Tuesday 16 January 2018

Reits take a pounding as hedge funds fall

US Reits have been battered by struggling hedge funds pulling cash from them
US Reits have been battered by struggling hedge funds pulling cash from them

Heather Perlberg

Hedge funds that piled into real estate investment trusts are hurting the companies on their way out.

Reits that have had a relatively large portion of hedge fund owners are struggling with declining stock prices. NorthStar Realty Finance is one of the two worst performers this year in a Bloomberg index of 41 mortgage Reits, with a 39pc decline. IStar has dropped 25pc, Colony Capital has fallen 19pc and New Residential Investment Corp. has slumped 10pc.

Hedge funds are reducing their stakes in the Reits as market turmoil has caused some of the funds to struggle with liquidity issues. Stocks with a heavy concentration of hedge fund ownership get high valuations when things are going well, and shares are sold rapidly when the funds hit tough times, said Trevor Cranston, a Reit analyst at JMP Securities.

"The selloff is quick," Cranston said. "So it takes some time for a transition in ownership to happen and for the valuation to stabilize."

The portion of hedge fund ownership of Reits including NorthStar and New Residential fell in the fourth quarter, according to filings with the US Securities and Exchange Commission.

Steadfast Capital Management and Maverick Capital, NorthStar's two biggest hedge fund stockholders in the third quarter, reduced their stakes by 90pc and 33pc respectively in the three months ended December 31.

Gem Realty Capital Management, previously one of IStar's largest shareholders, sold its entire stake in the Reit from March 31 to the end of last year. SAB Capital Management, which planned on returning most client money by mid-January, sold all its Colony shares, according to an SEC filing. The firm was one of Colony's largest shareholders as of Sept. 30. New Residential saw EJF Capital reduce its stake by 83pc, while SAB sold all of its shares in the Reit.

A smaller concentration of hedge funds will mean that shareholders will stick around longer, said New Residential chief executive Michael Nierenberg.

"For us, the underlying fundamentals of our business continue to be very good," Nierenberg said in a telephone interview. "We are more cautious now, as we should be. However, markets like this create great investing environments."

NorthStar, which has among the highest concentration of hedge fund owners among REITs, at 28pc, acquires loans, bonds and commercial properties such as hotels, office buildings and manufactured housing.

Jade Rahmani, a Keefe Bruyette & Woods analyst, cut his recommendation on the company's stock last week to market perform from outperform and said in a report that he expects a successful repositioning of the firm to be a "tall and likely lengthy order." He had previously recommended the Reit based on its discounted valuation and a belief that strategic actions such as asset sales might help turn the share price around.

Senvest Partners, which boosted its stake in in the fourth quarter, saw its main fund lose 12.5pc in January.

Orange Capital, which owned 3 million shares of the Reit at the end of December, is closing and returning about $1bn to investors.

Hedge funds are having the worst start to a year since 2008, falling an average of 1.7pc in January. Returns have been depressed by slowing global growth, falling prices for oil and other commodities, and a strengthening US dollar.

Northstar has recently gained the attention of activist investor Jonathan Litt, who announced plans to force changes at NorthStar's management company. Litt's Land & Buildings Investment Management nominated six directors for election to NorthStar Asset Management and expressed an interest in the firm selling assets and returning to an internally managed structure.

Hedge funds are drawn to Reits that are growing quickly or aggressively raising money, according to Cranston. That was the case for many of the real estate firms last year.

More typical Reit investors, he said, will wait a while "before they are willing to step in, especially given how volatile the market has been this year."


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