Their Eye on the Cycle, Shareholders Continue to Push REITs

ANNAPOLIS, MD—Come May 20th, when Chesapeake Lodging Trust holds its annual meeting, shareholders will be voting on a handful of proposals by investor UNITE HERE, including one that would prevent the REIT from imposing anti-takeover measures without shareholder approval. This so-called poison pill maneuver is used by companies when they don't want to be acquired, including Macerich when it was approached by Simon Property Trust earlier this year. Macerich, as it happened, later promised to terminate its stockholder rights plan and add two new independent directors as part of a settlement with another activist investor, Jonathan Litt of Land and Buildings.

UNITE HERE, which represents hospitality workers across the country and Canada, is hoping to prevent something similar from unfolding at Chesapeake. In short, says research coordinator JJ Fueser, Chesapeake is among a number of smaller "duplicative" REITs in the hospitality sector that would make for an attractive acquisition target. UNITE HERE doesn't want management to short-circuit an attractive offer.

Chesapeake did not return a call to GlobeSt.com for comment.

As part of its case, UNITE HERE argues that the REIT has high corporate, general and administrative costs (CG&A) that drag on shareholder value. It also notes its shares are down more than 15% year to date.

"In 2014, CHSP spent 67% more than Host Hotels & Resorts on CG&A per room," its proposal said. "If CHSP had paid what HST did on a per-room basis, CHSP would have spent $7.7 million less" translating into additional shareholder value of $2.55 per share.

This is not the only proposal UNITE HERE has put forward. Ashford Hospitality Trust, Hospitality Properties Trust and Pinnacle Entertainment have all been on the receiving end recently of a UNITE HERE proposal or a campaign to urge shareholders to vote for certain measures including anti-poison pill promises.

It would not be overstating matters to say these proposals have been dimly received. Ashford declined to comment to GlobeSt.com beyond a release it issued regarding UNITE HERE recently.

The "labor union activist" has made "misleading statements" it said, and furthermore "owns a negligible amount of shares for the sole purpose of furthering its own interests, at considerable time and expense to the company and its management, and to the detriment of Ashford shareholders."

Fueser shrugs off such statements. Pushback is to be expected. She says that the union's position is aligned with shareholder interests. "One reason you are seeing activist investors in general becoming more active or vocal lately is that we are nearing the top of the current real estate cycle," she tells GlobeSt.com. "Now is the time to sell."

"Chesapeake launched at the beginning of the cycle. It has not experienced a downturn yet and it may not have another opportunity to realize gains from its investments."

REITs, for their part, tend to make their investments with the long-term in mind—a position not well aligned with many institutional shareholders. Hence the clash, especially as the latter becomes convinced the current cycle is starting to end.

"Activist investor influence is growing as there are more attempts by larger REITs to acquire smaller REITs or large private investors to take existing REITs private when their stock price is low," Glenn R. Mueller, a professor at the Franklin L. Burns School of Real Estate & Construction Management at the University of Denver, tells GlobeSt.com.

"When management attempts to shun or stop takeovers and take privates, activist investors have stepped in to force management to do the right thing for shareholders." Institutions now claim about 80% ownership of REITs now – compared to less than half in the 1990s, he says. "With 80% ownership by institutions REIT management has little choice but to listen."