One of my daily activities consists of tracking all the moves made by activist investors. These are investors who are trying to get the management and board of a target company to take steps to increase the stock price’s value.

Sometimes these are friendly discussions, but more often than not, the talks are anything but that. Most of the time, the suggestions made by the activists involve executives and directors losing their high-paid positions.

These steps might include selling unproductive assets, buying back large blocks of stock, raising dividends, replacing board members, and often selling the entire company.

Activist intervention can often lead to a jump in the share price, as other investors follow the activist’s lead and grab hold of as much of the stock as they can, in the hopes of making a bit of profit in the short term.

I especially take notice when activist investors get involved with one of my favorite asset classes – real estate investment trusts (REIT), several of which I’ve recommended to my readers before.

They have a lot of potential resilience even when markets are down, because their cash flow, provided by tenants who are obligated to pay rent no matter what, remains constant. REITs often pay out very good dividends as well, providing passive income to hedge against volatility.

So when I see an REIT with a market cap north of a billion dollars making big moves in response to activist pressure, I know there’s great potential for folks like you and me to take a nice ride. On top of that, we’ll enjoy a hefty 7% dividend on the way up.

Let me tell you all about it…

This NYC Real Estate Icon Is Heading for Big Changes

The pitch being made right now by Lionbridge Capital of the board of Alexander’s Inc. (NYSE: ALX) is of the “sell the whole company” variety, and it’s coming at a great time.

Alexander’s is a REIT with an interesting history. From 1955 to 1992, Alexander’s was a New York City Department store with nine locations throughout the city. In the 1990s, the two largest shareholders were Steven Roth, the CEO of a New York City-focused REIT, Vornado Properties, and a fellow named Trump.

Donald Trump had to dump his shares of the company to pay off a loan to Citicorp. When ALX had to file bankruptcy, Roth and Vornado ended up with control of the company after the proceedings were finalized in 1995.

The company has transformed itself from the owner of some department stores to the owner of some premier properties in the New York market. The largest property is Bloomberg Tower which provides 55% of the REIT’s revenues, but they also own Queens’s Rego Center shopping complexes and the nearby 312-unit apartment tower, The Alexander.

They have managed to squirrel away about $541 million in cash, which is about 45% of the company’s current market cap.

Mr. Roth and the management team at Vornado oversee the operation of the company.

According to Greg Morillo, the Managing Partner at Lionbridge, that’s the problem. Mr. Roth and his team are running Alexander’s as an afterthought with no clear-cut plan to build value.

A visit to Alexander’s website would seem to support their point. Unfortunately, there is very little information for current or prospective investors.

Mr. Morillo points out that even before the pandemic hit, shares of Alexander were lagging well behind that of the REIT and stock indexes. The shares have lagged even farther behind thanks to the value destruction from the pandemic in New York real estate markets.

Lionbridge has its own internal valuation of ALX and came up with $425 a share, which is much higher than the current share price, hovering around $245 as of this writing.

The team at Lionbridge has a plan to unlock shareholder value.

Here’s the Plan That Makes ALX a Great Buy

First, they think Alexander’s should have its own management team and share services contracts with Vornado.

Second, they should return large amounts of capital to shareholders. In addition to the cash on the books, Alexander could refinance the Bloomberg Tower to unlock more cash. Currently, the property is financed at a 30% loan to value. Refinancing to a 55% level would bring in enough additional cash for Alexanders to pay a $165 special dividend or conduct a massive stock buyback to increase shareholder value. Even after the special dividend, Alexanders would have more than enough cash to fund the business and future growth plans.

This makes an enormous amount of sense to me. The Bloomberg lease runs through 2029, and it is highly unlikely that Bloomberg does not renew. It is an iconic building in Manhattan that is closely associated with the Bloomberg brand.

Refinancing to reward shareholders is a smart play.

Lionbridge estimates that post special dividend, the shares should trade at least between $180 and $220, as a matter of form. The dividend yield at that price would work to be about 5.5%, implying total value between $345 and $385 per share.

Lionbridge also points out that the average age of directors is 77, and most of them have been on the board for an extraordinary amount of time. The average tenure is 25 years right now.

Given that directors’ fees are between $169,000 and 204,000 annually, that’s a pretty nice payday for rubberstamping the decisions made by Mr. Roth and other Vornado executives.

Lionbridge also suggests that ALX better communicate with outside investors and develop an investor relations strategy that can attract buyers into the stock. Since they do almost nothing right now, any improvement would be a solid start.

Just in case the board doesn’t like these ideas, Lionbridge does mention that they are in touch with institutional investors who would be willing to buy out Alexander’s at a substantial premium to the current price.

They also suggest that the board announce a strategic review of measures to increase shareholder value. That announcement will likely bring other interested parties in to consider bids for the REIT.

I think Lionbridge has a good shot at a win. Even if they just force Mr. Roth and the Vornado team to pay more attention to the Alexander assets, that should help drive the stock price higher.

Best of all, we can collect a 7% dividend while waiting for the stock price to close in on the net asset value.

— Tim Melvin

Source: Money Morning