder value," Land and Buildings said in the report.

AEC Fight

For years, AEC, which is piloted by CEO Jeffrey Friedman, has been plagued by conflict-of-interest questions. For instance, in 2012, the Midwest-centric REIT made the curious decision to buy land all the way across the country, in California. It turned out the sale of the land was brokered by Friedman's son, Matthew, according to SEC documents.

So when Land and Buildings announced in November that it was proposing a new slate of directors for AEC's board, many industry observers thought the move was well overdue. While investors and analysts had been frustrated with BRE for a couple of years, they've been exasperated by AEC for decades.

"[AEC] has numerous conflicts of interest, and the capital allocation hasn't been great," says Conor ­Wagner, a senior associate at Green Street Advisors. "It makes sense that an activist would want to get involved and change the board structure."

Litt bought a 2% stake in AEC in November. "AEC made poor capital-allocation decisions consistently and persistently throughout their history," Litt says. "They have a board of directors with no background in the multifamily industry, and they haven't been advised on how to allocate capital and grow the multifamily business."

Like BRE, Litt says AEC's assets were underperforming similar institutionally owned assets, and that the company wasn't fully capitalizing on its revenue management investment.

"Associated Estates is one of a very few companies that went public 20 years ago that is trading below its IPO price," Litt says. "The company has, under its current management team, been unsuccessful at creating shareholder value and at keeping up with the rise in prices for apartments nationally."

For its part, AEC wants to narrow the focus of its performance to the past decade. From December 2004 to December 2014, the firm produced returns of 307% versus a peer average of 182%.

"We are proud of the outstanding portfolio of high-quality assets the Associated Estates management team has assembled over the past 10 years, as well as our fully funded pipeline of active development projects that is poised to create significant, additional shareholder value," it said in a statement to MFE when questioned about Litt. "Importantly, since this board and management team have been in place, the company has consistently delivered superior returns for shareholders, including industry-leading totals."

The Cleveland-area REIT has other defenders in the industry as well. "If you ask me, they get a bad rap," says MLV & Co.'s Meliker. "When everyone else is zigging, they're zagging. They don't do what investors necessarily want them to do. This is not a management team that has destroyed value."

But Litt thinks his board can put together a management team that can do better. His group of directors, led by Sellers, is one of the reasons some analysts give him an excellent chance of succeeding. "Jonathan has put together a viable board slate," says Stifel Nicolaus' Petrik. "I have a lot of respect for Mark Bromley, Dana Hamilton, and Scot Sellers, among others."

Even Meliker, an AEC defender, could see a change occurring. "There's definitely a viable chance of it happening," he says. "I think Litt put together a pretty strong lineup for that board."

While the two sides have had talks, they apparently haven't gone very well. After some meetings at the end of 2014, both sides put out dueling press releases in late December basically accusing the other of failing to work collaboratively and abandoning discussions. In response to Litt's director slate, AEC announced in its release that it was adding former Equity Residential CEO Douglas Crocker to the board; initiating a thorough business review; and adding corporate governance enhancements.

"It is time for real change, and we view today's announcement as too little, too late," Land and Buildings said in its press release. "The Land and Buildings nominees offer a clear path for Associated Estates to become a best-in-class apartment REIT."

If Litt's board does gain control of AEC, he's confident the REIT has a nice base of A-minus and B-plus assets off of which to grow. But before making any decisions on whether to sell the company or its assets, or grow the company, he'd first need to understand what's happening with AEC.

"We think we can remake this into a best-in-class apartment REIT," Litt says. "There's private institutional capital interested in buying it as well. All of this should be evaluated."

Deep Impact

With articles in The Wall Street Journal and appearances on the financial news networks, Litt certainly doesn't shy away from publicity. Combine that with his advocacy for change at REITs where management teams have grown comfortable over the years, and it's not surprising that he's become a magnet for criticism.

"An activist position is a bold strategy to undertake," Sellers says. "By nature, you're going to be calling out people for underperformance. Immediately, you're going to put yourself in a vulnerable position because everyone is shooting arrows at you."

If you talk to enough sell-side analysts about Litt, you start to get sighs. They wonder if he exerts an outsized influence compared with the size of his $100 million fund. "Land and Buildings is small," Meliker says. "They don't have a lot of capital coverage."

While some analysts may regard Litt as an attention hound, many seem to support his mission.

"He's not a really big shareholder," says Green Street's Bragg. "But he has the support of some of the REIT-dedicated crowd. Even though his fund is small, he's able to accomplish a lot because he's taking approaches that make sense to the broader REIT investment community."

Even AEC supporter Meliker appreciates Litt's work. "His fundamental analysis and understanding of what companies are worth has a lot of credibility across The Street because guys know him so well and he's been doing it for so long," he says.

After a rocky beginning at Archstone when Litt called the company "serial diluters" with its purchase of the Charles E. Smith apartments, Sellers became a fan.

"[Litt's activism] is one of the very best things for the industry," Sellers says. "What should public company CEOs be in the job of doing? Doing a great job for shareholders. If you're not doing that, someone should call you to task. For too long, the real estate industry has not had a visible activist presence that could call underperforming management teams to task and could get changes."

Other CEOs also think he serves a valuable purpose. Mike Schall, CEO of Essex Property Trust, which ended up buying BRE, says that public REITs, no matter how poorly they're managed, will be bought if their price gets low enough. Often the fact that they're bought and considered "values" just encourages management to continue making questionable decisions. Litt's brand of activisim can put a stop to that.

"There's a price at which a company that's underperforming will trade at and they'll be considered the value buy," Schall says. "Investors will look at that situation and buy the stock because they see it as cheap and inexpensive. Jon tries to take that next step and asks how you unlock that value."

Regardless of what happens at AEC and PREIT (which recently announced the sale of eight properties and plans to divest an additional five), Litt promises to keep looking for ways to uncover value. In fact, it kind of sounds like he's only getting started.

"We're always looking," he says. "It doesn't have to be an apartment REIT, a mall REIT, or an office REIT. Anywhere we think we can get real estate cheap compared to private-market value, we're going to pursue it."