There hasn’t been a wave of bargain-basement deals in commercial real estate, but there certainly has been some discounting of valuations of publicly traded REITS. Now top hedge fund managers that focus on distressed investing are competing to acquire shares of struggling REITs. A prime example involves D.E. Shaw, Flat Footed, H/2 Capital Partners, and Lonestar Capital, which joined forces to acquire one-fifth of the shares of healthcare REIT Diversified Healthcare Trust earlier this year. Later, the management team behind Diversified Healthcare revealed its intent to merge the healthcare REIT with a struggling office REIT, news that led the hedge fund investors to cry foul, claiming such a move would decimate the value of their investment. Diversified Healthcare’s stock price has already gone on a substantial upswing since the hedge funds bought into the REIT. But the fight between the management team and the funds rages on. An investor vote on the proposed transaction is scheduled for August 30.
While traditionally small investment entities comprise the bulk of investors in REITs, hedge funds specializing in distressed investing are increasingly seeking a piece of the REIT pie, especially since discounts in the stock market are hard to find these days. Capitalizing on discounted REIT shares is proving lucrative for existing shareholders who are benefiting from the rise in stock prices following hedge fund participation, and hedge funds will see profits when the real estate market recovers. However, as the Diversified Healthcare debacle indicates, if management has new ideas about a REIT’s future that are not in line with the management’s strategic direction, what originally looked like a good deal could quickly devolve into a bad investment.