Luxor Capital Has a Massive Stake in This REIT

Luxor Capital Group, managed by Christian Leone, is a New York-based hedge fund with close $3 billion in assets under management. Founded just after the turn of the 21st century, the fund has holdings in equity and fixed income investments in many markets throughout the world. Leone’s fund focuses on distressed companies and value-based investing. Luxor’s most recent 13F filings with the SEC show that the fund held just over $2 billion in U.S. stocks, with the highest concentration of investments being in the services and consumer goods sectors. Here’s a look at Leone’s top stock picks.

American Capital Ltd. (NASDAQ:ACAS)

The fund also has a penchant for REITs, with a large holding in American Capital Ltd. (NASDAQ:ACAS) worth close to $200 million, and a recently established position in American Realty Capital Trust Inc (NASDAQ:ARCT) worth more than $120 million. Luxor officially holds 10,112,796 shares of American Realty’s outstanding common stock, good for 6.4% of the company’s total float.

Since its IPO in early March, American Realty has been a moderately good investment, returning 13.3%, though shares have remained rather stagnant over the past month, trading in a tight range between $12.10 and $11.90 a share. American Realty primarily focuses on commercial real estate, owning close to 500 properties with 15.6 million square feet in total. Below is a table comparing the REIT’s industry-specific data with some of its competitors in the space.

Total Properties Aggregate Square Footage Lease/Operate Percentage Market Cap
American Realty 500 15.6 million 100% $1.88 billion
National Retail 1,422 16.4 million 97% $3.44 billion
Glimcher Realty Trust 27 21.2 million 90-100% (est.) $1.53 billion
Acadia Realty Trust 82 10 million n/a $1.19 billion
Regency Centers 217 23.8 million n/a $4.44 billion

The first thing that can be noticed about American Realty’s positioning within its peer group is its impressive lease/operating percentage, which was at 100% at the end of last quarter. Of its competitors, National Retail Properties, Inc. (NYSE:NNN) and Glimcher Realty Trust (NYSE:GRT) are close to being at full capacity, while data for Acadia Realty Trust (NYSE:AKR) and Regency Centers Corp (NYSE:REG) isn’t reported. The majority of American Realty’s real estate portfolio is comprised of single-tenant properties, primarily in small to mid-sized office buildings. REITs like Glimcher Realty and Acadia Realty lease multi-tenant properties like malls and large-scall office buildings.

From an income standpoint, American Realty offers investors a dividend with a projected yield of 6.0%, which is far above National Retail (5.0%), Glimcher Realty (3.7%), Acadia Realty (2.8%), and Regency Centers (3.7%). And as if this wasn’t the only reason to consider buying into this REIT, American Realty also trades at a rather cheap valuation, despite its moderate appreciation post-IPO. Shares of the REIT sport a forward earnings multiple of 15.0X, which is trading at quite the discount in comparison to National Retail (27.4X), Acadia Realty (40.5X), and Regency Centers (64.2X), while in-line with Glimcher Realty.

Much of the REIT’s malaise over the past month has to do with uncertainty surrounding a proposed merger with Realty Income Corp (NYSE:O), which is nearly twice as large as American Realty. The deal, which was originally announced for $1.9 billion in early September, had Realty Income issuing American Realty’s shareholders a total of 45.6 million shares, or 0.2874 shares of Realty Income for every one share of American Realty.

While the company’s board of directors are unanimously behind the decision, as it gives shareholders a 2-2.5% premium based on current market prices, it has been reported that Luxor Capital will vote against the deal. In a press release issued on Monday, the fund stated laid out its reasoning as such:

The transaction’s benefit to Realty Income shareholders is apparent. The merger is instantly accretive to adjusted funds from operations (AFFO) per share, it allows for a substantial and immediate increase in Realty Income’s pro forma dividend per share, it extends Realty Income’s weighted average lease life and it raises occupancy rates on a pro forma basis. In one transaction, Realty Income will be able to increase its dividend per share by an amount greater than it has achieved through acquisitions and organic growth over the last 4 years combined. In contrast, for ARCT shareholders, the deal is dilutive to AFFO per share, brings additional lease roll risk and, most importantly, dramatically dilutes the dividend yield [...] Luxor does not believe that increased size and liquidity warrant such a dilutive deal.

In short, Christian Leone’s fund believes that there’s no strong reasoning for shareholders to accept a deal just to feel like they are moving forward, and in fact, a merger with Realty Income might harm American Realty’s advantageous position in the industry. With a dividend yield above all of its competitors – including Realty Income, which pays a yield of 4.4% – it doesn’t make sense from an investing standpoint. With valuation metrics that show an undervaluation is actually occurring, the REIT’s shareholders would be best to lock in the dividend gains and enjoy added appreciation as the stock revalues.
Aside from Leone and Luxor, other money managers who are long American Realty include: Barry Rosenstein, Anand Parekh, and Steven Cohen. For a complete look at the hedge fund sentiment surrounding this REIT, continue reading here.
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