Alpha Buying: Unpacking the Power of Activist Investors in Driving Company Performance – Franklin Street Props (AMEX:FSP)
For more than two decades, the Schedule 13D filing has been a guiding light for value hunters seeking opportunities in the market. When an activist investor makes this filing with the SEC, it signifies much more than just ownership of a substantial stake—it signals intent. In the financial world, intent, particularly from a powerful entity, can lead to significant outcomes.
The initial reaction to these filings is typically a market price jump of about 5 to 10 percent—this is just the beginning. The genuine wealth-building performance emerges over the following years, where patient capital finds its reward.
Evidence overwhelmingly supports this assertion. Research demonstrates that companies targeted by activist investors often outperform the broader market by at least 10 percent in the year following a 13D filing. When these campaigns lead to a company sale or breakup, returns can exceed 20 percent above market performance. This is not mere speculation; it is documented history.
When experienced activists like Carl Icahn, Paul Singer, or Jeff Smith file these documents, it’s not just bureaucratic paperwork but a signal for change. Whether it be cost reduction, divesting underperforming assets, or holding management accountable for lackluster results, these activists catalyze value creation that might otherwise remain dormant for years or even decades.
The Canadian Pacific Railway saga serves as a perfect illustration. In 2011, when Bill Ackman filed his 13D, it initiated a transformation that saw the stock more than triple by 2014. The exceptional return wasn’t merely about the initial excitement; it was about appointing the right leadership, improving operational efficiency, and executing previously resisted strategies. Such campaigns can transform patient capital into substantial wealth.
However, not every activist effort succeeds—JCPenney is a case in point. Still, the broader data indicates that thoughtful and persistent activist involvement typically unlocks substantial value, especially in traditionally quiet sectors like real estate, industrial conglomerates, and insurance. Here, management often operates without significant external pressure.
In the pursuit of value investing, the key elements are a margin of safety and a catalyst for recognition. Activist 13D filings frequently provide both. When a seasoned activist with a strong track record targets a company trading at a substantial discount to book value or replacement cost, it isn’t speculation—it’s a structured path to value realization. However, selectivity and patience are crucial, as not every filing merits attention. The identity of the filer, their objectives, and their history matter. It’s also important to allow 12 to 24 months for the investment thesis to develop. Immediate gratification seekers may need to look elsewhere.
For methodical wealth builders, studying activist campaigns provides a compelling opportunity. An example worth observing is Converium Capital, which has increased its share purchases in Franklin Street Properties (FSP), a real estate investment trust focusing on office properties.
Converium Capital, a Canadian asset manager, employs strategies to generate positive and uncorrelated returns in various market environments, focusing on distressed and event-driven opportunities globally.
Franklin Street Properties primarily deals with suburban office properties in the U.S. Sunbelt and select core markets. The REIT, headquartered in Massachusetts, has traditionally acquired institutional-quality office buildings in areas with strong demographics and business environments. Their portfolio emphasizes properties in Texas, Colorado, Georgia, North Carolina, and Florida.
Initially focusing on mid-to-large Class A office buildings with stable tenancy and long-term leases, the company had to reassess its strategy following the significant decline in office demand due to the COVID-19 pandemic.
Starting in 2021, FSP embarked on an aggressive asset disposition program aimed at reducing leverage, enhancing liquidity, and improving operational flexibility. The shift moved the company from an acquisition-driven growth model to portfolio optimization and shareholder capital returns.
This strategy, central to FSP’s transformation, has seen the company selling over $1 billion in office assets since 2021. The proceeds have been primarily used for debt reduction, modest share repurchases, and dividends. Management has focused on selling non-core or underperforming properties, particularly those with high vacancy rates or significant lease expirations imminent. While this approach has successfully reduced leverage, there have been notable declines in revenue and funds from operations (FFO), raising concerns about long-term scalability and competitiveness.
Despite measures to enhance leasing activity, such as broker incentives and tenant improvement packages, occupancy rates remain pressured and below pre-pandemic levels. FSP maintains a conservative quarterly dividend, reflecting a cautious capital allocation approach. Currently trading at a significant discount to net asset value, the REIT faces investor skepticism on both the office market recovery and its value proposition.
The depressed valuation, elevated general and administrative costs, and disappointing stock performance have drawn activist attention from Converium and other shareholders, who advocate for enhanced capital returns, governance improvements, and possible asset liquidation.
The board has responded with shareholder-friendly initiatives, including governance reforms, better disclosure, and exploring strategic alternatives. There’s openness to additional asset sales and joint ventures, although complete liquidation or sale isn’t fully endorsed.
Franklin Street Properties’ fate hinges on the suburban office market’s recovery and further asset sale execution. Challenges from remote work trends, rising interest rates, and competitive leasing environments persist. However, activist involvement and the substantial discount to net asset value could provide a valuation floor and a catalyst for change.
For patient value investors, Franklin Street Properties showcases the potential opportunity that comes with activist involvement. The deep asset discount offers a margin of safety, and activist pressure could catalyze value realization. Ultimately, the most significant returns likely await those who comprehend the long-term implications and have the patience to watch the transformation unfold.
