Late Thursday, H&R announced a special committee of board members had shut down a nine-month strategic review without finding a buyer.Fred Lum/The Globe and Mail
CEOs and boards that successfully fend off activist campaigns from hedge funds roll out the same game plan.
These leaders follow a similar blueprint when navigating the investor disappointment that comes from a failed sales process at a public company. The program starts with transparency and decisive action.
One of the country’s largest property owners, H&R Real Estate Investment Trust HR-UN-T, seems intent on ignoring this proven game plan. Doing so all but guarantees investors will crank up a campaign for change at the owner of a $9.6-billion portfolio.
Late Thursday, H&R announced a special committee of board members had shut down a nine-month strategic review without finding a buyer for the company. The price of the REIT’s units dropped by 9.8 per cent on the news.
H&R REIT concludes review without finding buyer, pledges $2.6-billion in property sales
Earlier: H&R REIT units climb as company reveals it held talks with potential buyers
On Friday, H&R chief executive officer Tom Hofstedter led a conference call to discuss the board’s decision and the REIT’s results. Mr. Hofstedter has run the REIT since founding it 29 years ago.
“Disappointment” and “dismay” were among the words analysts used in reports to describe the minimal disclosure from management in the H&R call, and the lack of participation from REIT trustees such as Donald Clow, who chaired the H&R special committee that ran the review.
H&R’s portfolio is a hodgepodge of properties, with more than 400 holdings spanning the residential, industrial, retail and office real estate sectors.
Four years ago, Mr. Hofstedter promised to simplify H&R’s structure by exiting the retail and office investments. It never happened.
Two years ago, hedge fund K2 & Associates Investment Management Inc. launched a successful campaign to put trustees on H&R’s board. K2’s goal was forcing what it called a “sluggish and inactive” management team to pick up the pace.
In February, an unidentified potential buyer made an unsolicited offer for H&R. That triggered a strategic review, which the REIT announced in July, and a spike in the price of units on expectations of a sale. At that point, K2 chief investment officer Shawn Kimel said in a press release: “K2 would view it as a failure if the board were to fumble this unique opportunity.”
H&R fumbled the opportunity.
K2 declined to comment on plans for its “significant” stake in H&R. Sources who know Mr. Kimel say he’s determined to ensure the REIT’s management follows through on a restructuring that’s now been in the works for four years. The Globe and Mail is not naming the sources because they are not authorized to speak publicly.
In the REIT world, there is a game plan for bouncing back from an activist attack.
In 2022, several fund managers targeted First Capital REIT FCR-UN-T, pressing for a sale. In response, the REIT welcomed new trustees put forward by the activists and stepped up the speed of a previously announced strategy to sell properties.
Over the past five years, First Capital is one of the top performing REITS, with the price of units up 23 per cent. As the units took flight, activists sold their stakes and moved on.
Over the past five years, the price of H&R units dropped by 8.9 per cent, compared with a 3.4-per-cent decline in the S&P/TSX Capped REIT Index.
Can H&R use Frist Capital’s strategy to regain investor faith and satisfy the likes of K2?
Last week, Mr. Hofstedter said in the conference call that the REIT plans to sell up to $2.6-billion in real estate by the end of the year. He declined to say which properties are on the block – missing a chance to build credibility – but said H&R will hold on to its residential portfolio.
H&R is expected to sell office buildings, undeveloped land and its 30-per-cent stake in Echo Realty LP, which owns grocery-anchored U.S. malls. In the passive-aggressive tone analysts occasionally use to make uncomfortable observations, analyst Jimmy Shan at RBC Dominion Securities said in a report: “If the asset composition were to change as such, a CEO refresh is not inconceivable.”
Fund managers such as K2 rarely move on when disappointed by boards and executives at companies. They forge relationships with traditional fund managers and turn up the heat.
Bidders that have gone to the trouble of making an offer for a company also don’t go away. If H&R sheds properties potential buyers found unattractive, the REIT could attract new interest.
A long list of companies have faced activist campaigns and run strategic reviews that failed to find a buyer. In virtually every case, the result was new faces on the board and a significant restructuring of the business. H&R is going to end up following the same game plan.