Land & Buildings Investment Management LLC’s Jonathan Litt is seeking to elect himself and another candidate to the board of Lexington Realty Trust (LXP) in a campaign company followers say could encourage bids for the industrial property REIT.
On Monday, Dec. 6, Litt submitted himself and Donna Brandin, ex-CFO of Equity Residential (EQR) REIT, as trustee candidates, the latest escalation in a campaign that followed an October letter from Litt — revealed by Lexington — urging the REIT to reconstitute its board, install four activist-backed trustees, and form a committee to evaluate strategic alternatives.
However, the fund ultimately nominated two candidates for a board whose directors are elected annually, at a meeting likely to take place in May.
In a Nov. 18 note, KeyBanc Capital Markets analysts wrote that Lexington’s release of the Litt letter “seemingly opened up the door for unsolicited bidders to approach the company,” given recent intense M&A activity in the industrial REIT sector.
They noted that “substantial capital continues to pursue industrial assets,” assigning a 60% to 70% probability for a transaction to develop at Lexington. By disclosing Litt’s letters, LXP may be hinting at “the start of a formal process,” KeyBanc noted.
Most recently, Monmouth Real Estate Investment Corp. (MNR), one of Lexington’s close rivals, was sold to Industrial Logistics Properties Trust (ILPT) for $2.1 billion after shareholders voted down a sale of the REIT to Sam Zell-led Equity Commonwealth (EQC). An affiliate of Barry Sternlicht’s Starwood Capital Group Management LLC made a hostile all-cash $1.89 billion bid for Monmouth but failed to strike a deal.
In 2018, Prologis Inc. (PLD) acquired DCT Industrial Trust Inc. in an $8.5 billion deal, and Gramercy Property Trust sold to Blackstone Real Estate Partners VIII in a deal valued at $7.6 billion. In 2020, Prologis acquired Liberty Property Trust for $13 billion.
One company follower told The Deal Wednesday that that major REIT players could be interested in buying Lexington if it were to launch an auction process. However, the person added that it was unlikely that it could be sold at enough of a premium to drive Lexington’s board to accept it, considering banking fees, severance, and other deal costs.
It might make more sense to consider an auction after non-core assets are sold, making Lexington more of a pure play, the person said.
Evercore ISI estimates that only 40% of Lexington’s assets were industrial as recently as 2017. It is still in the process of divesting some non-core office and manufacturing assets.
KeyBanc analyst noted in their November report that “numerous clients” are concerned about the “incremental upside” for the stock even in a takeout scenario.
In his Dec. 6 letter, Litt contends that Lexington has underperformed its peers, its CEO, Wilson Eglin, is overpaid, and that the stock is failing to close a discount between its net asset value (NAV) and share price.
However, Evercore ISI analyst Sheila McGrath noted that as of Dec. 3, Lexington has outperformed its closest pure play, single-industrial peers, Monmouth and Stag Industrial Inc. (STAG) in terms of total return year-to-date and over three years. The research firm also noted that Lexington’s total returns outperformed the two most relevant indices, MSCI US REIT Index (RMS) and the Net Lease REIT index, over the same time frame.
LXP produced total returns of 96% over three years, surpassing Monmouth’s 70%, Stag’s 87%, RMS’ 41% and Net Lease Index’s 23% over the same time frame, Evercore ISI noted.
Land & Buildings reported 6.8 million shares in the fund’s third quarter 13F filing.
Lexington responded to the campaign by noting that it has met with Land & Buildings representatives each time a meeting was requested, adding that five new trustees have been installed since 2015, including three females, as part of an ongoing process for a seven-person board. No one has been on the board for more than six years, except director Richard Frary, 74, who has held a seat for 15, according to relationship mapping service BoardEx.