Small hedge fund tries for change at an actual property belief, the place activists usually discover a robust combat

A small agency is trying to make a change at an actual property funding belief, an space sometimes robust for activism.

• Enterprise: Actual property funding belief that primarily acquires, owns, and function Class A and workplace belongings in the USA.
• Inventory market worth: $155 million ($10.46 per share)

• Possession: : 6.16%
• Common price: $14.52
• Activist commentary: Engine Capital is an skilled activist investor led by managing accomplice Arnaud Ajdler, former accomplice and senior managing director at Crescendo Companions, L.P. 

On Could 18, Engine despatched a letter to the corporate’s board calling on it to right away cease any plans to boost fairness and to start a liquidation or a sale of the corporate. Engine expressed its concern that the board could also be favoring the pursuits of its exterior operator and administrative companies supplier, CIM Group, to the detriment of stockholders.

Engine transformed its passive 13G (filed on January 28, 2020) to a 13D this week.

Externally managed REITs are infamous for conflicts of curiosity and self-dealing and are sometimes the goal of activists. This one has a seven-member board that’s comprised of CIM Group’s three co-founders and three different people with vital ties to CIM Group and its principals. So, it begs the query as to how Engine began out as a passive investor and solely after investing found that the board could also be favoring the pursuits of the corporate’s exterior supervisor over shareholders.

Any investor in an externally managed REIT ought to do sufficient work to know and perceive the inherent conflicts of curiosity. Pursuant to a administration settlement, the exterior supervisor receives a payment primarily based on the corporate’s belongings and is incentivized to extend belongings even when it means diluting shareholders to take action. Whereas, CIM Group does personal 19% of the widespread inventory, that doesn’t imply they’re aligned with shareholders. Their widespread inventory possession is price $28.three million, which looks as if lots, however is nothing in comparison with the $52 million they and their associates have taken in charges from the corporate over simply the previous two years. So, they’re incentivized to maintain their administration settlement. Promoting the corporate would imply dropping a money cow, and they’re unlikely to do this.

Extra unhealthy information for Engine — externally managed REITs usually construction themselves so they’re shielded from shareholder activism (i.e., Maryland domicile, plurality voting in uncontested elections). Because of this, activists are not often profitable after they goal externally managed REITs. Corvex managed to defeat Fairness Commonwealth after a protracted, expensive and tenacious battle, however sadly, Engine just isn’t Corvex.

Engine is a small activist with restricted sources and solely a $13.25 million funding on this firm. Whereas we’d like to see them tackle the board and win for the sake of excellent company governance, this can be very unbelievable that they may commit the expense essential to combat this battle if the corporate digs in, which they’re almost certainly to do.

Whereas there are indicators of shareholder discontent — at the newest annual assembly, all seven administrators acquired over 28% of votes towards them, with two administrators receiving over 40% of votes towards — that is hardly sufficient for an activist like Engine to tackle a 19% stockholder with a major curiosity in the established order.

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