By Andrew Blazier, Senior Associate
A good friend and colleague of mine used to describe the universe of real estate investment trusts – REITs – as an “us girls” industry. It was difficult to break in, but once you did, the REIT community was so small, and so interconnected, that working within the industry could be done rather smoothly.
The publicly traded REIT community is indeed tightly knit. And the number of institutions investing in REITs isn’t much larger. When management teams go on roadshows or attend conferences, it’s not uncommon for them to meet the same individuals from the same funds four, five or six times in a year. I compare it to one of those small towns you see in Western films, with the two main characters squaring off to see who will ultimately control the town: “This investor pool isn’t big enough for the two of us.”
Personally, I’ve heard this complaint several times. Management looks at the one-on-one schedule for its upcoming conference appearance and says, “We’ve met them before.” Or worse: “We met them last week.”
Because of their tax-advantaged status, which requires REITs to distribute at least 90 percent of their profits in exchange for a corporate income tax exemption, both mortgage and property REITs are regularly selling equity in order to acquire more assets. They are frequently asking funds to increase their existing positions, rather than invest in the company for the first time.
For small-cap REITs, this problem is magnified, because many funds’ investment policies require a minimum equity market value of at least $1 billion. As a result, many smaller REITs have 40 to 50 percent of their shares held by the five largest institutional holders. If those are long-term positions, liquidity can become an issue.
So, what are management teams to do? Expanding beyond the “usual suspects” to find new institutional investors is neither easy nor swift, so here are four tips for REITs looking to bring in new investors.
1) Be Patient – When seeking non-traditional REIT investors, management teams and boards of directors need to set a longer-term time horizon. If they are already talking to your company, these funds or family offices are interested in your company for a reason. But it may take some time for them to become comfortable with what is typically seen as an alternative investment. Some of them may be taking a look at REIT investing for the first time.
2) Educate – Which means some investor education will likely be involved. These are savvy portfolio managers, so management teams shouldn’t feel the need to reinvent the wheel. At the same time, these investors have a different investment background – they may be generalists, growth or yield investors. They may ask questions your company is not accustomed to answering, and the up-front time spent addressing these queries may pose a challenge to already congested management schedules.
3) Nibble at the Edges – You don’t need to rebuild your shareholder roster with entirely non-traditional funds in order to improve trading liquidity. You also need to be realistic about management’s availability for investor meetings and conference calls. One of REIT executives’ chief concerns about outreach to non-traditional funds is the amount of time required to bring them up to speed. So start with just a handful of new investors and cultivate those relationships before expanding your investor outreach program.
4) Be Persistent – The second-most-common response to this type of investor engagement is to make one major push – say, by attending a general yield or growth conference – experience a less-than-stellar reception, and then stop altogether. Outreach to non-REIT funds and family offices can be rewarding in the long run, but it requires time and repetition. One meeting or conference is typically not enough to yield the results your management and board will want.
Given the capital needs of REITs, replenishing the investor roster is a primary concern. Particularly for growing REITs, it will help avoid investor fatigue while diversifying the shareholder base. This can enhance liquidity in the stock, support valuation and secure a sufficient market for the equity when it is time to raise capital. Making a sustained effort with just a handful of new funds can have significant benefits for the long-term outlook of the company and ensure your REIT’s investor pool is indeed “big enough.”
Andrew Blazier is a senior associate at Sharon Merrill. Andrew has developed and executed investor relations programs for small-cap and mid-cap companies, with a particular focus on pre-IPO and listed REITs and financial services companies. He counsels clients on the full spectrum of investor relations issues, including earnings messaging, strategic disclosure, peer monitoring, analyst and investor targeting, conference and investor day planning, non-deal road shows, internal communications and media outreach.
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